A tax system in which the income earner pays a fixed percentage of his income annually is known as …………. tax.

Analyze the question: The key phrase is "a fixed percentage of his income." This describes how the tax rate behaves as income changes.

Explain the concept: Tax systems are classified by how the tax rate changes with income:

• Proportional tax: The same percentage of income is paid by everyone, whether rich or poor. For example, 10% of income at every level. The amount paid rises with income, but the rate stays constant.
• Progressive tax: The rate rises as income rises. Higher earners pay a larger percentage, as with Nigeria's personal income tax bands.
• Regressive tax: The rate falls as income rises, so low-income earners bear a heavier burden relative to their income.
• Direct tax: Levied directly on income or wealth, such as PAYE or company income tax. It describes who pays, not the rate structure.
• Indirect tax: Levied on goods and services, such as VAT and excise duties.

Solution:

1. The question asks about a fixed percentage of income, which concerns the rate structure.
2. A constant percentage at all income levels is the definition of a proportional tax.

Example:

• Income ₦100,000 at 10% means a tax of ₦10,000.
• Income ₦500,000 at 10% means a tax of ₦50,000.

The rate stays at 10% for both, so the tax is proportional.

Why the others are wrong:

• A (direct) is about the method of collection, not a fixed rate.
• B (indirect) is a tax on spending, not on income.
• C (progressive) has a rising rate.
• E (regressive) has a falling rate.

Answer: D. Proportional

Exam tip: Remember the keyword links: fixed/flat/same percentage means proportional, higher income, higher rate means progressive, and higher income, lower rate means regressive.