An Empirical Investigation Of The Influence Of Taxation On The Nigerian Economy (1980 – 2006)

Project and Seminar Material for Economics

Project and Seminar Material for Economics


The main objective of this project work is to critically examine the influence of taxation on the Nigerian economy. There is a considerable debate over the appropriate role for the tax policy in Nigeria. In one view, likes reduces deficits and ease budgetary pressures, thereby emphasizes the distortionary effects associated with increased taxation and the positive benefits of a carefully designed tax system. This research tests these propositions by measuring the impact of government taxation and expenditure on real gross domestic product. A theoretical model is derived which shows that the impact of government expenditure, paradoxically, has an insignificant negative effect on RGDP in Nigeria. Custom and excise duties has a significant positive effect on economic growth in Nigeria. Company income tax affects economic growth, in negative and significant way.

Chapter one

Background Of The Study

Capitalism as advocated by Adams Smith (1776) in his book, “The Wealth of Nation” implies an economic system where the means of production and distribution of goods and services lies in the hands of individual. To enhance the smooth running of the economic system, a well secured environment through the maintenance of law and order to including the provision of social overhead by the government. Government need resources (finance) to meet up with this endless task. Hence, the concept of taxation becomes eminent.

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, it also has a tendency to reflect prevailing social values and priorities. The system of taxation is a socio-economic model, representing society’s social, political and economic needs often being reflected by changes to the system of taxation.

Oriakhi, (2002) defines taxation “as a compulsory levy an those who are taxed have to pay the sums irrespective of any corresponding returns of services or goods by the government, the government of most developing countries profess a desire to stimulate and guide the economic, and social development of their nations. The tax system is often identified as one of the most power levers available to those government to move the economy. Anyanwu (1997) view taxation as “compulsory transfer of payment of money from private individuals, institution or groups to the government. Taxation, system of raising money to finance government. All government requires payments of money taxes from people. Government uses tax revenues to pay soldiers and police, to build dams and roads, to operate schools and hospitals, and for hundreds of their purposes. Throughout history, people have debated the amount and kind of taxes that a government should impose, as well as how it should distribute the burden of those taxes across society.

Taxation is the most important source of revenue for modern governments, typically accounting for 90 percent or more of their income. The remainder of government revenue comes from borrowing and from charging fees for services.

Nigeria is basically a mixed economy. The government and private sector work side by side, but due to Nigeria state of economic development coupled with multi-various problems, the government usually plays a greater role. Most problems that confronts Nigerian economic activities, which retards it’s growth calls for a greater participation by the government for their solution.

Besides, the government is also committed to the achievement of macro-economic goals such as price stability, full employment, equitable distribution of income, balance of payment (BOP) equilibrium and economic stability which enhance economic growth thereby paving way for economic development. Huge resources are required by the government to enable her meet up with this commitment. Taxation which is compulsory levy imposed on tax accessories is one of the major sources of government revenue in Nigeria. It is the objects of discussion in relation to Nigerian economic development through the ages in this study.

Revenue collection from taxation “direct to indirect is expendable on national development to improve and transform the social, mental, economic, institutional and environmental condition of the people through the mobilization of materials, human resources in order to their capacity to cope commensurately with the daily commitment as well as the demand for modern time.

The impact of the Nigeria tax system on Nigerian economy is a vital issue which serves as yardstick for the measurement of the national development as income generated is geared towards the provision of social overhead. It runs through Nigerian society in that it has economic, political and social implication for both the citizens and the nation. Consequently, upon the above analysis, welfare economics becomes influential compared to other aspect of economics.

Statement Of The Problem

Taxation emerges as a result of financial constraint and inadequacy in the nation. It is one of the fiscal policy tools adopted by any country to correct some abnormalities in working the achievement of the macro-economic goals, external and internal equilibrium. This study is carried out to scrutinize the Nigerian tax system and its influence on the Nigerian economy. Presumably, the revenue generated is used for the development of the nation.

In the light of this preamble to the study, the beneath interrogative statement seek to investigate the study.

  1. How does the operation of Nigeria tax system – it concept, principle, form, base, assessment, jurisdiction and collection affects Nigerian economy?
  2. Is there relationship between Nigerian tax system, its nature of operation and her economic development?
  3. What are the effect of government functionaries on tax collection in Nigeria?
  4. Does tax collection have any effects on project implementation in Nigeria?

Objective Of The Study

The research work is an attempt to accessing the influence of taxation on Nigerian economy. In line with these, the primary objective of the study are as follows:

  1. To investigate empirically the influence of taxation on the Nigerian economy.
  2. To critically evaluate the concept of taxation in Nigeria.
  3. To examine the various forms of taxation.
  4. To examine the principle of taxation in Nigeria.
  5. To realize tax significance in relation to economic development of the nation.
  6. To suggest possible solutions and recommend how best to correct the abnormalities and allocative efficiency in the utilization of revenue generated from tax to develop the nation.

Significance Of The Study

Taxation is primary introduced to enhance the smooth running of the state within a critical examination of the Nigerian tax system. Its obvious that it has not witnessed a successful and satisfactory return of income due to low compliance of which often result to tax avoidance and aversion caused by administrative inefficiency. In view of this, some states such as Edo and Delta State (1994-1996) employed the services of private individual or agent to enhance tax collection. For example Adetota William chartered accounting firm, Tosan (Edo State). While in Delta State, the local government did the collection of tax by awarding it as a contract to individual or enterprise to pay a stated amount to the council and they did the collection within the stated categories.

However, this study becomes imperative as it will serves as a medium for suggestion and recommendation on how best to correct the abnormalities that prevails in tax collection and improve the implementation of tax policies. This research will no doubt aid the government in controlling tax delinquency to set up revenue generation and geared it towards effective utilization by giving priority to programmes and project of social and economic optimal growth and development.

Hypothesis Of The Study

The hypotheses of this research are as follows:

  1. There is no significant relationship between government revenue and her economic development.
  2. There is no positive relationship between taxation and private investment in Nigeria.

Scope Of The Study

The research work is meant to have retrospective view of taxation over the past years and its impact on the development of the Nigerian economy. Nigeria is undergoing both economic and socio-political transition thereby viewing the citizens right and obligation in the diverse socio political environment. For effectiveness, the period under review is taken from 1980 – 2006.


The research work is based on text data and literature collected from the Central Bank of Nigeria (CBN). This includes end of year report, Central Bank of Nigeria Quarterly Economic Review and end of year Statistical Bulletin. Tax officer was also consulted during the write up. More information were collected from secondary source. The ordinary least square (OLS), method was adopted in the analysis of data since it is fairly simple with non excessive requirement of rates. Beside, serious statistical tools such as F-test, t-test and so on were applied in the analysis of data in this project work.

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