TAX2601 – Principles of Taxation (TLI4801) Exam
Prep 2025–2026 | Complete Test Bank with
Application Questions, Verified Answers, Detailed
Rationales & Study Guide for UNISA, BCom, and
Accounting Students
Question 1
What is the primary purpose of taxation?
A) To raise revenue for government expenditures. (Correct Option)
B) To promote specific industries
C) To control inflation
D) To redistribute wealth
Rationale:
The primary purpose of taxation is to generate revenue for government operations and
public services.
Question 2
What does the term "progressive tax" refer to?
A) A tax that increases as income increases. (Correct Option)
B) A tax that decreases as income increases
C) A flat tax rate for all income levels
D) A tax that only affects corporations
Rationale:
A progressive tax imposes a higher tax rate on higher income levels, ensuring that those
who can afford to pay more contribute a larger share.
Question 3
What is the difference between direct and indirect taxes?
A) Direct taxes are levied on income, while indirect taxes are levied on goods
and services. (Correct Option)
B) Direct taxes are easier to collect than indirect taxes
C) Indirect taxes are always higher than direct taxes
D) Direct taxes are temporary, whereas indirect taxes are permanent
Rationale:
Direct taxes are assessed on income or profits, while indirect taxes are collected on the
sale of goods and services.
,Question 4
Which of the following is an example of a direct tax?
A) Income tax. (Correct Option)
B) Value-added tax (VAT)
C) Sales tax
D) Excise duty
Rationale:
Income tax is a direct tax imposed on individual or corporate earnings.
Question 5
What is the primary objective of tax policy?
A) To achieve economic stability and growth. (Correct Option)
B) To eliminate all forms of taxation
C) To increase government control over the economy
D) To prioritize certain industries over others
Rationale:
Tax policy aims to create a stable economic environment that encourages growth and
investment while ensuring fairness in the tax system.
Question 6
What does "tax evasion" refer to?
A) The illegal act of not paying taxes owed. (Correct Option)
B) The legal reduction of tax liability
C) The avoidance of taxes through legal loopholes
D) The payment of taxes on time
Rationale:
Tax evasion involves illegal practices to avoid paying taxes, such as underreporting
income or inflating deductions.
Question 7
What is a "tax deduction"?
A) An expense that can be subtracted from total income to reduce taxable
income. (Correct Option)
,B) A tax owed to the government
C) A fee imposed for late payment of taxes
D) An amount paid to receive a tax refund
Rationale:
Tax deductions reduce a taxpayer's taxable income, leading to a lower tax liability.
Question 8
What is the purpose of a "tax credit"?
A) To directly reduce the amount of tax owed. (Correct Option)
B) To increase taxable income
C) To provide a refund for overpaid taxes
D) To impose additional taxes on high earners
Rationale:
A tax credit directly reduces the amount of tax owed, providing a dollar-for-dollar
reduction in tax liability.
Question 9
Which of the following taxes is typically considered regressive?
A) Sales tax. (Correct Option)
B) Income tax
C) Corporate tax
D) Capital gains tax
Rationale:
Sales tax is considered regressive because it takes a larger percentage of income from
lower-income individuals than from higher-income individuals.
Question 10
What is "capital gains tax"?
A) A tax on the profit from the sale of an asset. (Correct Option)
B) A tax on income earned from employment
C) A tax on inherited wealth
D) A tax on corporate profits
Rationale:
, Capital gains tax is levied on the profit gained from the sale of assets such as stocks, real
estate, or other investments.
Question 11
What is the "tax base"?
A) The total amount of income or wealth subject to taxation. (Correct Option)
B) The total revenue generated from taxes
C) The total amount of tax credits available
D) The total number of taxpayers in a jurisdiction
Rationale:
The tax base represents the total amount of income, property, or transactions that can
be taxed by the government.
Question 12
What is the "federal income tax"?
A) A tax imposed on individual and corporate earnings at the national level.
(Correct Option)
B) A tax imposed only on corporations
C) A tax collected by state governments
D) A tax based on property value
Rationale:
Federal income tax is levied by the national government on the earnings of individuals
and corporations.
Question 13
Which of the following is a characteristic of a "flat tax"?
A) A single tax rate applied to all income levels. (Correct Option)
B) Higher rates for higher income brackets
C) Multiple rates based on income
D) Exemptions for low-income earners
Rationale:
A flat tax applies the same tax rate to all taxpayers, regardless of their income level.
Question 14
Prep 2025–2026 | Complete Test Bank with
Application Questions, Verified Answers, Detailed
Rationales & Study Guide for UNISA, BCom, and
Accounting Students
Question 1
What is the primary purpose of taxation?
A) To raise revenue for government expenditures. (Correct Option)
B) To promote specific industries
C) To control inflation
D) To redistribute wealth
Rationale:
The primary purpose of taxation is to generate revenue for government operations and
public services.
Question 2
What does the term "progressive tax" refer to?
A) A tax that increases as income increases. (Correct Option)
B) A tax that decreases as income increases
C) A flat tax rate for all income levels
D) A tax that only affects corporations
Rationale:
A progressive tax imposes a higher tax rate on higher income levels, ensuring that those
who can afford to pay more contribute a larger share.
Question 3
What is the difference between direct and indirect taxes?
A) Direct taxes are levied on income, while indirect taxes are levied on goods
and services. (Correct Option)
B) Direct taxes are easier to collect than indirect taxes
C) Indirect taxes are always higher than direct taxes
D) Direct taxes are temporary, whereas indirect taxes are permanent
Rationale:
Direct taxes are assessed on income or profits, while indirect taxes are collected on the
sale of goods and services.
,Question 4
Which of the following is an example of a direct tax?
A) Income tax. (Correct Option)
B) Value-added tax (VAT)
C) Sales tax
D) Excise duty
Rationale:
Income tax is a direct tax imposed on individual or corporate earnings.
Question 5
What is the primary objective of tax policy?
A) To achieve economic stability and growth. (Correct Option)
B) To eliminate all forms of taxation
C) To increase government control over the economy
D) To prioritize certain industries over others
Rationale:
Tax policy aims to create a stable economic environment that encourages growth and
investment while ensuring fairness in the tax system.
Question 6
What does "tax evasion" refer to?
A) The illegal act of not paying taxes owed. (Correct Option)
B) The legal reduction of tax liability
C) The avoidance of taxes through legal loopholes
D) The payment of taxes on time
Rationale:
Tax evasion involves illegal practices to avoid paying taxes, such as underreporting
income or inflating deductions.
Question 7
What is a "tax deduction"?
A) An expense that can be subtracted from total income to reduce taxable
income. (Correct Option)
,B) A tax owed to the government
C) A fee imposed for late payment of taxes
D) An amount paid to receive a tax refund
Rationale:
Tax deductions reduce a taxpayer's taxable income, leading to a lower tax liability.
Question 8
What is the purpose of a "tax credit"?
A) To directly reduce the amount of tax owed. (Correct Option)
B) To increase taxable income
C) To provide a refund for overpaid taxes
D) To impose additional taxes on high earners
Rationale:
A tax credit directly reduces the amount of tax owed, providing a dollar-for-dollar
reduction in tax liability.
Question 9
Which of the following taxes is typically considered regressive?
A) Sales tax. (Correct Option)
B) Income tax
C) Corporate tax
D) Capital gains tax
Rationale:
Sales tax is considered regressive because it takes a larger percentage of income from
lower-income individuals than from higher-income individuals.
Question 10
What is "capital gains tax"?
A) A tax on the profit from the sale of an asset. (Correct Option)
B) A tax on income earned from employment
C) A tax on inherited wealth
D) A tax on corporate profits
Rationale:
, Capital gains tax is levied on the profit gained from the sale of assets such as stocks, real
estate, or other investments.
Question 11
What is the "tax base"?
A) The total amount of income or wealth subject to taxation. (Correct Option)
B) The total revenue generated from taxes
C) The total amount of tax credits available
D) The total number of taxpayers in a jurisdiction
Rationale:
The tax base represents the total amount of income, property, or transactions that can
be taxed by the government.
Question 12
What is the "federal income tax"?
A) A tax imposed on individual and corporate earnings at the national level.
(Correct Option)
B) A tax imposed only on corporations
C) A tax collected by state governments
D) A tax based on property value
Rationale:
Federal income tax is levied by the national government on the earnings of individuals
and corporations.
Question 13
Which of the following is a characteristic of a "flat tax"?
A) A single tax rate applied to all income levels. (Correct Option)
B) Higher rates for higher income brackets
C) Multiple rates based on income
D) Exemptions for low-income earners
Rationale:
A flat tax applies the same tax rate to all taxpayers, regardless of their income level.
Question 14
