Impact of Taxation Revenue on Nigeria economic Growth

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Impact of taxation revenue on Nigeria economic growth with references. The taxation revenue on Nigeria economic growth comes to lime light considering the incidence of overdependent on oil revenue in Nigeria. This work examined the nature of tax system, benefits of tax revenue and mechanism that can be adopted to properly harness the revenue from taxation in Nigeria.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

For Nigerian government to effectively carry out its primary function and other subsidiary functions, governments need adequate funding. Government responsibilities has continue to increase over time especially in developing countries like Nigeria resulting from growing population of citizens, and infrastructural decay. But quit unfortunate the revenue of the government has not been growing above her expenditure to enable capital formation. In Nigerian, the government has depended so much on oil revenue for execution of its primary functions and economic goals neglecting taxation which is the primary sources of government revenue (Uzonwanne, 2015)

To this effect, the former Minister of Finance, Ngozi Okonjo-Iweala and other concerned citizens have called on governments at various levels to look for other means of revenue generation for the sustainable economic development of Nigeria. Kiabel & Nwokah (2009) corroborate this idea by saying that the dwindling revenue and increased cost of running government require all tiers of Nigeria government to look for alternative means of improving their revenue base. It is obvious that the country’s revenue from oil can no longer fully support its development objectives.

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Government spending as the basic tool of economic policy is conditioned by the necessity of their financing, where the tax revenues usually represent the most significant part of state budget income and this has always been neglected in Nigeria not until the fall in all price in 2016. The recent decline in government funds from oil has led the government at level to focus on tax and has equally abused same due to over charges or incidence of multiple taxation.

However, the tax system structure itself, tax mix, tax reliefs and tax surcharges and other characteristics of tax system are the subject of vast discussions and polemics not only among economists but also among other professionals and the public. This is the reason why individual tax systems are considerably heterogeneous and usually include various national specifications.

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Tax systems are primarily aimed at financing public expenditures. Tax systems are also used to promote other objectives, such as equity, and to address social and economic concerns. They need to be set up to minimise taxpayers’ compliance costs and government’s administrative cost, while also discouraging tax avoidance and evasion. But taxes also affect the decisions of households to save, supply labour and invest in human capital, the decisions of firms to produce, create jobs, invest and innovate, as well as the choice of savings channels and assets by investors. What matters for these decisions is not only the level of taxes but also the way in which different tax instruments are designed and combined to generate revenues (what this paper will henceforth refer to as tax structures). The effects of tax levels and tax structures on agents’ economic behaviour are likely to be reflected in overall living standards.

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Concurrently, many developed countries integrated in OECD are currently affected by the significant budget crisis within which they have problems to repay their short-term and long-term liabilities. Due to this, governments themselves are exposed to increased supervision from the financial markets and therefore they are forced to consolidate public budgets. The public finance crisis is usually solved by two concrete channels – channel of reducing the public spending, and the channel of increasing taxes, or tax revenues. On one hand, the basic aim of the consolidation is to keep criteria of budget responsibility as determined, and on the other hand, to restore the economic growth as soon as possible.

Different approaches to the creation and characteristics of tax system with the connection to budget problems of developed economies emphasize the significance of the issue of mutual interaction between taxes (tax burden) and economic growth (as a basic aim of the economic policy makers).

For instance, it is possible that taxes that influence innovation activities and entrepreneurship may have persistent long-run growth effects, while taxes that influence investment also can have persistent effects on growth but these will fade out in the long-run. In contrast, taxes affecting labour supply will mainly influence GDP levels. In this spirit, this study looks at consequences of taxes for both GDP per capita levels and their transitional growth rates, with a large part of the empirical analysis devoted to assessing the effects of different forms of personal and corporate income taxation on total factor productivity growth.

Therefore, the aim of this paper is to evaluate the taxation and economic growth by utilizing regression analysis on Nigeria economic growth for period 1981 – 2015. The analysis is based on widened neoclassical growth model of Mankiw, Romer and Weil (1992). When evaluating impact of taxation on the economic dynamics it is impossible to work with statutory tax rates because they have a very low explanatory power when it comes to the representation of real tax burden.

1.2 Statement of the Problem

There exists a consensus in the literature that an adequate and effective macroeconomic policy is critical to any successful development process aimed at achieving high employment, sustainable economic growth, price stability, long-viability of the balance of payments and external equilibrium.

The poor growth performance of the Nigerian economy since 1982 has generated interest in issue of growth and development. After the discovery of oil in commercial quantities, oil became the major source of government revenue contributing about 80% to her revenue. Due to the oil revenue Nigeria government neglected tax revenue which is major source of revenue to any government as well as the agriculture sector

Nigeria is endowed with enormous potential for growth and development with her vast oil and gas resources, rich and expensive agricultural land, solid minerals and abundant human resources. Despite these factors, since 1960 when she got her independence from Britain, the successive governments have not done enough to put the nation’s resources to effective productive use as to chart the path of growth and development.

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Given the fall in oil price in 1980’s Nigeria government could not control her expenditure in relation to the fall in her revenue base. Data available indicate that by 1985, government expenditure was N13040.9 million, by 1990, it increased to N60268.2 million and N254038 million in 1995. In 1998, the total expenditure of the federal government recurrent and capital was N443,563.3 billion, increased by N87,3010 billion or 2.45% above N356,262.3 billion for the period of 1997. The expenditure also exceeded the 1998 budget estimate of N370, 000 billion by N73,563.3 billion or 19.9% also between the year 2005 and 2009, the general government expenditure has also been increasing rapidly.

With the increase in government expenditure, the government failed to diversify her revenue base. The tax system was poorly organized and culminated with tax evasion especially by the top government officials leading to budget deficit in the country. Currently Nigeria government spends 42% of her fiscal budget on debt servicing (DMO, 2016). The increase in debt service payment creates socio-economic problems in the society. This and many other un-identified problems led the researcher to evaluate the relationship between taxation and economic growth in Nigeria.

1.3 Research Questions

Given the aforementioned problem prevalent in taxation, hence this research work on taxation and Nigeria economic growth tries to answer the following specific research questions:

  1. To what extent has taxation revenue impacted on economic growth of Nigeria?
  2. Is there any observed long-run relationship between taxation and Nigeria economic growth?

1.4 Objectives of the Study

The main objective of the study is to investigate the impact of taxation revenue on Nigeria economic growth. The specific objectives of study are to:

(i) Empirically investigate the impact of taxation revenue on Nigeria economic growth.

(ii) Examine the long-run relationship between taxation and Nigeria’s economic growth.

1.5 Statement of Hypothesis

In order to have a framework for the study and also to answer the research questions above, the following hypotheses were formulated:

  1. H0: Taxation has no significant impact on Nigeria’s economic growth.
  2. H0: There is no long-run relationship between Taxation and economic growth of Nigeria.

1.6 Significance of the Study

The study will be of benefit to Government and hence will help public fund managers in making adequate financial planning, forecast as well as mending the needed areas in public expenditure to balance with revenue base. Also it will encourage government in finding lasting solution to the problem of income inequality and rising poverty across the country.

All stakeholders in the public sector will find the work valuable as it redirect and re-orientate the thinking of managers of public and private enterprise on importance taxation to nation growth and development.

Individuals and groups will also benefit from this study as it will provide the avenue for better public participation in budget and budgetary implementation and tracking.

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This research work will be of great intellectual value to students of economics and other discipline who would want to make further research on economic growth and public expenditure as an evaluation of the effectiveness of fiscal policy in Nigeria.

Lastly, it will add to already existing body of knowledge on this topic as it will provides a new window for further research.

1.7 Scope and Limitation of the Study

The study seeks to analyze Nigeria’s taxation and its impact on her economic growth. In order to fully capture its effect on the economy, a thorough empirical investigation will be conducted with data covering a period of 36 years i.e. 1981-2015. This period was chosen to cover the period after the oil collapse and also the post debt-relief era. This study is limited by the following factors;

Paucity of Materials: Materials for the study were not adequate and consistent thereby resulting to extra effort by the researcher to validate the data.

Inaccessibility of Data: Difficulty in accessing data for the study was yet another limitation. This had its own toll on the research work because it limited the data that was used for the study.

Financial Constraint: Lack of adequate funds on the part of the researcher constituted another problem.

However, amidst all these enumerated constraint faced by the researcher, effort was adequately made by the researcher to ensure the reliability of the result by subjecting the research to many advance econometric test to fish out any possible spuriousity of result among others.

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