PART I: TRUE OR FALSE

Write “True” if the statement is correct and “False” if it is incorrect in the space
provided.
_____ 1. Taxation do not discourage saving, investment and productive activities.
_____ 2. A surplus budget would signify heavier than needed taxation and cause possible
unemployment and depression.
_____ 3. In progressive taxation system both average and marginal rates of tax increase with increasing
income and marginal rates of tax rises faster than average one.
_____ 4. In strict consideration to the principle of elasticity, changes in the tax system essentially should
be brought about only slowly and in stages.
_____ 5. A good tax system is the one that imposes the impact and incidence of tax on the same person.
_____ 6. Grants-in-aids are a means of balancing financial deficiency between the functions and
resources of the government in federal level.
_____ 7. Public debt bound to be inflationary in character as it diverts the economic resources from
production of consumption goods to capital goods.
_____ 8. The principle of fiscal access in federal finance calls for payment of equal taxes by all state in
the federation for federal finance.
_____ 9. In concurrent mixed system of the federal finance there would be transfer of resources between
the centre and the states.
_____ 10. In sharing revenue resources in federal set up consideration needs to be entrusted to factors
like population and distribution of wealth and standard of development of states.
_____ 11. With proper administration, the chances of tax envision are less likely to occur in the case of
indirect taxes.
_____ 12. The principle of efficient allocation of financial resources between governments in a federal
set up suggest that sources of public revenue can best be handled at central level.
_____ 13. Turnover tax is an efficient method of raising revenue as it encourages profitable
exchanges.
_____ 14. State lottery is a non-tax major source of government funding.
_____ 15. Elasticity of the demand curve has a direct relationship with the tax paid by
demanders.
_____ 16. Excess burden taxation exists on tax of illegal consumption of goods.
_____ 17. Value-added tax cannot be clearly taken as a tax burden.
_____ 18. The government first estimates the volume of expenditure and then tries to find out
the methods of raisins the necessary income.
_____ 19. In public finance government prefer surplus budget as virtue and a deficit budget is
undesirable to them.
_____ 20. VAT is paid by customer and collected by seller.

PART II. CHOICE THE BEST ANSWER AMONG THE GIVEN ALTERNATIVES
_____ 1. Among the following one is not the feature of consumption of private goods.
a. Price mechanism can be applied effectively in to it
Demand and market mechanisms are effective on externalities associated the
production and consumption of private goods
b. It is amenable to the principle of exclusion
c. The nature of consumption is rival
d. None of the above
_____ 2. Identify the correct statement about double taxation,
a. Double taxation arises from on account of conflicting criteria adopted by
different countries to levy taxes.
b. A corporation tax involves double taxation.
c. In partial double taxation relief agreement one country imposes a tax at full
rates and the other country at reduced rates.
d. All of the above
e. B and C
_____ 3. Identify the incorrect argument about the principle of exclusion in consumption of
private and public goods
a. It involves dividing people in to those who do have demand and those who do
not in the consumption of public goods
b. Non-excludability might hold even if consumption is rival to some goods
c. It refers to the case whereby price mechanism excludes those who are not
willing to consume a particular good
d. All of the above

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 e. None of the above
_____ 4. The subject matter of the public finance concerned with the preparation, control and
administration of financial budget is
a. Public revenue
b. Fiscal policy
c. Economic stabilization
d. Public borrowing
e. None of the above
_____ 5. Among the following identify the non-tax public revenues of the government
a. Taxes on income and expenditure
b. Taxes on property
c. Interest receipts
d. Taxes on commodities
e. None of the above
_____ 6. Which of the following is/are true about public debt?
a. It is a voluntary transfer of funds from public to the government
b. Involves withdrawal of resources by reducing private consumption
c. It is not as a burden on the economy if spent wisely
d. It may result in excess supply of goods and services
e. All of the above
_____ 7. Fiscal policy
a. Deals with public revenue resources and spending
b. Influences income level, output and employment
c. Determines the extent to which funds are withdrawn from the private
economy
d. Attempts to allocate more resources for investment in developing countries
e. All of the above
_____ 8. Private and public finances are alike in all of the following issues except;
a. Incidence of borrowing
b. Adjustment of income and expenditure
c. Satisfaction of human wants

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 d. The problem of economic choice
e. All of the above
_____ 9. Identify the wrong statement about public and private finances.
a. Unlike the private finance the government can avoid or postpone its
expenditures
b. Individuals expect relatively a short term benefit from expenditure made while
this is may not be the case in public finance.
c. In public finance governments possess coercive power while private finance
lacks this attribute
d. All of the above
e. None of the above
_____ 10. Which of the following is/are true about public budget?
a. It is a timeless financial program of the government
b. It must be approved by the highest government body
c. It is a statement of receipts and payments of government for specified period
of time
d. A and B
e. B and C
_____ 11. Recurrent budget in Ethiopian context includes
a. Expenditure for administrative and general service
b. Expenditure for acquisition of bonds
c. Expenditure for acquisition of movable plant
d. Construction of roads and buildings
e. Expenditure on urban development
_____ 12. Budget deficit
a. Unintentional and unfavourable gap between public revenue and public
expenditure
b. It is enables the government to mobilize idle and unutilized resources through
financing its deficit
c. A situation in which the government receipts exceeds expenditure charged to
revenue and capital account

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 d. It signifies inappropriate use of funds and poor budgetary policy of the
government
e. None of the above
_____ 13. Taxation
a. Is illegal collection by the government
b. Involves sacrifice by the tax payer for a return of direct benefit
c. There must be a tax base on which it is levied
d. It is imposed only on the income of citizens
e. None of the above
_____ 14. Identify the wrong statement
a. Taxation has insignificant effect on consumption and employment pattern
b. Taxes are compulsory payments to the government
c. Tax imposes duty of payment on person who is liable to it
d. Tax receipts are commonly used for the production of public goods
e. None of the above

Question 15 – 19 refer the following list of taxation approaches and match each cases
(taxation approaches) with the correct argument associated with it.
a. Socio-political approach
b. Ability to pay approach
c. Cost of service approach
d. Benefit principle approach
e. Expediency approach

_____ 15. Approach that involves reshaping the tax policy and structure depending upon the
changing political strength of different economic groups.
_____ 16. It considers revenue and public expenditure as distinct entities.
_____ 17. Approach that demands tax system to be designed to serve the needs and welfare of
the society as a whole rather than the individual members of the society.
_____ 18. Every individual should contribute in proportion to the value of the services he has
received from the government.

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_____ 19. Approach in which tax is considered as an instrument of recovering the cost of
service to individuals and that involves case where the government gives up its basic
protective and welfare functions.
_____ 20. Identify the correct statement about the concept of equal absolute sacrifice.
a. The tax burden should be distributed in such a way that the marginal
sacrifice of all the tax payers is equal
b. The total disutility of tax payment should be equal for all tax payers
c. It is based on the psychological burden felt by the tax payers
d. All of the above
e. B and C

Question 21 – 24 refer the following list of canons of taxation and match each cases with
the correct argument that best explain the respective principle.
a. Canon of certainty
b. Canon of economy
c. Canon of expediency
d. Canon of elasticity

_____ 21. The minimum possible amount should be spent on tax collection and the maximum
part of the collection should be brought to the government treasury.
_____ 22. The taxes should be flexible and be levied in such a way to increase or decrease the
tax revenue depending upon the need.
_____ 23. The time of payment, the manner of payment, the quantity to be paid, should be clear
and plain to the contributor and every other person.
_____ 24. Tax should be levied after considering all favourable and unfavourable factors from
different angles such as economical, political and social.
_____ 25. Indirect taxes are
a. A tax whereby the impact and incidence of tax fall on the same person
b. A tax that is to be borne by the person on whom it is levied
c. A tax which cannot be passed on to others
d. All of the above

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 e. None of the above
_____ 26. All of the following are the disadvantage of direct tax except,
a. Uncertainty in the amount of revenue to be generated for government
b. Create incidences of fraudulent activities
c. Possibility of violating the canon of convenience
d. It has a limited scope for raising revenue
e. None of the above
_____ 27. A system that imposes small amount of tax as a proportion on income with large
incomes and vice versa is known as ___________.
a. Regressive tax system
b. Digressive tax system
c. Progressive tax system
d. Proportional tax system
e. Graduated tax system
_____ 28. Progressive taxation system is advocated based on
a. Ease to comply with and administer than proportional tax
b. Its potential to end unfair discrimination
c. Its ease to raise more revenue by increasing the tax rates
d. The fact that the tax rate remains the same for both the rich and the poor
e. None of the above
_____ 29. Identify the false statement about taxation systems.
a. Proportional tax falls more heavily on small incomes than high incomes
b. Progressive tax system reduces income and wealth inequalities
c. Progressive tax system tax system do not affect the relative economic status of
tax payers
d. Regressive tax system violates the principles of equity and social justice
e. All of the above
_____ 30. One of the following is not true about the effects of budget deficit finance
a. Price inflation
b. It causes change in the pattern of investment
c. Promote faster economic growth

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 d. Ensure equitable distribution of wealth and income for all citizens
e. Help to overcome economic depression

PART III: MATCHING QUESTIONS

Match Column ‘A’ with the Corresponding Best Explanations Provided under
Column ‘B’.

Column ‘A’ Column ‘B’

_____ 1. Production VAT A. A form of VAT that allows the deduction of non-
capital and capital inputs purchased by a firm from
_____ 2. Inheritance tax
the gross value of its products to arrive at the value
added by the firm
_____ 3. Regressive tax B. The case where the same tax payer being subjected to
taxation more than once on account of the same
_____ 4. Fiscal decentralization
subject matter or base of tax
_____ 5. Tax incidence C. The case whereby an economic unit liable to double
taxation is provided a tax relief by deducting the tax
_____ 6. Tax base
paid to a foreign government from the tax liability
estimated based on the assumption that the income is
_____ 7. Marginal tax rate
originated within the home country
_____ 8. Double taxation D. A tax on income or property received by an heir from
the estate of a person who has died
_____ 9. Grants-in-aid E. A form of VAT that allows the deduction of only the
value of non-capital purchases of a firm from the
_____10. Unilateral double taxation
gross value of its products to arrive at the value
relief
added by the firm
F. Specify who must legally pay the tax and who bears
the actual burden of a tax
G. A tax that takes a greater percentage of income from
people with low incomes than from those with high
incomes

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 H. The tax rate applied to a particular tax bracket that
designate a range of taxable income
I. The object on which a tax is based or calculated, such
as income, property, or the individual.
J. The system of assigning spending responsibilities and
source of revenue to between different levels of
governments for the efficient discharge of their
respective functions
K. A federal financial adjustment meant to bring about a
balance between the functions and resources of
government at different levels

PART IV: ANSWER THE FOLLOWING QUESTIONS.

1. B is an employee working in Harambee University College as an instructor from the year
2007. He was appointed as the head of the department in the month of April 2010.
Calculate the tax deduction that should be made as per the income tax proclamation no.
286/2002 from the following information.
- His basic salary is Birr 5,000 per month
- Transport allowance Birr 300 per month
- Position allowance Birr 300 per month
- Teaching material preparation Birr 5000 (Net of tax)
- Remuneration for valuation of Exam papers Birr 400

2. Ato Mulugeta had leased a furnished residential building @ 1000 per month for the
building and 300 per month for the furniture and Television. Taxes others than income
tax paid is 300 for the year. He does not maintain any books of account.

Required
A. Calculate the tax that should be paid under schedule B of the income tax proclamation
no. 286/2002?

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 B. If the owner of the building were Mulugeta Trading Plc instead of Ato Mulugeta, would
there be any difference in the tax liability under schedule B of the income tax
proclamation no. 286/2002?

PART V: SHORT ANSWER QUESTIONS

1. Write the characteristics of a good tax system.
2. Critically explain the concept of 'ability to pay' theory of taxation.
3. Explain the procedure of collection of tax on imports.
4. What amounts shall be deducted from income in computing income under schedule B of the
income tax proclamation.
5. As the production of pure public goods concerned, the public sector (the government) should
be entrusted to this task. In this job is left in the hands of the private sector, we would end up
in inefficiency. Discuss the main justifications for this argument and try to illustrate relevant
examples.
6. Discuss and list the various sources of government revenue and the classification of taxes.
Illustrate with relevant examples.
7. What is federal finance? Discuss any four principles of federal finance.
8. Compare and contrast ad valorem and specific duties. Provide relevant examples in support
of your idea.
9. Explain the process of budget preparation at federal level in the context of Ethiopia.
10. Define and discuss fiscal policy and elaborate on the role of fiscal policy in the economy
from the perspective of developing countries.