ABSTRACT

This study has examined taxation and economic growth in Nigeria: an empirical analysis. The primary goal of any developing country is to increase the rate of economic growth and per capital income which leads to a higher standard of living. Thus, taxation can be used as a stimulus to accelerate such growth in the Nigerian economy. Combined with economic growth, it reduces long term reliance on aid and ensures good governance by promoting the accountability of governments to their citizens. It has been observed that in Nigeria, the quantum of income generated from non-oil tax over the years by the federal government is grossly insufficient in relation to the ever increasing social, political and infrastructural developmental needs of the country. In Nigeria revenue derived from income taxes has been grossly understated due to improper tax administration, assessment and collection. It Is in the light of these and many more that this study examined the impact of tax revenue on aggregate and disaggregate on economic growth in Nigeria for the period 1979-2018 with purposive sampling technique. ARDL model was employed. The result showed that PPT has significance effect on gross domestic product with coefficient 0.4675 at 5% level of significance. Company income tax also has a positive significant effect on economic growth with coefficient 0.1975 with p-value of 5% level of significant. The overall result showed significant effect of tax revenue on aggregate on economic growth. The study then concluded that there is urgent need for government to prioritize her needs as petroleum revenue continues to decrease. Therefore, the study recommends that government should try to diversify the economy as revenue generated from petroleum should be used to develop other sectors of income generation.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

One of the most commonly discussed issues in economics is on how taxes as means of fiscal policy at stabilizing the general economy relate to economic growth of developing countries such as Nigeria. A lot of studies have tended to yield an audience of the relationship between taxation and economic. Some of the studies have rather yielded results that have established negative effects of taxes on economic growth. Taxes as means of fiscal policy raises the cost or lower the return to the taxed activity (Juliana, Mustaffa and Zulkifli, 2018).

Income taxes create a disincentive to earning taxable income. Individuals and firm have an incentive to engage in activities that minimize their tax burden. As they substitute activities that are taxes at a cover rate for activities taxed at a higher rate, individuals and firms will engage in less productive activity, leading to lower rates of economic growth (Juliana Mustaffa and Zlukifli, 2017).

Economic growth is the basis of increased prosperity. Investments in new capital such as (human and physical) the implementation of new production techniques and the introduction of new products are the fundamentals of the growth process. Though its effect on the return to investment or the expected profitability of research and development, taxation can affect what choices are made and ultimately the rate of growth. Taxation is necessary simply because it would neither be feasible nor desirable to finance government solely by charges on services (Mwima-Swaya, 2015).

Basically, taxation refers to a system used by the government through levying assessments to obtain money from people, industries and organizations. It is not only relatively paramount but also compulsory and does not guarantee a direct relationship between the amount contributed by a citizen and the extent of government services provided to him/her. A tax is an involuntary fee paid by individuals or business to the government for the sole purpose of answering resources to society and economically beneficial use, to stabilize the economy and to redistribute wealth between the rich and the poor (Mwima-Swaya, 2916).

Moreover, the relationship between taxation and economic growth has of recent times become one of the most important economic issues. This is particularly due to the poor fiscal performance in a number of developing countries such as Nigeria. The relationship to a large extent empirical and forces one to employ methods of scientific investigation that do not yield aprioristic conclusions and external truths, but only statements of validity limited by the character of the model used or by significance of evidence provided (Dalibor, 2015).

The primary goal of any developing country is to increase the rate of economic growth and per capital income which leads to a higher standard of living. Thus, taxation can be used as a stimulus to accelerate such growth in the Nigerian economy. Economic history of both developed and developing countries, reveals that taxation is an important instrument of government that generates revenue, which also create fiscal goals that influence the direction of investment and taming the consumption and production of certain goods and services. Oriakhi, (2014) stated that, taxes are imposed to regulate the production of certain goods and services, protection of infant industries, control business and commerce, curb inflation, and these in turn result to economic growth.

Taxation is the key to promoting sustainable growth and poverty reduction. It provides developing countries with a stable and predictable fiscal environment, promote growth and to finance their social and physical infrastructural needs. Combined with economic growth, it reduces long term reliance on aid and ensures good governance by promoting the accountability of governments to their citizens (Romer & Romer, 2020). They buttressed their point that, availability and mobilization of revenue is the fundamental factor with which an economy is managed.

A sound tax system protects infant industries, encourages entrepreneurial development in the country, which is paramount for the sustenance of economic growth of every economy (Eyisi, Chioma & Bassey, 2015). Taxation has existed since the birth of early civilization and it could be said that it is part of the price to be paid for living in an organized society. However, taxation is not just a means of transferring money to the government to spend as it thinks fit, but it also has a tendency to reflect prevailing social values and priorities (Soyode & Kajola, 2016).

Basically, there are two ways of financing government expenditure in Nigeria; which are oil revenue and non-oil revenue sources, the Nigerian government derives a large proportion of its total revenue from oil. Empirical studies have shown that the quantum of revenue available to any government needed to meet the social and capital expenditure in a country depends on its ability to harness funds from internal and external sources and channel it towards national development and economic prosperity. Appah (2020) stated that revenue from taxation forms the bedrock of the revenue base of most governments all over the world. The extent to which a government can provide social, economic and infrastructural development is a function of the amount of funds at its disposal. This research therefore examined taxation and economic growth in Nigeria: an empirical analysis.

1.2 Statement of the problem

The achievement of Macro Economic objective of full employment, stability of price level, high and sustainable Economic growth from time immemorial has been a policy priority of every economy such as Nigeria given the susceptibility variables to fluctuations in the economy. The achievement of this very goal is influenced by the employment of fiscal policy instrument such as taxation.

It has been observed over the years that tax revenue has generally been grossly understated due to improper tax administration arising from under assessment and inefficient machinery for collection (Chigbu & Njoku, 2015). In Nigeria revenue derived from income taxes has been grossly understated due to improper tax administration, assessment and collection (Ola, 2001; Adegbie & Fakile, 2021). Persons and companies are known to routinely evade and avoid taxes due to corrupt practices and the existence of various loopholes in the tax laws. According to Oluba (2018), the success or failure of any tax system depends on the extent to which it is properly managed; the extent to which the tax law is properly interpreted and implemented.

According to Iweala, (2013), about 75% of registered firms were not in the tax system and 65% of them had not filed their tax returns for 3years (2020-2015). Over ₦80billion was lost monthly from these companies, estimating the total Company Income Tax leakages in that period to about $250million.

According to Fowler (2018), there are 6,772 number of billionaire tax defaulters and they are of three categories: those that have Tax Identification Number (TIN), those that do not have TIN and of course no TIN no pay and those that have not even paid anything. On a minimum, every company or business included here over the period three years (2015-2017) have had a banking turnover of N3 billion and above while some of them have had banking turnover of over N5 billion and have not paid one kobo in taxes.

Illiyas and Siddiqi (2018), observed that in Nigeria, the quantum of income generated from non-oil tax over the years by the federal government is grossly insufficient in relation to the ever increasing social, political and infrastructural developmental needs of the country. As noted by Odusola (2016), Nigeria economy has thrived largely on oil revenue in the past decades. In essence, Nigeria runs a monolithic economy which is subject to international oil price mechanism far beyond the control of the government, thereby exposing the economy to global market fluctuations, slant budgetary protrusions, and renders meaningful developments unapt. The current budget of borrowing in Nigeria is a fall out of the dwindling oil revenue that has sank into abysmal low prices in the international market and has thrown the Nigeria budget in recent years into serious crisis.

Therefore, the problems of poor economic growth, insufficient revenue collection and inefficient administrative framework by federal government of Nigeria were the major issues this study investigated. The main objective of this study is to examine the impact of tax revenue collected on the economic growth of Nigeria. The specific objectives were raised.

1.3 Objectives of the Study

i. Assess the impact of Petroleum Profit Tax on economic growth in Nigeria;

ii. Ascertain the influence of Companies’ Income Tax on economic growth in Nigeria;

iii. Examine the impact of Custom and Excise Duties on economic growth in Nigeria.

1.4 Research questions

i. What is the impact of Petroleum Profit Tax on economic growth in Nigeria?

ii. What is the influence of Companies’ Income Tax on economic growth in Nigeria?

iii. What is the impact of Custom and Excise Duties on economic growth in Nigeria?

1.5 Hypotheses of the study

i. There is no impact of Petroleum Profit Tax on economic growth in Nigeria.

ii. There is no influence of Companies’ Income Tax on economic growth in Nigeria.

iii. There is no impact of Custom and Excise Duties on economic growth in Nigeria.

1.6 Significance of the study

The significance of this study can be viewed from two major stands points-academic and practical.

a. Academic Significance:

In the academic arena, this study will prove to be significant in the following ways:

i. It will contribute to the enrichment of the literature by adding a new body of knowledge to the existing body of knowledge in the research work related to the research

topic.

ii. The study aims at exposing factors responsible for low level of revenue from taxation in Nigeria

iii. It will suggest ways (of interest to academics) based on empirical evidence of improving tax Administration process in Nigeria.

iv. The research work also aim at providing recommendation to address the savagery impact of poor taxation and tax system as an aid to economic and social development in

Nigeria

B. Practical Significance

This kind of study will assist in broadening understanding and scope of knowledge of the following:

i. To policy makers and regulators, it will present a scheme through it’s analysis of the loopholes in the taxation Administration and taxation system.

ii. To economic watchers and interested public, it will provide some insight into the factors militating against the impact of taxation as a tool for socioeconomic development in Nigeria

iii. To students, it will provide more information on the origin of taxation in Nigeria and it’s importance to economic and social development when properly designed.

1.7 Scope of the study

This study examined the impact of taxation on the economic growth of Nigeria. This study covers the time between 1995-2021. In terms of the samples size, such taxes as petroleum profit tax, company income tax, value added tax and personal income tax are critically examined under this study within the Nigeria economy with a geographical bias or restriction. The period of the study is forty (40) years spanning from 1979-2018.

1.8 Limitation of the study

There are still scanty literature reviews on the impact of taxation over the Nigerian economy. Most of the study done thus far on taxation and economic growth has mainly been peculiar to advanced countries of the world.

Data serve as another limitation of the study. Most times, the accuracy and reliability of the data extracted from the secondary source are unreliable, such that the outcome of this study might be very valid and the problem of generalizing the outcome of the study.

1.9 Operational definition of terms

TAXATION: This is a Compulsory levy imposed by the government to defray the cost of government and communal services.

GROSS DOMESTIC PRODUCT: This is the market value of all officially recognized final goods and services produced or the primary indicators used to gauge the health of a countries economy.

DEVELOPMENT: This is the sustained concerted actions of a policymakers to promote taxation and economic health of a specified area.

GROWTH: This is the increase in the amount of tax paid by the tax payers over time or it is the conventionally measure in percentage rate of increase in real GDP calculated in real terms.