Correct Option: C. Regressive Explanation of the Correct Answer To determine the nature of the tax that Mr. A and Mr. B are paying, we need to analyze how the tax burden is distributed relative to their incomes.

1. Understanding Tax Types:
2. Progressive Tax: A tax system where the tax rate increases as the taxable amount increases. Higher earners pay a larger percentage of their income in taxes compared to lower earners.
3. Regressive Tax: A tax system where the tax rate decreases as the taxable amount increases. Lower earners pay a larger percentage of their income in taxes compared to higher earners.
4. Proportional Tax: A tax system where the tax rate remains constant regardless of income level. Everyone pays the same percentage of their income.
5. Indirect Tax: Taxes that are not directly paid by the individual but are included in the price of goods and services (e.g., sales tax, VAT).
6. Calculating the Effective Tax Rate:
7. For Mr. A:
   • Income = N2,000
   • Tax Paid = N200
   • Effective Tax Rate = (Tax Paid / Income) × 100 = (200 / 2000) × 100 = 10%
8. For Mr. B:
   • Income = N8,000
   • Tax Paid = N400
   • Effective Tax Rate = (Tax Paid / Income) × 100 = (400 / 8000) × 100 = 5%
9. Analyzing the Effective Tax Rates:
10. Mr. A pays 10% of his income in taxes, while Mr. B pays only 5% of his income in taxes. This means that as income increases, the percentage of income paid in taxes decreases. This is the hallmark of a regressive tax system.
11. Conclusion:
12. Since Mr. A, who earns less, pays a higher percentage of his income in taxes compared to Mr. B, the tax structure is regressive. Therefore, the correct answer is C. Regressive.

Explanation of Why Other Options Are Incorrect

• A. Progressive: This option is incorrect because, in a progressive tax system, higher earners would pay a higher percentage of their income in taxes. In this case, Mr. B, who earns more, pays a lower percentage of his income in taxes than Mr. A.
• B. Indirect: This option is also incorrect because the tax being discussed is a direct tax (paid directly by the individuals based on their income) rather than an indirect tax (which is included in the price of goods and services).
• D. Proportional: This option is incorrect because a proportional tax would mean that both Mr. A and Mr. B pay the same percentage of their income in taxes. Since their effective tax rates differ (10% for Mr. A and 5% for Mr. B), this is not a proportional tax.

Summary of Key Points

• A regressive tax system imposes a higher percentage burden on lower-income earners compared to higher-income earners.
• Mr. A pays 10% of his income in taxes, while Mr. B pays only 5%, illustrating the regressive nature of the tax.
• Understanding the differences between progressive, regressive, proportional, and indirect taxes is crucial for analyzing tax systems.
• Always calculate the effective tax rate to determine how tax burdens are distributed among different income levels.