HOW TO APPROACH TO TAXATION MATHEMATICALLY

                    HOW TO APPROACH TO TAXATION MATHEMATICALLY

           Certainty calculations are done in taxation and for proper understanding of it, it is very important to take note of the following terms;

  1. Tax base: The tax base refers to the item or the object which is taxed. This includes personal income, import and exports, company profits, properties and goods for sale.

  1. Tax rate: Tax rate refers to the percentage (or proportion) of tax base or tax object which is to be paid as tax, e.g. 10% of income. And ad valorem tax, for instance, is expressed as a percentage. On the other hand, it could be a flat rate of tax, e.g. 100 per adult male.

           Tax rate has a formula;

           Tax rate= Tax Payment                       100

                              Tax base                             1

  • Disposable income: This is the type of income derived after tax has been deducted from gross income. In other words, disposable or net income is total income less tax.

        Disposable income = Income – Taxation

                                             Or tax base – tax paid

Worked Example

The table below shows the tax payments of three income earners in a year. Use the

Information in the table to answer the questions that follows: 

  Income           Earners           Income            Base            Tax payments X(N)             Y(N)
          Mr. Okafor          Alhaji Tanko   Mr. Kolawole          10,000           15,000           30,0001,000               800 1,500            1,300 3,000            1,500

Determine the percentage rate of taxation paid by

  1. Mr Okafor in column X and Y
  2. Kolawole in column X and Y
  3. Alhaji Tanko in column Y

(b).       i.                        Identify the systems of taxation employed in columns X and Y

                      ii.             Which of the income earners has the least burden under column Y?

  • i.    if the government increases its rate of taxation to 20% flat rate, how much revenue     will be generated from the payees?

ii.   At 20% flat rate of taxation, calculate the disposable income of Mr. Okafor, Alhaji Tanko and Mr. Kolawole.

Solution

  1. Tax rate = Tax payment       x          100

       Tax base                        1

  1. For Mr. Okafor

=   1,000      x          100

10,000         1

= 10% for X

=   800         x          100

     1   

10,000

=   8% for Y

  1. For Mr. Kolawole

=            3,000   x    100

           30,000         1

=         10% for X

=         1,500    x     100

           30,000   1

=         5% for Y

           (b)(i) The systems of taxation employed in column X and Y are:

           Column X = Proportional systems of taxation

           Column Y = Regressive system of taxation

                       (ii)        The person with the last burden is M. Kolawole with 5% tax rate.

           (c) (i)  Mr. Okafor = 20   x 10,000   = N2,000.00

                                             100        1

           Alhaji Tanko = 20  x 15,000  = N3,000.00

                                  100       1

           Mr. Kolawole 20  x 30,000  = N6,000.00

                                  100       1

Total revenue = N2,000 + 63,000 + N6,000

= N11,000

OR

20% of total income

=20  x (N10,000 + N15,000 + N30,000)

   100                                      1

= Disposable Income = Income – Taxation or Tax base – Tax Paid

Mr. Okafor     = 10,000 – N2, 000 = N8, 000

Alhaji Tanko   = 15,000 – 3,000   = N12, 000

Mr. Kolawole  = 30,000 – 6,000   = N24,000 

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