The Role Of Revenue Mobilization On Economic Growth And Development In Nigeria

Project and Seminar Material for Economics

The Role Of Revenue Mobilization On Economic Growth And Development In Nigeria


Abstract


The contribution of taxation to any economy globally cannot be overemphasized. Apart from the revenue function it performs for the government, it is also used to assist the national government to achieve the country’s macro-economic objectives in the areas of fiscal and monetary policies. Thus the main objective of this study is to explore the role of revenue mobilization on economic growth and development in Nigeria.

Time series data was applied in carrying out this research work. Multiple Linear Regression analysis was used to analyze the data by employing d use of Vector Error Correction Model.

Results showed that there is a positive relationship between the contribution of taxes and GDP and that tax revenue has a great impact on the GDP of Nigeria. It can therefore be said that there is a strong positive relationship between the contribution of revenue from taxes and GDP as shown in the result presented. This signifies that tax revenue has a very high impact on the economic growth of Nigeria as a source of revenue available to government for the purpose of Growth and development.


Chapter One


1.0 Introduction

1.1 Background to the Study

Government revenue refers to the revenue received by a government to finance its operations and development projects. It is an important tool of the fiscal policy of the government as it facilitates government spending (OECD, 2008b). Governments need to perform various functions in the field of political, social and economic activities to maximize social and economic welfare. In order to perform these duties and functions government require large amount of resources. These resources are called Public Revenues. Public revenue consists of taxes, revenue from administrative activities like fines, fees, gifts and grants.

Public revenue can be classified into two types including: tax and non-tax revenue (Illyas and Siddiqi, 2010). Taxes are the first and foremost sources of public revenue. Taxes are compulsory payments to government without expecting direct benefit or return by the tax payer. Taxes collected by Government are used to provide common benefits to all mostly in form of public welfare services.

Taxes do not guarantee any direct benefit for person who pays the tax. It is not based on direct quid pro quo principle. The government collects tax revenue by way of direct & indirect taxes. Direct taxes includes; Corporate tax; personal income tax, capital gain tax and wealth tax. Indirect taxes include custom duty, central excise duty, Value Added Tax (VAT) and service tax (Chaudhry and Munir, 2010). Non tax revenue refers to the revenue obtained by the government from sources other than tax. These include fees, fines and penalties, surplus from public enterprises, special assessment of betterment levy, grants and gifts and deficit financing.

Fiscal policy aligning government revenue and expenditure is of crucial importance in promoting price stability and sustainable growth in output, income and employment which are important parameters of economic growth (Ahmed, 2010). It is one of the macroeconomic policy instruments that can be used to prevent or reduce short-run fluctuations in output, income and employment in order to move an economy to its potential level. However, for sound fiscal policy, a good understanding of the relationship between government revenue and economic growth of a nation is very important, for instance, in addressing government’s budgetary deficits. Government collects tax revenues, provides goods and services not produced by the private sector, engages in commercial-type activities, makes cash and in-kind transfers to families and businesses, and pays interest on its debts (Abiola and Asiweh, 2012).

All these activities require that government raise enough revenue. Governments raise revenue from different sources in order to undertake its development agendas (Ahmed, 2010). A country’s revenue structure determines who pays for public services and goods. By spreading revenues across different instruments, countries can distribute the burden across particular groups of citizens and sectors of the economy. In all OECD member countries, taxes other than social contributions represent the largest share of government revenues.

Revenue is defined as all amounts of money received by a government from external sources for example those originating from “outside the government” net of refunds and other correcting transactions, proceeds from issuance of debt, the sale of investments, agency or private trust transactions, and intergovernmental transfers ((Ahmed, 2010). Government Revenue comprises amounts received by all agencies, boards, commissions, or other organizations categorized as dependent on the government concerned. Stated in terms of the accounting procedures from which these data originate, revenue covers receipts from all accounting funds of a government, other than intra-governmental service (revolving), agency, and private trust funds (Chaudhry and Munir, 2010).

Ayres and Warr (2006) define economic as ‘a rise in the total output (goods or services) produced by a country’. It represents an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth refers only to the quantity of goods and services produced. Economic growth can be measured in nominal terms including inflation, or in real terms, which are adjusted for inflation like by the percent rate of increase in the gross domestic product (GDP).

Economic growth measures growth in monetary terms and looks at no other aspects of development (Illyas and Siddiqi, 2010). Economic growth can be either positive or negative. Negative growth can be referred to by saying that the economy is shrinking. Negative growth is associated with economic recession and economic depression (King and Levine, 1993). Gross national product (GNP) is sometimes used as an alternative measure to gross domestic product. In order to compare multiple countries, the statistics may be quoted in a single currency, based on either prevailing exchange rates or purchasing power parity. Then, in order to compare countries of different population sizes, the per capita figure is quoted (Beck and Web, 2003).


1.2 Statement of the Problem

Economies with large public sectors will grow slowly because of large tax wedges but a lack of growth-enhancing government initiatives may stymie growth in countries with very small governments (Barker, Buckle and St Clair, 2008). However, not all expenditure and methods of financing have the same impacts on economic growth. While economic research suggests that the cumulative effect of taxes on economic growth is moderate, recent research (OECD, 2008b) has suggested that there is a relationship between the types of taxes imposed and economic growth. Several research studies have been conducted on government revenue and economic development.

In Nigeria, people, especially the rich and the elites, deliberately dodge this civic responsibility of paying tax and sometimes employ the service of tax specialists in order to pay less tax to the government. There is also the problem of falsification of ages and the number of children and dependents one has in order to reduce the amount of tax payable. Emanating from these factors, the sub-national governments (state and local governments) contend that their currently assigned taxes are poor in terms of their bases and, therefore, accruable revenues are not enough to meet their expenditure targets. Also the statutory allocation from the federation account has been grossly inadequate as a result of a fall on gross domestic product.

This invariably reduces their overall performance, considering their expenditure profiles. Taiwo (2008) observed that the distribution of government revenue is skewed in favor of one tax base or the other (eg oil revenue) in Nigeria. Nevertheless, the overwhelming evidence of positive impact of oil revenue on economic growth in Nigeria cannot be overemphasized (Odusola, 2006). However, the first question is, are other forms of taxes not important for consideration? Emanating from the above, there are some questions to ask: what relationship exists between Nigeria’s tax revenue and her economic growth? And what is the contribution from other tax base to the overall tax revenue of a nation


1.3 Objective of the Study

The main objective of this study is to find out the role of revenue mobilization on economic growth and development, specifically the study intends to:

  1. Determine the impact of tax on economic growth in Nigeria;
  2. Investigate the role of revenue mobilization on economic growth and development in Nigeria.

1.4 Research Hypothesis

The following research questions are formulated to guide the study:

H01: Taxation does not have any significant impact on the growth of the Nigerian economy.

H02: Company Income Tax has no significant impact on Nigerian economic growth.

H03: Value Added Tax has no significant impact on Nigerian economic growth.


1.5 Significance of the Study

This study would be significant to several stakeholders:

To scholars and academicians, this study would increase body of knowledge to the scholars in the area of government revenue and economic development. It would also suggest areas for further research so that future scholars can pick up these areas and study further. The study would be important to the government especially the Ministry of Finance for making policy decisions whose overall objectives is to influence the level of economic activity and Government revenue in line with the expanding Government budget. Finally, the findings of this study would be important to policy makers especially on matters concerning taxation and budgeting so as to have manageable budgetary deficits.


1.6 Scope and Limitations of the Study

This research work covers Nigeria as a whole, the problems, effect and the role of Revenue mobilization on economic growth and development will be deeply investigated on in this research.

The scope of this study covers the impact of tax revenue on the Nigerian economic growth over a period of 31 years (from 1991-2017). The trends of Company Income 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).

However, in the course of carrying out this research work, the researcher can foresee some limitations which include; insufficient financing, insufficient data for the research work and the time required for the project to be concluded.


1.7 Definition of Terms

Definition of VAT

VAT is a consumption Tax levied at each stage of the consumption chain and borne by the final consumer of product or service. Oserogho& Associates (2011)

Finance:

The management of large amounts of money, especially by governments or large companies.

Financial Management:

Financial management is defined as the act of total management function concerned with the effective and efficient raising and use of funds. As processes and responsibility, financial management consists of decision making regarding the following major activities among others.

  1. Determination of funds requirement of the organization revenue generation and mobilization.
  2. Seeking and obtaining the right amount of funds at the right time for cash flow management
  3. Deploying available funds to the needs of the organization revenue application and control, and
  4. Giving proper stewardship for funds obtained and utilized (Abubakar, 1999)
Internally Generated Revenue (IGR):

This refers to the revenue or money collected by the local government from its internal sources (within the Local Government Area). The internal sources of revenue comprise many major and miscellaneous items aggregated to provide the required fund for financing the enormous functions ascribed to local government as third tier of government (Abubakar, 1999).


Chapter Five


Summary, Conclusion and Recommendations

5.1 Summary

The research work focuses on the role of revenue mobilization on economic growth and development in Nigeria. The first chapter began with providing a background on the Nigerian tax system and the changes that it has gone through as well as providing details of tax revenue in an economy.

It was stated that tax revenue plays a crucial role in the economy by promoting economic activity and making funds available in the government purse that can be used to adequately execute massive projects to the benefit of the society. Despite the massive income realized via tax revenue in the economy, it was opined by Olashore 1999 that the economy still needs radical reform as the impact of tax revenue is not properly felt, hence, the economy is still in a state of slumber.

The main problem that necessitated this research work was deduced from past studies with the aim of finding out the current state of things and also to see the position as it upholds in Nigeria.

The objective of the research work is to critically identify the impact of tax revenue on Nigerian economic growth from 1991-2017 and to ascertain the relationship that exists between revenue generated from taxes and the Nigerian economy.

The main significance of this study lies in the fact that the study serves as an update on the work done on developed and developing economies; Nigerian economy is the main focus of this study. Therefore this study adds to the body of knowledge by investigating the deficiency in the findings of previous researchers on the impact of tax revenue on Nigerian economic growth. In chapter two, diverse literatures were reviewed and a lot of things were uncovered. Tax revenue was said to be a veritable source of government revenue, it is as certain as death. However, it is still debatable in the literature the optimal tax revenue to be imposed to enhance development without unjustly inflicting welfare cost. Also, level of spending in any economy is affected by the level of tax revenue. To progress further, the literature review looked into tax revenue administration across the globe, role of tax revenue in economic development, how the Nigerian tax system function and the major challenges it is faced with.

The researcher also made frantic efforts to discuss some of the various taxes that form the independent variables of this research work. The researcher concluded the review of literatures by adopting the expediency theory which lays emphasis on the fact that tax revenue should be able to link its activities to outcomes evident in a state (Country or Nation). This implies that tax revenue is very important to the growth and development of any country as tax proceeds helps in rural and urban development in the form of road constructions, hospitals, schools and other social amenities.

In chapter three, efforts were made to describe different tools or techniques that were employed in analyzing the result of the functional test carried out on the hypothesis. The study adopted an econometric method of analysis and data were sourced largely from secondary means comprising of the CBN annual statistical bulletin. In this chapter, details of the source of data, data estimation criteria, method of data analysis were discussed.

In chapter 4 which is the analysis and interpretation of data, the chapter presents data used to empirically investigate the impact of tax mobilization on the Nigerian economy. Time series data was used to capture the trends of tax revenue in Nigeria, and its contribution to GDP ranging from the year 1991-2017. The data were analyzed with E-views 6.0 using Vector Error Correction Model (VECM).

The test carried out on the various tax revenues to determine their individual impact on GDP shows that petroleum profit tax, company income tax and value added tax has a positive impact on Nigeria‘s economic growth.

The statistical tool use to test for the presence or absence of serial correlation is the Durbin Watson Statistics which revealed the nonexistence of autocorrelation. Having obtained an insignificant probability at 5%, we failed to reject the null hypothesis. We hence conclude that our model‘s residuals are not serially correlated.

Normally by default, most statistical software run regression tests on the assumption of homoskedasticity, e-views 6.0 inclusive. To avoid qualifying a result whose residuals might have violated one of the classical assumptions such as constant variance, we therefore tested for heteroskedasticity- that is whether constant variance exists. This was done using VEC residual heteroskedasticity. This tests the null hypothesis that constant variance exists. Since our probability is not significant here, we again fail to reject the null hypothesis. We hence uphold that our residuals are indeed homoskedastic.


5.2 Conclusion

The findings of this study contribute towards a better understanding of tax revenue and economic growth in Nigeria. GDP and four other variables that represent petroleum profit tax, company income tax, custom and excise duties, and value added tax were developed to test which factors best describes economic growth in Nigeria.

Results showed that there is a positive relationship between the contribution of taxes and GDP and that tax revenue has a great impact on the GDP of Nigeria. It can therefore be said that there is a strong positive relationship between the contribution of revenue from taxes and GDP as shown in the result presented. This signifies that tax revenue has a very high impact on the economic growth of Nigeria as a source of revenue available to government for the purpose of Growth and development.

The implication of our findings is pointing majorly at policy makers, especially the Federal Board of Inland Revenue as most of our variables shows a positively significant relationship with economic growth, meaning that there should be no area in tax collection that should be taken lightly as they have all proven to be a major variable in connection to the growth of the economy. Aso, for researchers, the study will re-introduce them to a different direction of ways in which tax revenue can contribute to the economic growth in Nigeria and add to the existing literatures on this subject matter and also ensure that the regulatory body implement policies that will reduce the loop holes in tax laws which tax payers capitalize on to evade tax.

Our analysis has thrown some light on the impact of tax revenue on Nigeria‘s economy. It is glaring that the Nigerian total tax revenue generated has a significant impact on the economy in general.


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