The Relationship Between Corporate Taxation And Economic Growth In Nigeria From 1990 To 2017

Project and Seminar Material for Economics

Project and Seminar Material for Economics

Chapter One


1.1 Background to the Study

The relationship between taxation and economic growth has received serious attention in developed and developing economies the world over. Taxation forms the hub of financing public expenditure with other sources of revenue supplementing it. It is an important component and instrument of fiscal policy framework of every nation. It generates income for government for the funding of economic activities capable of raising the growth rate. Among other things, it is a means of redistributing income and wealth among the citizens.

Generally, the political, economic and social development of any country depends on the amount of revenue generated for the provision of infrastructure in that given country. The ability to the tax system to generate revenue affects the services offered by the government. According to Azubike (2009), tax is a major player in every society of the world. The tax system is an opportunity for government to collect needed revenue for discharging its obligations. A tax system offers itself as one of the most effective means of mobilizing a nation’s internal resources and lends itself to creating environment conducive for promotion of economic growth.

Taxes can be collected from various sources such as petroleum profit, corporate profits, value added tax, withholding tax, royalty from natural resources exploited, personal income taxes among other sources. Each of the tax revenue sources has implication on economic growth and development.

Corporation tax is tax imposed on the profit and other income of quoted or incorporated business entities. The nexus between corporates tax and economic growth is long recognized in the literature. The United Nations (UN) (2005) asserts that to achieve rapid economic growth and development, developing countries must have to increase their domestic revenue through taxation in line with the Millennium Development Goals (MDGs). Several empirical studies have attempted to identify the relationship between corporate taxation and economic growth (UN 2005; Popoola, 2009, Adegbie and Fakile, 2011).

A proper economic management framework through a fair and prudent tax system should, among other things, encourage investment, stimulate economic growth, ensure equitable distribution of income, expand the productive capacity of the economy, and ensure price stability and a favorable balance of payments.

Nigerian Government has over the years, and on annual bases, set out her taxing and expenditure profile through budgets depending on the objective it wants to achieve. Such actions which form the basis of tax policy (Fiscal policy) are formulated to either “gear up” or stabilize the economy that is to steer the economy in the desired direction. The choice of some types of tax by the government has placed some sectors of the economy on priority than others. Several questions have always been raised as to how successful government tax policy have achieved the goals and objectives they intended, and the extent to which they have affected the growth positively.

This study is aimed at evaluating corporate tax effect on economic growth of Nigeria from 1990 -2013 fiscal years.

1.2 Statement of the Research Problem

Tax policy influence economic behaviour, this has become a basic tenet for economic policy makers. Taxation is assumed to influence firms’ financing decisions. It is observed by the World Bank that economic performance in developing countries is tie to the level of taxation; and that countries with lower marginal tax rates have higher economic growth. A proper economic management through a fair and prudent tax system should, among other things, encourage investment, entrepreneurship and stimulate economic growth.

Corporate taxation, a form of direct tax has been found to have inverse relationship with economic growth with varying degree of results particularly from studies conducted in developed economies of the world. In Nigeria, various tax policy measures adopted in specific budget statements has not yielded corresponding expected growth of the economy. Hence, the Nigerian tax system has not been able to perform the expected roles of revenue generation and ensuring economic growth of the economy as it should have. A study by the Organization for Economic Corporation and Development (OECD) (2008) indicates that corporate income tax is detrimental to growth rate particularly in the short-run for OECD countries.

This study evaluates corporate taxation and economic growth in Nigeria from the period of 1990 to 2013.

1.3 Objectives of the Study

The main objective of this study is to investigate the relationship between corporate taxation and economic growth in Nigeria. Other specific objectives are:

  1. To examine the components of corporate taxes in Nigeria.
  2. To find out fiscal policy framework of government that affect corporate taxation in Nigeria
  3. To determine the effect of corporate taxation on economic growth in Nigeria.
  4. To make policy recommendations from the study findings aimed at improving corporate tax policy and administration in Nigeria.

1.4 Research Question

To achieve the aforementioned objectives, the following research

Questions are raise for study:

  1. What are the components of corporate taxes in Nigeria?
  2. Does fiscal policy framework of government affect corporate taxation in Nigeria?
  3. What are the effects of corporate taxation on economic growth in Nigeria?
  4. How can corporate taxation be improved on in Nigeria.

1.5 Research Hypotheses

The following hypothesis stated in null form will be tested in for the study:

HO1: There is no significant relationship between corporate taxation and economic growth in Nigeria.

HO2: Corporate taxation has no significant effect on economic growth in Nigeria.

Ho3 Education tax (EDT) has no significant effect of Economic Growth in Nigeria.

1.6 Scope and Limitation of the Study:

This study covers the period 1990 to 2013 and deals basically with taxes from corporate entities charged under Company Income Tax Act 1979 (as amended 2004). Companies charged to Petroleum Profits taxation are outside the scope of the study.

1.7 Significance of the Study:

It is envisaged that the results of this study will be of benefits to the government on tax policy issues, consultants, economic advisers, international agencies, lecturers, researchers as well as students in the field of accounting, finance, taxation, economics and other allied field who will find the work as a good reference materials.

1.8 Organization of the Study

The study is organized into five chapters, starting with

  • Chapter one which is the introductory chapter addressing background of the study, statement of the research problem, objectives of the study, research questions, and hypothesis, significance of the study, scope of the study, organization of the study and definition of terms used in the study.
  • Chapter two covers review of related literature on corporate taxation and economic growth under pinning the conceptual framework, theoretical framework and empirical studies.
  • In chapter three, the research methodology of the study is specified starting with introduction, research design, data sources, model specification and estimation and validation of data analysis technique.
  • Chapter four deals with data presentation analysis and discussion of findings based on the regression results.
  • Chapter five, the last chapter provides a summary of major findings, conclusion and policy recommendation, and suggestions for future studies.

1.10 Definition of Terms Used in the Study

The following terms are defined as used in the study:


The determination of the amount of tax payable by a company within a year.

Direct Tax:

Taxes which the burden is directly borne by the taxpayer.

Economic Growth:

The process of increasing the national incomes and standard of living of the citizens.

Federal Inland Revenue Service (FIRS):

The tax authority saddled with revenue matters at the federal level.

Gross Domestic Product:

Is the money value of all goods and services produced in a country during a given year. It measures the productivity level of a country’s factors of production.

Direct Tax:

These are taxes imposed mostly upon the consumption of goods/services and the burden can be shifted from the initial bearer to the final consumer.

Tax Administration:

Is the use of human and material resources to bring about efficient and effective tax assessment, collection and accountability.

Tax Base:

The object which is being taxed for example, income profits and expenditures.

Tax Rate:

This is the amount of a tax per unit of the tax base.

Tax Revenue:

Is the income gained by government through taxation.


A compulsory payment made by companies to the government in accordance with pre-determined criteria for which no direct or specific benefit is received by the payer.


A system of imposing taxes on income/revenues of companies.

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