– Tax Revenue and Economic Growth of Nigeria (1981-2015) –
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ABSTRACT
The aim of this study was to examine the impact of tax revenue collected by federal government on the economic growth of Nigeria, while looking at the specific objectives which include:
Assess the impact of companies’ income tax on economic growth of Nigeria; ascertain the influence of Petroleum Profit Tax on economic growth of Nigeria; examine the impact of custom and excise duties on economic growth of Nigeria and determine the impact of VAT on the economic growth of Nigeria.
Ex -post facto and survey research designs was adopted in the work to investigate reasons for consistent low tax contributions to GDP in Nigeria over a period of 35 years. Secondary data were obtained from FIRS and Bureau of Statistics for the purpose of this research.
Method of analysis include ordinary Least square regression model was estimated to examine the individual effects of tax revenue proxies of Value Added Tax (VAT), Petroleum Profit Tax (PPT), Customs and Excise Duties (CED), and Companies of Income tax (CIT) on Gross Domestic Product (GDP), Autoregressive distributed lag (ARDL) model was adopted to determine the combined effect of tax revenue proxies on GDP of Nigeria.
The study revealed that the GDP is strongly impacted upon by VAT, PPT, CED, and CIT. In summary, the simple regression analysis shows that about 75% variations in GDP can be attributed to changes in PPT; also, Value Added Tax (VAT) was discovered to be responsible for about 95% changes in GDP.
The average contribution of tax revenue to GDP for the thirty five year period was computed at mere 7.8%, which is still far below the acceptable global average of 20%.
Although the simple regression showed that CIT and CED individually has positive effect on GDP, the multiple regression analysis through long run estimation indicated that in the long run, CIT and CED have negative effects on GDP and PPT and VAT have positive effects on GDP.
The study concluded that tax revenue combined have significant effect on the economic growth of Nigeria.
Although Companies Income Tax (CIT) and Custom Excise Duties (CED) have not contributed positively to economic growth of this nation over the period of study, hence government need to reposition the tax administrative system and sufficiently equip them to deal with complexities of technological advancement in global commerce, enforce compliance and track all taxable persons in order to generate sufficient revenue needed to foster economic growth in Nigeria.
TABLE OF CONTENTS
Content Page
Title Page i
Certification ii
Dedication iii
Acknowledgements iv
Abstract v
Table of Contents vi
List of Tables xi
List of Figures xiii
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of the Problem 6
1.3 Objective of the Study 9
1.4 Research Questions 10
1.5 Hypotheses 10
1.5.1 Rationale for Hypotheses 10
1.6 Significance of the Study 12
1.7 Scope of the Study 13
1.8 Operationalization of Variables 13
1.10 Operational Definition of Terms 15
CHAPTER TWO: REVIEW OF LITERATURE
2.1 Conceptual Review 17
2.1.1 Historical Background of Taxation in Nigeria 17
2.1.2 Taxation 19
2.1.3 Nigerian Tax System 21
2.1.3.1 Relevant Tax Authorities 23
2.1.3.1.1 The Federal Inland Revenue Service Board (FIRSB) 23
2.1.4 Nigeria National Tax Policy 24
2.1.5 Revenue Generation of Nigerian Government 25
2.1.6 Reasons for Insufficiencies of Tax Revenue 26
2.1.7 Problems of Tax Administration in Nigeria 27
2.1.8 Problems of Tax Collection in Nigeria 28
2.1.9 The Role of Taxation on Economic and Social Development Sustainability 30
2.1.10 Tax reforms in Nigeria 30
2.1.11. Economic growth 31
2.2 Theoretical Review 32
2.2.1 Deterrence Theory 32
2.2.2 Behavioural Economics 33
2.2.3 Risk Management Theory 33
2.2.4 Other Theories of Taxation 34
2.2.4.1 Benefit Received Theory 34
2.2.4.2 Cost of Service Theory 35
2.2.4.3 Responsive Regulation Theory 35
2.2.5 Theoretical Framework 37
2.3 Empirical Review 37
2.3.1 Tax Reforms and Economic Growth in Nigeria 37
2.3.2 Tax Revenue and Economic Growth in Nigeria 43
2.3.2.1 Company Income Tax and Customs and Excise Duties and Economic Growth 43
2.3.2.2 Petroleum Profit Tax and Economic Growth in Nigeria 44
2.3.2.3 VAT and Economic Development 46
2.3.2.4 Customs and Excise Duties and Economic Development 47
2.4 Gaps in Literature 52
CHAPTER THREE: METHODOLOGY
3.1 Research Design 54
3.2 Population 54
3.3 Sample size and sampling Technique 54
3.4 Sources of Data 55
3.4.1 Validity of the Research Instrument 55
3.5 Model specification 56
3.6. Method of Data Analysis 58
3.7 Model Estimation and Evaluation Technique 58
3.8 Apriori Expectation 59
3.9 Ethical Considerations 59
CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION OF FINDINGS
4.1 Descriptive Analysis 60
4.2 Empirical Analysis 63
4.2.1. Correlation Analysis 63
4.2.2. Regression Analysis 64
4.2.2.1. Test of Hypothesis One (H01) 64
4.2.2.2. Test of Hypothesis Two (H02) 66
4.2.2.3 Test of Hypothesis Three (H03) 67
4.2.2.4 Test of Hypothesis Four (H04) 69
4.2.3 The Main Model 70
4.2.3.1 Diagnostic Test 70
4.2.3.2 Regression Result 72
4.2.3.3 Post Estimation Test 75
4.3 Discussion of Findings 76
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary 83
5.1.1. Summary of Findings 84
5.1.2 Implications of Findings 86
5.2 Conclusion 89
5.3 Recommendations 89
5.4 Contribution to Knowledge 90
5.5 Limitation of the Study 91
5.6 Suggestion for Further Studies 91
References 92
Appendix I: Results 100
Appendix II: Data Used 107
INTRODUCTION
1.1 Background to the Study
Effective tax administration is an issue as old as taxation itself. The balancing act between maximizing tax revenues and minimizing the impact on the populace in which the state must engage was evident as early as 2350 BC.
The responsibility shouldered by the government of any nation, particularly the developing nations, is enormous.
The need to fulfil these responsibilities largely depends on the amount of revenue generated by the government through various means. Taxation is one of the oldest means by which the cost of providing essential services for the generality of persons living in a given geographical area is funded.
Globally, governments are saddled with the responsibility of providing some basic infrastructures for their citizens. Functions or obligations the government may owe her citizens include but are not restricted to: stabilization of the economy, redistribution of income and provision of services in the form of public goods (Abiola & Asiweh, 2012).
Taxation is a major source of government revenue all over the world and governments use tax proceeds to render their traditional functions, such as: the provision of roads, maintenance of law and order, defence against external aggression, regulation of trade and business to ensure social and economic maintenance (Appah & Eze, 2013).
The primary function of a tax system is to raise enough revenue to finance essential expenditures on the goods and services provided by government; and tax remains one of the best instruments to boost the potential for public sector performance and repayment of public debt as enunciated by (Okoye & Raymond, 2014).
According to Azubike (2009), a system of tax avails itself as a veritable tool that mobilizes a nation’s internal resources and it lends itself to creating an environment that is conducive for the promotion of economic growth.
Therefore, taxation plays a major role in assisting a country to meet its needs and promote self-reliance.
In Nigeria, tax revenue has accounted for a small proportion of total government revenue over the years compared with the bulk of revenue needed for development purposes that is derived from oil (Uremadu & Ndulue 2011).
The serious decline in the prices of oil in recent times has led to a decrease in the funds available for distribution to the 14 federal, state and local governments as noted by (Nzotta, 2007).
Consequently, dependence on oil as a particular or main source of revenue in Nigeria has become risky and not beneficial for sustainable economic growth.
REFERENCES
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