TAXATION AND ECONOMIC GROWTH IN NIGERIA: AN EMPIRICAL ANALYSIS
1.1 Background to the Study
The Nigerian Tax System has undergone significant changes in recent times. The Tax Laws are being reviewed with the aim of repelling obsolete provisions and simplifying the main ones. Under current Nigerian law, tax revenue is enforced by the 3 tiers of Government, which are Federal, State, and Local Government with each having its sphere clearly spelt out in the Taxes and Levies Act, 1998. The whole essence of tax revenue is to generate revenue to advance the welfare of the people of a nation with focus on promoting economic growth and development of a country through the provision of basic amenities for improved public services via proper administrative system, and structures. Tax revenue plays a crucial role in promoting economic activity growth and development. Through tax revenue, government ensures that resources are channeled towards important projects in the society, while giving succor to the weak. The role of tax revenue in promoting economic activity and growth may not be felt if poorly administered. This calls for a need for proper examination of the relationship between revenue generated from taxes and the economy, to enable proper policy formulation and strategy towards its efficiency. According to Olashore (1999), the Nigerian economy has remained in a deep slumber with macroeconomic indicators reflecting an economy in dire need of rejuvenation, revival and indeed radical reform. Also in the view of Oni (1998), tax administration needs to be revamped and refunds of taxes as well as duty drawbacks administration are inefficient.
A critical challenge before tax administration in the 21st century Nigeria is to advance the frontiers of professionalism, accountability and awareness of the general public on the imperatives and benefits of tax revenue in our personal and business lives which include: promoting economic activity; facilitating savings and investment; and generating strategic competitive advantage. If tax administration does not for any reason meet the above challenges, then there is a desperate need for reform in the area of the tax regime, and in the administration of taxes.
A country‘s tax system is a major determinant of other macroeconomic indexes, specifically, for both developed and developing economies; there exists a relationship between tax structure and the level of economic growth and development. Indeed, it has been argued that the level of economic growth has a very strong impact on a country‘s tax base (Kiabel, 2009, and Vincent, 2001), and tax policy objectives vary with the stages of development. Similarly, the economic criteria by which a tax structure is to be judged and the relative importance of each tax source vary over time (Vincent, 2001). For example, during the colonial era and immediately after the Nigeria‘s political independence in 1960, the sole objective of tax revenue was to raise revenue. Later on, emphasis shifted to the infant industries protection and income redistribution objectives. In his discussion of the relationship between tax structure and economic development, (Vincent, 2001) divided the period of economic development into two, the early period when an economy is relatively underdeveloped and the later period when the economy is developed. During the early period, there is limited scope for the use of direct taxes because the majority of the populace resides in the rural areas and is engaged in subsistence agriculture. Because their incomes are difficult to estimate, tax assessment at this stage is based on presumptions prone to wide margins of error.
Tax revenue is a powerful tool of economic reform and a major player in every economy of the world. It is never static but dynamic and should reflect current realities prevailing in the economy. The tax system is an opportunity for government to collect additional revenue besides other sources of income, which is needed in discharging its pressing obligations. A good system of tax also offers itself as one of the most effective means of mobilizing a nation’s internal resources and it lends itself to creating enabling and conducive environment to the promotion of economic growth and development (Ogbonna, 2010).
Further, the rudimentary nature of the economy precludes retail form of taxes. At this stage also, taxes are difficult to collect because of the lack of skills and facilities for tax administration (Kiabel, 2009). Given this, a complicated tax structure is not feasible and the amount of revenue from personal income tax will depend on taxpayers‘ compliance and the efficiency of the tax collector. An important source of government revenue during the early stage of economic development is the foreign trade sector because exports and imports are readily identifiable and they pass through few ports. However, revenue from export and custom duties is not stable because of periodic fluctuations in the prices of primary products. This tends to complicate plan implementation in many developing countries (Kiabel, 2009).
Tax revenue mobilization as a source for financing development activities in Nigeria has been a difficult issue primarily because of various forms of resistance, such as evasion, avoidance and corrupt practices attending to it. These activities are considered as sabotaging the economy and are readily presented as reasons for the underdevelopment of the country. (Adegbie et al, 2010:2). Government exists in order to effectively collect taxes from available economic resources and make use of same to create economic prosperity such that available and willing human and other resources are gainfully employed, infrastructures provided, essential public services (such as the maintenance of law and order) are put in place etc. Tax resistance only makes the development process unattainable. (Onairobi, 1998). It could be deduced that changing or fine-tuning, tax rates is used to influence or achieve macroeconomic stability. Some of the most recently cited examples are the governments of Canada, United States, Netherland,
United Kingdom, who derive substantial revenue from Company Income tax, Value Added Tax, Import Duties and have used same to create prosperity (Adegbie et al, 2010:3). Thus it can be said that the economic development of a country depends on various reasons one of which is the presence of an effective and efficient tax revenue policy. In Nigeria the contribution of tax revenue has not met the expectations of Government. Government has equally expressed this disappointment and has accordingly vowed to expand the non-oil tax revenue. (Festus and Samuel, 2007). It is in the light of the foregoing that this study examines the extent to which the tax system has contributed to economic growth of Nigeria.
1.2 Statement of The Problem
There is a general lack of consensus among scholars on the contribution of tax revenue to the economic growth of nations. For instance, whereas Ariyo (1997) in his study on productivity of the Nigerian tax system documented a satisfactory level of productivity of the tax system before the oil boom, Festus and Samuel (2007) established that the role of tax revenue in promoting economic activities and growth is not felt in Nigeria. The two studies reflect that the oil boom has not improved the economic state of the country since before the boom, there was a level satisfactory and after the boom, the growth of economic activities deteriorated. The emergence of oil as a major tax revenue is one of the means a country‘s government devises in solving the economic problems of the country and to enhance government expenditure which is expected to be beneficial to the citizens of such country through the provision of social and economic infrastructures (Adereti et al 2011). In Nigeria, this has not been the case because despite the tax revenue and expenditure reported year in year out by the government, the physical state of the nation in terms of infrastructure and social amenities is backward. This is evident in the lack of electricity supply, portable drinking water, basic health care delivery, bad roads, just to mention but a few.
The gap in terms of the period covered is also a contributory factor to the disparity in the outcomes of relationship between tax revenue and an economy. The advent of the oil boom encouraged some laxity in the management of non-oil revenue sources like the company income tax and custom and excise duties. This calls for an urgent need in the improvement of the tax system to enhance the evaluation of the performance and facilitate adequate macroeconomic planning and implementation (Adereti et al 2011).
Bonu and Pedro (2009) investigated the impact of income tax rates (ITR) on the economic development of Botswana which shows that the impact of income tax revenue over the nations GDP is not impressive in developing nations. This calls for the need to further investigate the current tax performance vis-à-vis the Nigerian economy.
1.3 Objectives of the Study
Broadly, the objective of this study is to identify the impact of tax revenue on the Nigerian economic growth from 1981-2010. Other specific objectives include:
i. To investigate the impact of petroleum profit tax on the growth of the economy of Nigeria.
ii. To investigate the impact of company income tax on the growth of the economy of Nigeria.
iii. To investigate the impact of custom and excise duties on the growth of the economy of Nigeria.
iv. To investigate the impact of value added tax on the growth of the economy of Nigeria.
1.4 Research Questions
The study would examine the following questions:
(1) Does tax revenue have any significant impact on the economy of Nigeria?
(2) What is the impact of Petroleum profit tax on the development of Nigeria‘s economy?
(3) What is the impact of Company income tax to the development of the economy of Nigeria?
(4) What is the impact of Customs excise and Duties to the development of the economy of Nigeria?
(5) What is the impact of Value Added tax to the development of the economy of Nigeria?
1.5 Research Hypotheses
From the objectives of this study, the following hypothesis have been formulated:
1. H01: Taxation does not have any significant impact on the growth of the Nigerian economy.
2. H02: Petroleum Tax has no significant impact on Nigerian economic growth.
3. H03: Company Income Tax has no significant impact on Nigerian economic growth.
4. H04: Custom and Excise Duties has no significant impact on Nigerian economic growth.
5. H05: Value Added Tax has no significant impact on Nigerian economic growth.
1.6 Scope of the Study
The scope of this study covers the impact of tax revenue on the Nigerian economic growth over a period of 31 years (from 1981-2010). The trend of Company Income tax, Petroleum profit tax, Customs and excise duty and Value added tax are examined for the period to determine their correlation with the Nigerian economy which will be captured as Gross Domestic Product(GDP). The focus will be based on data obtained at the Federal Inland Revenue Service (FIRS).
1.7 Significance of the Study
Tax revenue is one of the sources of revenue to the government. This can be used to achieve economic growth, maintain equilibrium in the economy by combating elements of depression, inflation or deflation, achieve equity in income and wealth distribution and address issues of poverty and promote socioeconomic development, hence the need to find out the extent tax revenue impacts on Nigeria‘s economic growth. The research findings would be of importance to policy makers at national level as they design policies aimed at enhancing economic growth and development through a better tax revenue system. Policy makers, especially the Federal Inland Revenue Service will use the outcome of the study to gauge its performance, and determine the level of input it would have to make to impact positively to the Nigerian economy. Students, academicians and other scholars who wish to undertake further research on taxation will find the literature arising from this study to be of great value, as it will be added to the existing literature.