Public Finance

14 Grade 10 Business Studies questions on Public Finance, with worked marking schemes. 14 questions are available on this topic in full.

1. Question 1

   1 mark

   Under Kenya's pay as you earn (PAYE) system, a teacher earning a higher monthly salary pays a larger percentage of that salary as tax than a teacher earning less. This tax is best described as:

   A. Indirect

   B. Proportional

   C. Regressive

   D. Progressive

   (1 mark)

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2. Question 2

   4 marks

   Outline four sources of revenue available to a county government in Kenya.

   (4 marks)

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3. Question 3

   1 mark

   Which one of the following is an indirect tax?

   A. Value added tax charged on a bar of soap bought in a shop

   B. Pay as you earn deducted from a teacher's salary

   C. Land rates paid by a plot owner to the county government

   D. Corporation tax paid by a tea processing factory in Kericho

   (1 mark)

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4. Question 4

   1 mark

   A hardware trader in Kitale deliberately fails to declare part of his sales when filing his returns so as to pay less tax. This practice is known as:

   A. Tax shifting

   B. Tax avoidance

   C. Tax relief

   D. Tax evasion

   (1 mark)

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5. Question 5

   1 mark

   Which one of the following is a non-tax source of government revenue?

   A. Value added tax charged on electricity

   B. Fees paid for a single business permit at the county offices

   C. Excise duty charged on bottled soft drinks

   D. Import duty charged on second-hand clothes

   (1 mark)

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6. Question 6

   4 marks

   State four canons of a good tax system.

   (4 marks)

   Marking scheme

   Award 1 mark each for any FOUR of: equity (the tax should match the taxpayer's ability to pay); certainty (the amount, time and manner of payment should be clear in advance); convenience (it should be collected at a time and in a manner suitable to the taxpayer); economy (the cost of collecting it should be small compared with the yield); flexibility or elasticity (it should be adjustable as government needs change); diversity (revenue should come from several kinds of tax); simplicity (it should be easy for the taxpayer to understand).

7. Question 7

   1 mark

   The national government raises money by selling Treasury bonds to commercial banks and pension funds based in Nairobi. This borrowing is best described as:

   A. External debt

   B. A grant from development partners

   C. Bilateral borrowing

   D. Internal debt

   (1 mark)

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8. Question 8

   1 mark

   Which one of the following is an item of development expenditure by a county government?

   A. Constructing a new water pipeline to serve a market centre

   B. Paying the monthly salaries of county nurses

   C. Paying sitting allowances to members of the county assembly

   D. Buying fuel for the county ambulance

   (1 mark)

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9. Question 9

   6 marks

   Explain three effects on a small soft-drinks retailer in Kisumu of a sharp increase in excise duty on bottled soft drinks.

   (6 marks)

   Marking scheme

   Award 2 marks for each of any THREE effects (1 mark for the effect, 1 mark for the explanation): higher buying price, because the wholesaler passes the duty on, so each crate costs her more; higher selling price leading to reduced sales volume, as customers switch to cheaper drinks such as water or locally made juices; reduced profit margin where she absorbs part of the duty in order to retain her customers; more capital tied up per crate, so she stocks fewer crates and suffers a cash-flow strain; she may change her stock lines or source untaxed stock, exposing her to legal risk; falling turnover may force her to cut casual staff or trading hours.

10. Question 10

    1 mark

    State the meaning of a balanced budget.

    (1 mark)

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11. Question 11

    4 marks

    Suggest four measures the national government may take to reduce a budget deficit.

    (4 marks)

    Marking scheme

    Award 1 mark each for any FOUR of: widen the tax base by registering more traders, especially in the informal sector; seal revenue leakages and curb tax evasion using digital filing and payment systems; raise the rates on selected taxes such as excise duty; cut non-essential recurrent spending such as foreign travel and allowances; sell, lease or privatise loss-making state corporations; postpone development projects that are not urgent; seek grants from development partners; improve efficiency in procurement to reduce wastage. Suggestions that merely finance the deficit by fresh borrowing earn no mark.

12. Question 12

    1 mark

    In its annual estimates, the national government plans to spend Ksh 4 trillion while it expects to collect Ksh 3 trillion in revenue. This budget is:

    A. A balanced budget

    B. A supplementary budget

    C. A deficit budget

    D. A surplus budget

    (1 mark)

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13. Question 13

    4 marks

    Outline four reasons, other than raising revenue, why the government of Kenya imposes taxes.

    (4 marks)

    Marking scheme

    Award 1 mark each for any FOUR of: to discourage consumption of harmful goods, e.g. high excise duty on cigarettes and alcohol; to protect local industries by making imported substitutes dearer through import duty; to redistribute income, since heavier taxes on high earners fund services used by the poor; to control inflation by reducing the purchasing power in people's hands; to correct an unfavourable balance of payments by discouraging imports; to direct investment to chosen areas or activities through tax holidays and reliefs. Do not award marks twice for the same reason stated in different words.

14. Question 14

    2 marks

    Distinguish between recurrent expenditure and development expenditure by the government.

    (2 marks)

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