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| Chapters: 1-5
| Pages: 67
INVESTIGATE THE RELATIONSHIP BETWEEN TAX REVENUE AND ECONOMIC GROWTH IN NIGERIA FROM 1980-2013
CHAPTER ONE
INTRODUCTION
The political, economic and social development of any country depends on the amount of revenue generated for the provision of infrastructure. The revenues may be derived from diverse sources. These sources may be classified in various ways such as tax and non-tax revenue sources, oil and non-oil revenue sources, internally and externally generated revenue sources, among others. Public revenues may consist of revenue receipts and capital receipts. Revenue receipts include routine and earned, while capital receipts cover those items which are basically of non repetitive and non-routine government financial assets and liabilities (Bhartia, 2009). Whichever of the classifications is adopted, taxes remain the most potent revenue source to government all over the world (Konrad, 2014).
This perhaps explains why the government shows great concern for a medium through which funds can be made available to achieve its set goals for the society (Fagbenie & Noah, 2010). Government needs money to execute its socio-economic obligations to the citizens. These socio-economic obligations include but are not limited to the provision of infrastructure and social services (Murkur, 2001; Akpan, 2005; Miller & Oats, 2009; Popoola, 2009). Taxes have been used throughout the world in the most for their role in regulating economic activities and ensuring stability. Taxation, as a component of fiscal policy framework in economic theory, thus has implications in the economic growth rate and other micro and macro economic variables.
The nexus between tax revenue and economic growth is long recognised in the literature. The United Nations (UN) (2005), for instance, 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 studies (UN, 2005; Popoola, 2009; Adegbie & Fakile, 2011; Onefeiwu, 2012) have attempted to identify the linkage between taxation revenue and economic growth. In economic growth models, the factors -such as capital, education level (human capital) and labour, as well as technological level determine an economy’s output level and its long-term growth. The relationship between taxes and economic growth can therefore be described along all the channels through which taxes affect these input factors; capital taxes influence individual’s decisions to save as well as businesses’ decisions to invest and promote innovation (Konrad, 2014). Also, taxes affect the extent to which enterprises build up their productive capital stock and their level of innovation. Taxes on labour income affect labour demand and supply as well as an individual’s decision to invest in education, thereby building human capital (Myles, 2000). Generally, therefore, an underlying premise might be that when the government prudently applies tax revenue to the provision of infrastructures and social security, and creates an enabling environment for businesses to thrive through fiscal policies, economic growth is enhanced.
Economic growth as a noun can be defined as an increase in the amount of goods and services produced per head of the population over a period of time. The Investopedia defined ‘Economic Growth’ as an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. It can thus be calculated as a percentage increase in the Gross Domestic Product (GDP) of a given economy.
Some studies (Chen, 2007; Fullerton and Heute, 2007; Keshab, 2010) which have attempted to identify the determinants of the level of taxation, often cite one of the most commonly used determinants to be per capita income. This is based on the belief that economic growth brings about an increase in demand for public expenditure (Tanzi, 1987) and a larger supply of taxing capacity to meet such demands (Musgrave, 2004; Tanzi & Lee, 2008). These considerations suggest, with generally strong empirical support, that a correlation exists between tax levels and economic growth. This is important because the common notion that higher tax levels would generate larger distortions and would, thus, be detrimental to growth – is then necessarily contradicted by the observed correlation between tax levels and economic growth (Ariyo, 1997; Aruwa, 2010; ITC, 2010).
The International Monetary Fund (IMF) (2010) emphasizes that developing countries must recognise that taxation is an important mainstream priority for growth. This recognition reflects the focus of interest in mobilising domestic resources in the form of taxes as a foundation to sustainably fund essential public services. It also reflects increasing recognition that the development of an effective, efficient, equitable tax system is a central pillar of state building and governance (Organization for Economic Cooperation and Development (OECD), (2013).
The study on tax policy is concerned with the design of a tax system that is capable of financing the necessary level of public spending in the most efficient and equitable way possible. The tax system should raise enough revenue to finance essential expenditures without recourse to excessive public sector borrowing; raise the revenue in ways that are equitable and that minimize its disincentive effects on
economic activities; and do so in ways that do not deviate substantially from international norms.
Bird (2008) posits that despite the resulting variety of tax systems and possibilities found in the developing world, all developing countries, Nigeria inclusive, face the same basic tax challenge. One of which is how to meet public spending needs by raising revenue in a way that is conducive to the political survival of those making policy decisions. Thus, with fiscal imbalances which characterize the Nigerian public sector and the ever increasing public needs, policy thrusts need to be put in place to enhance steady revenue flows to the government. This will minimize dependence on oil which has been the bane of the Nigerian economy for the past five decades of her existence as an independent nation. This calls for administrative reforms, most cardinal of which is taxation reforms.
Reforming the tax system is critical to achieving fiscal consolidation, minimising distortions in the economy and creating stable and predictable market environment for the markets to function. In many developing countries, tax policy is used as the principal instrument to correct fiscal imbalances (Rao, 2005; Ahmed & Stern, 2011). Thus, a country’s tax system is a major determinant of other macroeconomic indexes. Specifically, for both developed and developing economies, there exists a relationship between tax structure and the level of economic growth and development. Unfortunately, unlike in many developed countries where major tax policy initiatives are followed by detailed analyses of their impact, there are no known studies analysing the economic impact of tax
policy matters in Nigeria, to the best of the researcher’s knowledge; hence, the justification for this study.
1.2 Statement of the Research Problem
The drive for increased revenue through taxation by successive government has not achieved the expected result. This perhaps is because of the argument by most Nigerians that they have not felt the impact of taxation in terms of growth and development (Abiola & Asiweh, 2012). Indeed, the relationship between tax revenue and economic growth has been a subject of intense debate among academic researchers, tax practitioners and policy makers. The thrust of this debate has been whether the policy makers can use taxation to stimulate economic growth or vice versa. (Keho, 2013; Gravelle & Marples, 2014).
Important as this debate is especially in terms of facilitating sound economic policy formulation, the relationship between tax revenue and economic growth has not been sufficiently investigated in the context of Nigeria economy. Also, prior studies, mostly from advanced economies such as the United States of America (USA), The United Kingdom (UK) and the Caribbean are inconclusive on the direction of causality and effect of tax revenue on economic growth (Myles, 2000; Keho, 2013; Gravelle & Marples, 2014). It becomes expedient to know where Nigeria stands. This study, therefore, investigates the relationship between tax revenue and economic growth in Nigeria from 1980 to 2013.
1.3 Objectives of the Study.
The main objective of this study is to investigate the relationship between tax revenue and economic growth in Nigeria from 1980-2013. The specific objectives of the study are to:
1.4 Research Questions
To achieve the stated objectives, the following research questions are raised:
1.5 Research Hypotheses
The hypotheses to be tested in this study are presented in their null form as follows:
Ho1 Tax revenue has no significant relationship with economic growth in Nigeria.
Ho2 Tax revenue components (PPT, CIT, PIT, VAT, EDT & CED) have no significant effect on economic growth in Nigeria
Ho3 There is no specific direction of causality between tax revenue and economic growth.
1.6 Significance of the Study
It is envisaged that the results and findings of this study will be of benefit to the different tiers of government in the country. It will help the federal, states and local governments to appreciate the need to diversify their revenue portfolio particularly from the oil to non oil sectors as well as paying attention to internally generated revenue sources. This will reduce overdependence on federation account allocation, which is principally funded from oil revenue which at present has plummeted at the international oil market causing substantial revenue shortfalls.
The study is expected to act as a guide to improving upon the administration of taxes in Nigeria and other developing economies. This, policy makers, practitioners, government agencies among other institutional bodies will find the study as a reference material.
The findings of this study are expected to contribute to the existing body of knowledge on taxation and fiscal management framework. Nigeria’s tax reform experience can provide useful lessons for many other countries due to the size of the country, with its multilevel fiscal framework, uniqueness in the continent and in its reform experience.
Finally, those in the academia who might want to use the work as a source of reference when teaching, conducting further researchers in similar or related fields will find the material useful as an addition to existing body of knowledge in the field of accountancy, taxation, finance, fiscal management and related fields.
1.7 Scope of the Study
A time frame of 1980 to 2013 has been used for this study. This period is considered long enough to enable the drawing of necessary inferences and arriving at some useful conclusions. Only tax revenue from Petroleum Profit Tax, Companies Income Tax, Personal Income Tax, Education Tax, Value Added Tax and Custom and Excise Duties, and Gross Domestic Product are considered in this study. Other revenues generated from other sources as well as internally generated revenue of state and local governments are not taken into consideration. On the other hand, the Real Gross Domestic Product (RGDP) is used as a proxy of the economic growth.
1.8 Organization of the Study
This research work is organized into five chapters, starting with chapter one which is the introductory chapter comprising the background of the study, statement of the research problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study, organization of the study, and definition of terms used in the study.
Chapter two is a review of the related literature on tax revenue and economic growth underpinning the conceptual framework, the theoretical framework and empirical literature. In chapter three, the methodology of the study is specified, starting with the introduction, research design, data sources, model specification, and estimation and validation of data analysis techniques. Chapter four covers data presentation, analysis and discussion of findings based on the regression results and computations from computer software printouts. Chapter five is a summary of major findings, conclusion and policy recommendations, and suggestion for future studies.
CHAPTER ONE
INTRODUCTION
The political, economic and social development of any country depends on the amount of revenue generated for the provision of infrastructure. The revenues may be derived from diverse sources. These sources may be classified in various ways such as tax and non-tax revenue sources, oil and non-oil revenue sources, internally and externally generated revenue sources, among others. Public revenues may consist of revenue receipts and capital receipts. Revenue receipts include routine and earned, while capital receipts cover those items which are basically of non repetitive and non-routine government financial assets and liabilities (Bhartia, 2009). Whichever of the classifications is adopted, taxes remain the most potent revenue source to government all over the world (Konrad, 2014).
This perhaps explains why the government shows great concern for a medium through which funds can be made available to achieve its set goals for the society (Fagbenie & Noah, 2010). Government needs money to execute its socio-economic obligations to the citizens. These socio-economic obligations include but are not limited to the provision of infrastructure and social services (Murkur, 2001; Akpan, 2005; Miller & Oats, 2009; Popoola, 2009). Taxes have been used throughout the world in the most for their role in regulating economic activities and ensuring stability. Taxation, as a component of fiscal policy framework in economic theory, thus has implications in the economic growth rate and other micro and macro economic variables.
The nexus between tax revenue and economic growth is long recognised in the literature. The United Nations (UN) (2005), for instance, 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 studies (UN, 2005; Popoola, 2009; Adegbie & Fakile, 2011; Onefeiwu, 2012) have attempted to identify the linkage between taxation revenue and economic growth. In economic growth models, the factors -such as capital, education level (human capital) and labour, as well as technological level determine an economy’s output level and its long-term growth. The relationship between taxes and economic growth can therefore be described along all the channels through which taxes affect these input factors; capital taxes influence individual’s decisions to save as well as businesses’ decisions to invest and promote innovation (Konrad, 2014). Also, taxes affect the extent to which enterprises build up their productive capital stock and their level of innovation. Taxes on labour income affect labour demand and supply as well as an individual’s decision to invest in education, thereby building human capital (Myles, 2000). Generally, therefore, an underlying premise might be that when the government prudently applies tax revenue to the provision of infrastructures and social security, and creates an enabling environment for businesses to thrive through fiscal policies, economic growth is enhanced.
Economic growth as a noun can be defined as an increase in the amount of goods and services produced per head of the population over a period of time. The Investopedia defined ‘Economic Growth’ as an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. It can thus be calculated as a percentage increase in the Gross Domestic Product (GDP) of a given economy.
Some studies (Chen, 2007; Fullerton and Heute, 2007; Keshab, 2010) which have attempted to identify the determinants of the level of taxation, often cite one of the most commonly used determinants to be per capita income. This is based on the belief that economic growth brings about an increase in demand for public expenditure (Tanzi, 1987) and a larger supply of taxing capacity to meet such demands (Musgrave, 2004; Tanzi & Lee, 2008). These considerations suggest, with generally strong empirical support, that a correlation exists between tax levels and economic growth. This is important because the common notion that higher tax levels would generate larger distortions and would, thus, be detrimental to growth – is then necessarily contradicted by the observed correlation between tax levels and economic growth (Ariyo, 1997; Aruwa, 2010; ITC, 2010).
The International Monetary Fund (IMF) (2010) emphasizes that developing countries must recognise that taxation is an important mainstream priority for growth. This recognition reflects the focus of interest in mobilising domestic resources in the form of taxes as a foundation to sustainably fund essential public services. It also reflects increasing recognition that the development of an effective, efficient, equitable tax system is a central pillar of state building and governance (Organization for Economic Cooperation and Development (OECD), (2013).
The study on tax policy is concerned with the design of a tax system that is capable of financing the necessary level of public spending in the most efficient and equitable way possible. The tax system should raise enough revenue to finance essential expenditures without recourse to excessive public sector borrowing; raise the revenue in ways that are equitable and that minimize its disincentive effects on
economic activities; and do so in ways that do not deviate substantially from international norms.
Bird (2008) posits that despite the resulting variety of tax systems and possibilities found in the developing world, all developing countries, Nigeria inclusive, face the same basic tax challenge. One of which is how to meet public spending needs by raising revenue in a way that is conducive to the political survival of those making policy decisions. Thus, with fiscal imbalances which characterize the Nigerian public sector and the ever increasing public needs, policy thrusts need to be put in place to enhance steady revenue flows to the government. This will minimize dependence on oil which has been the bane of the Nigerian economy for the past five decades of her existence as an independent nation. This calls for administrative reforms, most cardinal of which is taxation reforms.
Reforming the tax system is critical to achieving fiscal consolidation, minimising distortions in the economy and creating stable and predictable market environment for the markets to function. In many developing countries, tax policy is used as the principal instrument to correct fiscal imbalances (Rao, 2005; Ahmed & Stern, 2011). Thus, a country’s tax system is a major determinant of other macroeconomic indexes. Specifically, for both developed and developing economies, there exists a relationship between tax structure and the level of economic growth and development. Unfortunately, unlike in many developed countries where major tax policy initiatives are followed by detailed analyses of their impact, there are no known studies analysing the economic impact of tax
policy matters in Nigeria, to the best of the researcher’s knowledge; hence, the justification for this study.
1.2 Statement of the Research Problem
The drive for increased revenue through taxation by successive government has not achieved the expected result. This perhaps is because of the argument by most Nigerians that they have not felt the impact of taxation in terms of growth and development (Abiola & Asiweh, 2012). Indeed, the relationship between tax revenue and economic growth has been a subject of intense debate among academic researchers, tax practitioners and policy makers. The thrust of this debate has been whether the policy makers can use taxation to stimulate economic growth or vice versa. (Keho, 2013; Gravelle & Marples, 2014).
Important as this debate is especially in terms of facilitating sound economic policy formulation, the relationship between tax revenue and economic growth has not been sufficiently investigated in the context of Nigeria economy. Also, prior studies, mostly from advanced economies such as the United States of America (USA), The United Kingdom (UK) and the Caribbean are inconclusive on the direction of causality and effect of tax revenue on economic growth (Myles, 2000; Keho, 2013; Gravelle & Marples, 2014). It becomes expedient to know where Nigeria stands. This study, therefore, investigates the relationship between tax revenue and economic growth in Nigeria from 1980 to 2013.
1.3 Objectives of the Study.
The main objective of this study is to investigate the relationship between tax revenue and economic growth in Nigeria from 1980-2013. The specific objectives of the study are to:
1.4 Research Questions
To achieve the stated objectives, the following research questions are raised:
1.5 Research Hypotheses
The hypotheses to be tested in this study are presented in their null form as follows:
Ho1 Tax revenue has no significant relationship with economic growth in Nigeria.
Ho2 Tax revenue components (PPT, CIT, PIT, VAT, EDT & CED) have no significant effect on economic growth in Nigeria
Ho3 There is no specific direction of causality between tax revenue and economic growth.
1.6 Significance of the Study
It is envisaged that the results and findings of this study will be of benefit to the different tiers of government in the country. It will help the federal, states and local governments to appreciate the need to diversify their revenue portfolio particularly from the oil to non oil sectors as well as paying attention to internally generated revenue sources. This will reduce overdependence on federation account allocation, which is principally funded from oil revenue which at present has plummeted at the international oil market causing substantial revenue shortfalls.
The study is expected to act as a guide to improving upon the administration of taxes in Nigeria and other developing economies. This, policy makers, practitioners, government agencies among other institutional bodies will find the study as a reference material.
The findings of this study are expected to contribute to the existing body of knowledge on taxation and fiscal management framework. Nigeria’s tax reform experience can provide useful lessons for many other countries due to the size of the country, with its multilevel fiscal framework, uniqueness in the continent and in its reform experience.
Finally, those in the academia who might want to use the work as a source of reference when teaching, conducting further researchers in similar or related fields will find the material useful as an addition to existing body of knowledge in the field of accountancy, taxation, finance, fiscal management and related fields.
1.7 Scope of the Study
A time frame of 1980 to 2013 has been used for this study. This period is considered long enough to enable the drawing of necessary inferences and arriving at some useful conclusions. Only tax revenue from Petroleum Profit Tax, Companies Income Tax, Personal Income Tax, Education Tax, Value Added Tax and Custom and Excise Duties, and Gross Domestic Product are considered in this study. Other revenues generated from other sources as well as internally generated revenue of state and local governments are not taken into consideration. On the other hand, the Real Gross Domestic Product (RGDP) is used as a proxy of the economic growth.
1.8 Organization of the Study
This research work is organized into five chapters, starting with chapter one which is the introductory chapter comprising the background of the study, statement of the research problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study, organization of the study, and definition of terms used in the study.
Chapter two is a review of the related literature on tax revenue and economic growth underpinning the conceptual framework, the theoretical framework and empirical literature. In chapter three, the methodology of the study is specified, starting with the introduction, research design, data sources, model specification, and estimation and validation of data analysis techniques. Chapter four covers data presentation, analysis and discussion of findings based on the regression results and computations from computer software printouts. Chapter five is a summary of major findings, conclusion and policy recommendations, and suggestion for future studies.
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