The Impact Of Taxation On Government Capital Expenditure And Economic Growth In Nigeria

Project and Seminar Material for Economics

Project and Seminar Material for Economics


Abstract


This study was carried out on the impact of taxation on government capital expenditure in Nigeria. It specifically evaluated the significant effect of companies’ income tax on government capital expenditure in Nigeria; the level of significance of petroleum profit tax on government capital expenditure in Nigeria; the significant impact of value added tax on government capital expenditure in Nigeria; and the long run relationship between tax revenue and government capital expenditure in Nigeria. The study used relevant secondary data that span from 2009 to 2018 extracted from series of published central bank statistical bulletins.

Public finance analysis model (CAPEX= f (CIT, PPT, VAT)) was formulated and was tested with the use of descriptive analysis in the form of minimum and maximum values, mean and coefficient of variation, while inferential statistics in the form of multiple regression, T-Test, Johansen’s co-integration test, coefficient of multiple determinations, F-test, DW-test. Findings revealed that Companies’ Income Tax had a positive relationship with capital expenditure; Petroleum profit tax (PPT) had a negative effect on the financing of government development project; value added tax (VAT) had insignificant positive relationship with total government capital expenditure (CAPEX). It is concluded that tax revenue does not impact the spending on capital expenditure. The study recommended that utilization of tax revenue on public goods will encourage the payment of tax by tax payers.


Table Of Contents


Preliminary Page(s)

  • Title page
  • Certification page
  • Dedication
  • Acknowledgement
  • Abstract
  • Table of content

Section One:

Introduction

  • 1.1 Background of the study
  • 1.2 Problem statement
  • 1.3 Research methods

Section Two:

Literature Review

  • 2.1 Conceptual Framework
  • 2.2 Theoretical Framework
  • 2.3 Empirical review
  • 2.4 Gap in Literature

Section Three:

Research Methodology

  • 3.1 Research design
  • 3.2 Sources of data
  • 3.3 Method of data analysis
  • 3.4 Models Specification

Section Four:

Results And Discussion

  • 4.1 Introduction
  • 4.2 Descriptive Analysis
  • 4.3 Presentation of Ordinary Least Square Result
  • 4.4 Tests of Variable Significance (T-Test)
  • 4.5 Tests for Overall Significance of Model (F-Test)
  • 4.6 Co-Integration Test
  • 4.7 Long-Run Model
  • 4.8 Discussion of Findings

Section Five:

Conclusion And Recommendations

  • 5.1 Conclusion
  • 5.2 Recommendations
  • References

Section One


Introduction

1.1 Background Of The Study

Taxation is one of the delicate areas of government policy. Not only are taxes necessary to fund government expenditure, they can also be an effective lever to achieve a fairer distribution of income and more inclusive growth. At the same time, taxes may distort economic behaviour and risk damaging economic growth. This is why public policy makers are interested in raising revenue in ways that will minimize disruption to economic activity. Economists have long understood that the larger the behavioral response to a tax change, the larger the resulting efficiency cost or deadweight loss. Although the deadweight loss may not be of utmost relevance to policy makers or voters per se, they are usually keenly interested in the impact of taxes on productivity growth and employment.

In this direction, OECD (2010) has noted that a growth-oriented tax systems pursue not only ‘to minimize the distortions of market signals by the tax system, but also to create as few obstacles as possible to investment, innovation, entrepreneurship and other drivers of economic growth.’ Spry (2014) further explained that ‘a tax system with low tax rates and a broad tax base minimizes economic distortions’ and noted that with such minimal distortions, economic decisions allocate resources to their most productive use. This means that tax structures should best be designed to specifically encourage savings, investments, innovations, entrepreneurship and generally support GDP per capita growth. Also, Stiglitz (2014) advised that such tax reforms geared towards promoting equity and growth should be carefully done if they are not to have large distributional consequences and impose large transition costs.

In the country we are today, different irregularities leading to public outcry and perpetual increasing fraud in government sector activities resulting from an inappropriate public finance planning and implementation mostly in some of the developing countries. Banks and businesses organizations were collapsing thereby leading to crisis of confidence in internal and external activities in the country due to poor governance. The reason behind this is corruption, indiscipline, lack of accountability which is the hall marks of our society in developing countries resulting into decrease in growth and development.

Economic growth represents the expansion of a country’s potential GDP or output Olopade & Olopade, 2010). Growth models that incorporate public services, the optimal tax policy lingers on the characteristic of services. Economic growth has provided insight into why state growth at different rates over time; and this influence government in her choice of tax rates and expenditure levels that will influence the growth rates (Nazifi, 2014 & Nwaeze 2010).

The narrow goal of development (economic growth) induced nations to focus their energies narrowly on the rapid growth of national incomes (Todaro & Smith 2013). “To maximize income growth, environmental considerations were left to languish on the sidelines; the standard of living was often allowed to slide; large inequalities between classes, regions, and genders were ignored; and poverty was tolerated more than it should have been in the rush to generate maximum growth” (Basu 2015). It was then scholars and policy-makers in most developing countries who realized that income growth was only one dimension of development; a new economic view of development has arrived. The state spends on the defense, education other social services. It also spends on servicing national debts, capital investment such as Airport, etc. Government also spends onits own maintenance as well as on other countries and governments.

Public or government expenditure therefore is the expenses of the government for its own maintenance and on the society and the economy as a whole. The state is getting increasingly involved in economic activities and in transfer payments to other countries. As a result, public expenditure has maintained an upward trend over time in virtually all the countries of the world (Maku, 2010). The major items of public expenditure in Nigeria include: administration, economic service, infrastructure and social amenities, national security and defence, grants and aids and interest on loans.)

Public expenditure could be broadly classified into recurrent expenditure ad capital expenditure. The expenditure of government which occurs regularly throughout the year is referred to as recurrent expenditure. Capital expenditure on the other hand are the expenditures of government on the acquisition of things of permanent nature (Nwaeze 2010). They include all expenditure on capital projects such as buildings, construction of roads, bridges and all permanent structures and assets.

A tax is a fee charged or levied by the government on a product, income, or activity. If it is levied directly on personal or cooperate income, it is called a direct tax. If it is levied on the price of a good or services, then it is called an indirect tax. The main reason tor taxation is to finance government expenditure and to redistribute wealth which translate to financing development of the country (Ola, 2014; Jhingan, 2014; Musgrave and Musgave; 2014 and Bhartia, 2010). Whether the taxes collected are enough to finance the development of the country will depend on the needs of the country and country can seek alternative sources of revenue to finance the development of the country will depend on the needs of the country and countries can seek alternative sources of revenue to finance sustainable development (Unegbu & Irefin, 2011). Government collects taxes in order to provide an efficient and steadily expanding non-revenue yielding services, such as infrastructure- education, health, communications system etc, employment opportunities and essential public services (such as the maintenance of laws and order) irrespective of the prevailing ideology or the political system of a particular nation.

This study therefore attempts to address the issues on the influence of tax revenue on government capital expenditure and economic growth in Nigeria with the view for remedying the country’s revenue potentials for enhanced wealth creation and development.


1.2 Problem Statement

The attitude of Nigerians towards taxation is worrisome as many prefer not to pay tat if given the opportunity the economy continues to lose huge amount of revenue through the unwholesome practice of tax avoidance and tax evasion, these loss of revenue can change the fortune of many economy particularly, developing countries like Nigeria. This problem has been lingering for so long which urgent attention and solution is overdue. The cost of collecting tax in Nigeria both social and economic cost is too high to the extent that if left unchecked the cost may soon out weight the benefit or value, derived from such operation and that will not be appropriate for the system. The government spends more to realize a miserable pittance.

The rate of corruption on the part of tax officials is alarming as most of them connive and collude with supposed tax payer to evade and avoid tax. Sometimes, the tax officials art; not properly trained on the modern ways of tax administration. The inadequate social infrastructures in Nigeria call for attention as to how tax revenue generated is to be expanded and accounted Tor especially where those in authority continue to spend these hand earned resources with reckless abandon.

This study therefore attempts to address the issues on the impact of tax on government capital expenditure and economic growth with the view for remedying the country’s revenue potentials for enhanced wealth creation and development.


1.3 Research Methods

The study adopted both longitudinal research strategy and quasi-experimental research design as the research designs. The rationale behind adopting the design is after finding whether revenue derived from the administration of tax over the years’ impacts government capital expenditure, while quasi-experimental research design approach was adopted because it combines theoretical consideration (a prior criterion) with the empirical observation and extracts maximum information from the available data.


Section Five


Conclusion And Recommendations

5.1 Conclusion

This research work critically evaluated the impact of taxation on government capital expenditure in Nigeria and economic growth with the use of both qualitative and quantitative approach in other to determine thesignificantimpactofvarioustaxesadministeredinNigeriaontheoverall government capital expenditure.

The research work revealed majorly that the revenue derived from taxation in Nigeria from 2010 to 2019 has been impressive over the period but not efficient. This is in conformity with the findings of Onaolapo, Aworemi & Ajala (2013); Abiola & Asiweh (2012); Oziengbe (2013). Furthermore, the study showed that companies’ income tax (CIT) and value added tax (VAT) are positively related to total government capital expenditure (CAPEX) while petroleum profit tax (PPT) showed an inverse relationship with total government capital expenditure. Based on T-test which test significance of the explanatory variables of each research hypotheses on the explained variable, It is revealed that all the explanatory variables (CIT-Companies Income Tax, PIT-Petroleum Profit Tax, VAT-Value Added Tax) does not have significant effect on the spending of government on capital expenditure during the period under consideration which makes null hypotheses (Ho) to be accepted for research hypotheses one, two and three and supported the findings of Oziengbe (2013) that showed insignificant relationship exist between capital expenditure and overall government revenue. In addition, based the F-test and coefficient of determination it is disclosed that the whole model was not significant in explaining the relationship between the dependent variable which is captured by the Total government capital expenditure (CAPEX) and three explanatory variables which are companies’ income tax (CIT), petroleum profit tax (PPT), value added tax (VAT), while negative long-run relationship (co-integration) exist between total tax revenue (TTR) and capital expenditure (CAPEX) which contradict the findings of Saeed and Somaye (2012) who disclosed unidirectional longrun positive relationship between tax revenue and government expenditure.

Therefore, taxation is a monetary charge levied on citizens by government in other to make funds available to perform its statutory responsibilities to the people. In Nigeria though the contribution of taxation to total government revenue have been impressive over the period but it is insignificant if compared to the revenue derived from petroleum which is regarded as oil revenue and other most advanced countries of the world in which their economy is tax driven.

Based on the findings of the study, it is concluded that tax revenue does not impact the spending on capital expenditure in the sense that companies income tax which is the tax charged on companies’ profit does not have a corresponding significant impact on the spending of government on developmental and infrastructural projects which will encourages the payment of tax by reducing evasion and avoidance of tax and also directly influence industrialization which will increase revenue derivation from companies income tax.

The administration of petroleum profit tax for the period under consideration does not granger-cause government spending on capital expenditure of the government, while the tax on value added to goods and services exhibited insignificant effect on government expenditure.


5.2 Recommendations

The contributions of tax revenue to government revenue and indirectly to total government spending cannot be overemphasized in Nigeria, but these contributions can still be enhanced if the following are adopted by the government.

  1. The use of presumptive tax, where small scale trader are asked to pay a particular amount because they cannot afford auditors and accountants that will help them in the preparation of financial statement that is suitable for tax purpose so that there will be increase in government revenue and minimize deficit spending.
  2. The use of aggressive tax drive, where by defaulters are taken to court and asked to pay heavy penalty. The utilization of tax revenue on public goods will encourage the payment of tax by tax payers. This should be implemented where by any tax revenue expended on public goods should be indicated and that the chairman of federal Inland Revenue service should be a member of federal executive council (FEC) in other to influence this move.
  3. The policy implication derivable from this study is that the increase in government expenditure without corresponding revenue will widen the budget deficit. Thus, government will be left with an option to borrow which could increase indebtedness to lending countries and institutions.
  4. Government should reduce the size of large recurrent expenditure and move towards capital and other investment expenditures. The cost of running the government should be reduced, ghost workers as well as redundant ones should be terminated and funds recovered from such put to investment use. Deliberate efforts should be made to check inflation of contracts sums, these will help reduce budget deficit.
  5. Government should diversify the economy. Other sources of revenue should be explored especially the non-oil minerals sector so as to correct the disparity between revenue and expenditure and reduce the attendant budget deficit.
  6. Taxes have a role to play in the economy especially in deemphasizing the mono-economic (petroleum sector) nature of Nigeria. Expenditure reforms analysis should be considered vis-à-vis taxes and all other revenues sources (oil and non-oil) reforms; this will help set targets for revenue mobilization and utilization as well as expenditure spreading over the entire economy.

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