The Macroeconomic Impact Of Taxation On The Economic Growth Of Nigeria (Empirical Study From 1980-2016)

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The Macroeconomic Impact Of Taxation On The Economic Growth Of Nigeria (Empirical Study From 1980-2016)

Chapter One


1.1 Background to the study.

Over the years, one of the main issues developing countries have faced is sustainable economic growth. To keep up with the tremendous demand for government need to raise revenue to carry out its duties. The single most important way government raise funds to finance its operations is through taxes (Osundina and Olanrewayu 2013: 76). Tax is a major player ofevery nation of the world and tax system put in place an opportunity for government to collect additional revenue needed in discharging it’s obligations.

The economic effects of taxation include micro effects on the distribution of income and efficiency of resource use, as well as, macro effect on the level of capacity output, prices, employment, and growth. Hence, taxation tends to affect productivity and resources allocation in the economy.

It is important to note that asides the fact that taxation is an important source of generating revenue for the government, it is also an avenue for the redistribution of wealth and re-adjustment of the economy (Ojo 2008) cited in (Abata 2014: 110). The tax system is one of the most powerful levies available to any government to stimulate and guide its economic and social development (Abata 2014: 110). Furthermore, according to Roche (2015: 1), corporate taxation is of great concern in investors’ decisions and hence wetin employment and economic growth.

Taxation has different impacts depending on the form it assumes. Corporate and Shareholder taxes reduce the capital funds available to make investments and build a general and more productive structure (Roche 2015:2).

1.2 Statement of the problem

Taxation as a source of financing economic growth in Nigeria has been a difficult issue primarily because of its administration and various girls of resistance such as avoidance, evasion, etc. These activities are considered as sabotaging the economy and are presented as part of the reasons for the present state of underdevelopment in Nigeria.

It is an important part of fiscal policy which can be used effectively by government and developing economies. Taxation also affects condition consumption, distribution, price, stability, savings, investment, and economic growth. It is important to note that despite the policies and measures that are being taken by the government in promoting economic growth in Nigeria, the efforts have not really produced results. Also, many researchers have worked on the economic growth of Nigeria and have taken a critical look at variables that affect economic growth, however not much empirical studies have been made to examine how taxation had impacted economic growth . This study intends to fill the gap in the literature by carrying out an empirical study of the trend of taxation in Nigeria right from 1980 to 2016 and examine its impact on the economic growth.

1.3 Research Objective

The main objective of this study is to investigate the macroeconomic impact of taxation on economic growth of Nigeria.

The specific objectives are:

  1. To determine the nature of the relationship between taxation and economic growth in Nigeria.
  2. To examine the impact of taxation on the Nigerian economic growth.

1.4 Research Questions

  1. What is the relationship between taxation and economic growth in Nigeria
  2. To what extent has taxation contributed to the growth of Gross Domestic Product in Nigeria?
  3. In what ways can Nigeria change her tax system in order to boost revenue generation through this source?

1.5 Research Hypothesis

  1. Taxation has contributed significantly on economic growth in Nigeria.
  2. Taxation has contributed significantly on economic growth in Nigeria.

1.6 Scope of the study.

This study covers the Gross Domestic Product of Nigeria from 1980-2016 to obtain the extent to which taxation has contributed to the GDP and consequently economic growth of Nigeria.

1.7 Significance of the study

This study will help to provide a clear insight that would help government to know how to run a smooth and effective tax system and policies. Given the fact that the subject of taxation is an essential part of a country’s investment and growth plan, this study will help to contribute to the efforts of government in promoting economic growth by showing how taxation has impacted economic growth from 1980-2016. It also coordinator contributes to the empirical literature by focusing on the effect of each tax indicators on economic growth.

1.8 Limitation of the study

The broad scope of this study makes it require enoqugh time to carry out empirical studies

1.9 Definition of terms

1.) Tax:

This refers to a compulsory levy on the citizens of the country in order to generate revenue for the government. It could be direct or indirect tax.

2.) Economic Growth:

This refers to the positive change in the level of goods and services produced by a country.

3.) Gross Domestic Product:

This refers to the output of goods and services of a country. It is used to measure the economic growth of the country.

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