Tax As A Stimulus For Growth And Development In Nigeria

Project and Seminar Material for Economics

Tax As A Stimulus For Growth And Development In Nigeria


Abstract


Taxation and its product, Tax have been very important vehicles for economic policies of many countries of the world. For a very long time, tax has been a major source of revenue for various levels of governments. For instance, in Nigeria, the laws of the land stipulate the categories of taxes that are collectable by each of the three tiers of government. This is with a view to enhancing basic economic growth and development at all levels of government. However, the use to which taxes are put is a major concern to the majority of Nigerians.

This paper examines the major taxes accruing to various governments in Nigeria as reported by the Federal Inland Revenue Service (FIRS). The study adopted the use of secondary data as the major data collection method. Thus, the author relies on data obtained from the Federal Inland Revenue Service report for the analysis of the various revenues accruing to Nigeria. Also, various books, journals and government publications were used extensively for the analysis. Reported opinions of Nigerians on the application of these revenues for developmental activities were also reviewed. The analysis of the taxes collected from 1995 to 2004 suggests that government has not really lived up to its responsibilities in terms of the provision of basic social amenities and other infrastructures necessary for the growth and development of a nation. The study therefore, suggests some recommendations, which if accepted and embraced could enhance a better economic growth and development in Nigeria.


Chapter One


Introduction

1.1 Background of the Study

Responsible governments all over the world, be it at the Federal, State or Local government level, are concerned with the provision of social goods and services for their citizens.

They are responsible for the maintenance of laws and orders within their nations and also for the protection of their territorial integrity against any external aggression.

In carrying out these social responsibilities, a huge amount of money is needed. One of the major sources of fund available to government to execute its numerous programs is imposition of taxes.

Governments at various levels enact laws to impose taxes and to enforce their payment so that enough revenue can be generated to defray their expenditure.

However, despite many stringent penalties and fines in the tax laws, it appears that a lot of individuals and corporate entities still do not see the reason why they should pay correct taxes or pay taxes at all. Hence, they try in some cases to avoid payment of taxes and in other extreme cases, evade taxes (Bukar, 2004; Omoigui, 2004).

One of the remarkable trends in contemporary history has been the importance in the growth of economic life. Any serious discussion of government is bound to raise the question about revenue and expenditure. Through appropriate tax, expenditure and regulatory policies, government seek to attain certain objectives. The achievement of macroeconomic goals namely, full employment, stability of price level, high and sustainable economic growth and external balance, from time immemorial, has been a policy priority of every economy whether developed or developing, given the susceptibility of macroeconomic variables to fluctuations in the economy. The realization of these goals is not automatic but requires policy guidance.

The policy guidance represents the objectives of economic policy (Olawunmi & Ayinla 2007). One of the regulatory policies used by government in achieving its objectives to bring about economic growth is fiscal policy. Fiscal policy is an outgrowth of Keynesian economics; its logical analysis suggests that it offers a sure-fire means of stabilizing the economy. The goal of modern fiscal policy is to achieve economic efficiency and stability. In a modern economy, no sphere of economic life is untouched by the government.

Two major instruments or tools are used by government to influence private economic activity; taxes and expenditure. The effect of taxation covers all the changes in the economy resulting from the imposition of a tax system. One may say that without taxation, a market economy would not attain certain production, consumption, investment, employment and other similar patterns. The presence of taxation modifies these patterns for good or for bad and such modifications may collectively be called the effect of taxation. Expenditure on the other hand, was meant to directly add to the effective demand in the market and generate a high-value multiplier by distributing income to those sections of the population which had a high marginal propensity to consume.

Government has the responsibility of preventing calamitous business depression by the proper use of fiscal and monetary policy, as well as close regulation of the financial system. In addition, government tries to smooth out the ups and downs of the business cycles, in order to avoid either large scale unemployment at the bottom of the cycle or raging price inflation at the top of the cycle. More recently, government has become concerned with financing economic policies which boost long-term economic growth.

Because of the increasing importance of government conduct in a nations development process, fiscal policy handles the issues of resource allocation and is preoccupied with the problems of economic growth, economic stability, employment, prices, income distribution and social welfare. Fiscal policy has developed an array of instruments to handle different facets of the economics of public sector. But by the very existence of multiplicity of goals, it is often bedevilled by inherent conflict of objectives; between long-term growth and short-term stability, between social welfare and economic growth, and between income redistribution and production incentives (Samuelson & Nordhaus 2005).

One of the most important objectives of macroeconomic policy in recent years has been the rapid economic growth of an economy. Economic growth is defined as “the process whereby the real per capita income of a country increases over a long period of time”. Economic growth is measured by the increase in the amount of goods and services produced in a country. A growing economy produces more goods and services in each successive time period. Thus growth occurs when an economy‟s productive capacity increases which, in turn, is used to produce more goods and services. In its wider aspect, economic growth implies raising the standard of living of the people and reducing inequality of income distribution (Jhingan, 2003).

The relationship between government expenditure and economic growth has continued to generate series of debate among scholars. Some scholars argued that increase in government socio-economic and physical infrastructure encourages economic growth. For example, government expenditure on health and education raises the productivity of labour and increase growth of national output.

Similarly expenditure on infrastructure such as roads, communications, power, etc., reduces production costs, increases private sector investment and profitability of firms, thus, fostering economic growth. Some scholars supporting this view concluded that expansion of government expenditure contributes positively to economic growth. The intent of fiscal policy is essentially to stimulate economic and social development by pursuing a policy stance that ensures a sense of balance between taxation, expenditure and borrowing that is consistent with


1.2 Statement of Problem

Tax is a major source of government fund, and this fund is the bed rock of our economic development if effectively managed. This therefor makes tax collection and administration a top priority to government. There is high incidence of tax evasion and avoidance by tax payers. This may affect the amount of revenue collectible by the government for the running of administration.

Furthermore, it is hoped that people were wrongly assessed and the assessment sometimes result to regressive taxation


1.3 Objective of the Study

The main objective of this studies is to ascertain the impact of taxation as a stimulus for economic growth, however the study specifically seek to:

  1. To evaluate the benefit of taxation in the economy
  2. To ascertain how taxation stimulate economic growth and development
  3. To evaluate the tax administration system
  4. To explore avenues of ensuring effective tax compliance.

1.4 Research Question

In other to achieve the objective of the study and proffering solution to problem of study, the following research question were formulated:

  1. What are the challenges of taxation?
  2. What are the method which can be adopted to ensure tax compliance?
  3. How has taxation help in stimulating economic growth?
  4. What measures can we adopt to make sure that all tax payers are entrapped in the tax net?

1.5 Significance of the Studies

It is conceived that at the completion of the study its findings would be beneficial to:

  1. The tax authority who has the responsibility of tax collection
  2. The government who is responsible for utilization of the fund
  3. The tax payers who bear the tax burden
  4. The researchers, academia and the general public.

1.6 Scope of the Study

The studies covers the impact of tax as a stimulus for growth and development in in Nigeria. However, the study has some limitation, which are:

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher have to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.


1.7 Definition of Terms

Tax

A tax (from the Latin taxo) is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a stateor the functional equivalent of a state to fund various public expenditures. A failure to pay, or evasion of or resistance to taxation, is usually punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent. Some countries impose almost no taxation at all, or a very low tax rate for a certain area of taxation.

Economic Growth

Economic Growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP, usually in per capita terms.[1]

Growth is usually calculated in real terms i.e., inflation-adjusted terms to eliminate the distorting effect of inflation on the price of goods produced. Measurement of economic growth uses national income accounting.[2] Since economic growth is measured as the annual percent change of gross domestic product (GDP), it has all the advantages and drawbacks of that measure.

The “rate of economic growth” refers to the geometric annual rate of growth in GDP between the first and the last year over a period of time. Implicitly, this growth rate is the trend in the average level of GDP over the period, which implicitly ignores the fluctuations in the GDP around this trend.

An increase in economic growth caused by more efficient use of inputs (such as labor productivity, physical capital, energy or materials) is referred to as intensive growth. GDP growth caused only by increases in the amount of inputs available for use (increased population, new territory) is called extensive growth.

Fiscal Policy

Fiscal policy refers to that part of government policy concerning the raising of revenue through taxation and other sources and deciding on the level and pattern of expenditure for the purpose of influencing economic activities. It is a policy under which the government uses its expenditure and revenue programs to produce desirable effects and avoid undesirable effects on national income, production and employment. The policy can also be seen as a deliberate spending and taxation actions undertaken by government in order to achieve price stability, to dampen the swings of business cycles, and to bring about nation‟s output and employment to desired levels (Jhingan, 2003).

Gross Domestic Product

Gross domestic product (GDP) is a monetary measure of the market value of all final goods and services produced in a period (quarterly or yearly). Nominal GDP estimates are commonly used to determine the economic performance of a whole country or region, and to make international comparisons. Nominal GDP per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a GDP PPP per capita basis is arguably more useful when comparing differences in living standards between nations.


Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to find out how tax act as a stimulus to the economic growth and development of Nigeria economy.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges associated with economic development and economic growth.

Economic growth is the basis of increased prosperity. Growth comes from the accumulation of capital (both human and physical) and from innovations which lead to technical progress. Accumulation and innovation raise the productivity of inputs into production and increase the potential level of output. The rate of growth can be affected by policy through the effect that taxation has upon economic decisions. An increase in taxation reduces the returns to investment (in both physical and human capital) and Research and Development (R&D). Lower returns mean less accumulation and innovation and hence a lower rate of growth. This is the negative aspect of taxation.

Taxation also has a positive aspect. Economic theory supports the idea that public spending and taxation are important channels of transmission between fiscal policy and growth. In the 1990s, development in the theory of growth recognized that there might be a larger role for public expenditure in determining an economy‟s growth rate. Some public expenditure affects the productivity of the private sector, other „unproductive‟ expenditure only raise citizens‟ welfare or does neither, public provision of capital affects private production and some taxes distort investment decisions. Changes in expenditure composition, tax design and deficit financing might alter economy growth path. The principal avenue for fiscal policy to influence growth comes from adopting a longer-term perspective. The range of options that are available with regard to tax and expenditure policies is necessarily restricted in the short-term. Longer-term horizon, however, provides both a better way to consider inter-temporal trade-offs and offers increased scope to shift expenditure and tax policies in ways that might be significantly more growth promoting


5.2 Summary

It is obvious that tax revenue constitutes a major source of government revenue (pubic revenue). Revenue collected through various taxes is meant to be used for various specific projects to better the lives of citizens in a country. In the light of this, it is strongly advised that cognizance should be taken of the “specific uses” that Lagos State government has been putting its revenue to. These include: re-habilitation of old roads and construction of new ones, canalization and drainage system, construction of pedestrian bridges, provision of BRT buses, to ease the transportation problem in the state, and the beautification of Lagos State to mention just a few. All these have multiplier effects on the economy, such as creation of jobs for thousands of people, opening up links between rural and urban areas and inducing new investors into the state with the utmost objective of stimulating economic growth and development in the state. It is advised that other state governments and even the federal government should emulate this lofty idea of good governance in order to make life better for the citizens of this country. Governments at all levels should embark upon public expenditure that will stimulate economic growth and development so that apathy among many taxpayers in this country will be a thing of the past.


5.3 Conclusion

The role of taxation and fiscal policy in securing stability and growth in Nigeria is of fundamental importance. Fiscal policy is a means of raising the domestic savings ratio. All tax revenue are useful in raising the level of domestic saving. The central problem of tax policy in Nigeria is how to obtain the necessary revenue while at the same time providing a correction for a typically high degree of inequality in the distribution of income, but without interfering unduly with private saving and investment. There is need for new policies that look at other ways of sourcing new funds and the issue of mobilizing resources is 1mportant. The most strategic thing is the mobilization of domestic resources which are not fully utilized. This is where the issue of taxation comes into play. While external finance is attractive the danger is in accruing unnecessary and excessive debt burden. Taxation is emerging as most central to economic development agenda discourse compared to other development financing mechanisms like trade and aid as it provides a stable flow of revenues to finance development priorities. Beyond resource mobilisation, tax is an effective tool to enhance accountability between governments and the citizenry. Less attention is paid to citizens when governments are using more aid monies than their own funds. In this regards, governments should work towards involving the general populace on tax formulation as this is mostly viewed as the work of technocrats. Government financial operations are well-nigh impossible without taxation. Apart from this, taxation can be a powerful means in order to achieve the goals of social progress and the objectives of economic development. It serves as a device to encourage the growth certain activities by way of giving exemptions, discourage use of certain products by way of imposing heavier charges like those sin taxes which are imposed upon tobacco products, or strengthen anemic enterprises, also by way of tax exemptions. Local industries may be protected through taxation by imposing high customs duties to foreign goods. Moreover, taxation can also be used to reduce inequities or inequalities in wealth and income by progressively higher taxes as in the case of estate and income tax.


5.4 Recommendation

In order to achieve economic growth and development through specific uses of tax, the following recommendations are suggested:

Tax Education:

It is very essential for government to give adequate tax education to the general public. Since changing the errant mindset of older Nigerians on tax matters is nearly impossible, it becomes imperative to inculcate a new mentality in the next generation of taxpayers. This may be a long-term solution for an endemic problem but certainly will yield better result. The idea of liaising with the ministry of education to inculcate the need to pay tax in our young people as being proposed by Omoigui (2004) is also a welcome one. She was however, quick to say “But I accept that the government also needs to win the trust and confidence of the people if we are to get them to pay taxes”.

National Tax Policy:

The idea being considered by Omoigui, chairman of the Federal Inland Revenue Service (FIRS), to draft Nigeria’s first ever-national tax policy is a welcome one. The national tax policy should be projected and implemented based on the principles of fiscal neutrality, efficiency (i.e. fiscal performance), fiscal treatment equality, fiscal norm sustainability, minimizing cost of collecting, substantiating the public expenditure, public expenditure performance, tracing the public funds, the equality of treatment upon public funds and multi annual budget.

Stimulation of Effective Demand:

Government should invest in specific productive and viable projects that would create employment for the generality of the people. This will enhance people’s ability to demand for goods and services.

Stabilization of Prices and Employment:

Market mechanism (i.e. the forces of demand and supply) alone may not likely achieve economic growth and development in a country. The more advanced and free the market mechanism, the more prone the economy is to the vagaries of income, employment and price fluctuations. Therefore, public expenditure can be devised as an anticyclical tool to create “effective demand” thereby, stimulating investment activities. It is instructive to emphasis that the total demand needs to be controlled so that the demand flows match the supply flows, otherwise, the stimulating effect may lead to an inflationary tendencies.

Public Expenditure and Redistribution of Income and Wealth:

The inequality of income and wealth is an important evil of market mechanism. Inequalities in income and wealth do not only result in economic injustice but also distort production and employment patterns. Specific use of tax for public expenditure such as direct purchases, production of vital public goods and subsidies can ensure the supply of certain goods and services to the desired level. An example of this was the establishment of the Nigerian National Supply Company (NNSC) and purchase of fertilizers and selling them to farmers at subsidized rates.

Public Expenditure and Economic Growth:

In developed economies, public expenditure helps to maintain a smooth growth rate through economic stabilization, stimulation of investment activities and social welfare. In developing economies like Nigeria, public expenditure has an important role to play in reducing regional disparity, developing social overheads, creation of infrastructure for economic growth in terms of communication and transportation facilities, education and training, research and development and so on. It is therefore, imperative for governments at all levels to ensure that the public expenditure that are embarked upon are those that will stimulate economic growth and development.

Efficient and Effective Budgetary Allocation:

For there to be economic growth and development in this country, governments at all levels should strive very hard to ensure the efficiency and effectiveness of budgetary allocation on the basis of priorities, transparency of public expenditure and assuring the multiplication effect of public expenditure on the real economy.

Recognition of Benefits to Tax Producers:

In order to use tax as a stimulus for economic growth and development, government fiscal policy should rather function in the benefit of tax producers than in the benefit of tax collectors and such policy should rely on a real partnership between state and contributor.

Possible Reduction in Tax Rate:

Government may consider possible reduction in tax rates so as to encourage compliance by different categories of taxpayers. For instance, the government of Romania has reduced profit tax from 25% to 16%, whereas, Nigerian Companies Income Tax is 30% (Government of Romania, 2006: 3). This 30% tax rate is considered to be high and needs to be reviewed downward. A possible decrease in tax rate if well managed will lead to an increase of the taxation base by development of the existing business and increase of direct foreign investments. This will also reduce the share that underground economy has on GDP.

Possible use of Single Tax Rate:

Government may consider the application of single taxation rate, both for Personal Income Tax and for Profit Tax. The taxation rate should be a competitive one as compared to the countries that Nigeria competes with, in order to attract direct foreign investment.

Collaboration With the Economic and Financial Crimes Commission (EFCC):

A part from the conventional processes for getting and punishing tax offenders in Nigeria, the Federal Inland Revenue Service should partner with the Economic and Financial Crimes Commission to track down those who are flouting the tax laws.

Adherence to the Basic Conditions and Principles of Sustainable Economic Development:

Finally, strict adherence to the basic conditions for sustainable economic development such as Democracy, Fairness, Interdependence, Responsibility and Accountability; general principles of sustainable development such as Environmental and economic integration, Maintenance of biological diversity and conservation of natural resources, Precaution, prevention and evaluation, Cooperation, partnership and participation, Education, training and awareness as explained earlier in this paper is a very good impetus for specific uses of tax as a stimulus for growth and development of any nation.


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