THE ROLE OF REVENUE MOBILIZATION ON ECONOMIC GROWTH AND DEVELOPMENT IN NIGERIA
CHAPTER TWO LITERATURE REVIEW
Introduction
Tax revenue is a veritable source of government revenue; however, it is still debatable in the literature especially in determining the optimal tax revenue to be imposed to enhance development without unjustly inflicting welfare cost. Economic theories of taxation approach the question of how to minimise the loss of economic welfare through taxation and also discuss how a nation can perform redistribution of wealth in the most efficient manner. This research work focuses on the effect of tax revenue on economic growth and development in Nigeria. This chapter provides reviews of diverse literatures as well as the theoretical and conceptual frame work of the study.
Conceptual Issues
Taxation and tax administration in Nigeria
According to the black law dictionary (1999), tax is a ratable portion of the produce of the property and labor of the individual citizens, taken by the nation, in the exercise of its sovereign rights, for the support of government, for the administration of the laws, and as the means for continuing in operation the various legitimate functions of the state. The Institute of Chartered Accountants of Nigeria (2006) and the Chartered Institute of Tax revenue of Nigeria (2002) view tax as an enforced contribution of money, enacted pursuant to legislative authority. If there is no valid statute by which it is imposed; a charge is not tax. Tax is assessed in accordance with some reasonable rule of apportionment on persons or property within tax jurisdiction.
Anyanwu (1997) defined tax revenue as the compulsory transfer or payment (or occasionally of goods and services) from private individuals, institutions or groups to the government. Sanni (2007:5) advocated tax as an instrument of social engineering which can be used to stimulate general or special economic growth. From Onairobi (1994); Taxes are generally either of two types; Direct and Indirect. A direct tax is levied on income or profit while an indirect tax is levied on expenditures. Good examples of Direct Tax include Personal Income Tax, Capital Gain Tax, Profit Tax and Wealth Tax. Examples of Indirect Tax include Excise Taxes, Export Taxes, Import Duties, Expenditure Tax, Sales Tax and Value Added Tax.
Jarkir (2011) iterated that tax is a contribution exacted by the state; it is a non penal but compulsory and unrequited transfer of resources from the private to the public sector, levied on the basis of predetermined criteria. The classical economists were of the view that the only objective of tax revenue was to raise government revenue. But with the changes in circumstances and ideologies, the aim of taxes has also been changed. These days apart from the objective of raising the public revenue, taxes is levied to affect consumption, production and distribution with a view to ensuring the social welfare through the economic development of a country.
According to Nzotta (2007), four key issues must be understood for tax revenue to play its functions in the society. First, a tax is a compulsory contribution made by the citizens to the government and this contribution is for general common use. Secondly, tax imposes a general obligation on the tax payer. Thirdly, there is a presumption that the contribution to the public revenue made by the tax payer may not be equivalent to the benefits received. Finally, a tax is not imposed on a citizen by the government because it has rendered specific services to him or his family. Thus, it is evident that a good tax structure plays a multiple role in the process of economic development of any nation which Nigeria is not an exception (Appah, 2017).
Sen (1999) explained that under current Nigerian law, tax revenue is enforced by the 3 tiers of Government, that is Federal, State, and Local Government with each having its sphere clearly spelt out in the Taxes and Levies (approved list for Collection) Decree, 1998.
Successive governments have expressed concern about the low level of productivity of the Nigerian tax system. This has been attributed largely to the deficiencies in the tax administration and collection system, complex legislation, and apathy, especially on the part of those outside the tax net (Ndekwu, 1991: Ariyo, 1997). This is because as a means of meeting their expenditure requirements, many developing countries undertook tax reforms in the 1980s. However, most of these reforms focused on tax structure rather than on tax administration geared towards generating more revenue from existing tax sources. (Osoro, 1991; Ariyo, 1997).
In the words of Enegbu et al (2011), the Nigerian tax system has undergone several reforms geared at enhancing tax administration with minimal enforcement cost. The recent reforms include the introduction of TIN, (Taxpayer Identification Number), which became effective since February 2008, automated tax system that facilities tracking of tax positions and issues by individual tax payer, E-payment system which enhances smooth payment procedure and reduces the incidence of tax touts, Enforcement scheme which engages special tax officers in collaboration with other security agencies to ensure strict compliance in payment of taxes.
Section 8(q) of FIRS Establishment Act 2007 has led to an improvement in the tax administration in the country, thus, the integrated tax offices and authorities now have autonomy to assess, collect and record tax. Despite this improvement, there are still a number of contentious issues that require urgent attention and among them are the appropriate tax authority to administer several taxes, the issue of multiple taxes severally administered by all the three tiers of government which sometimes imposes welfare cost and the issue of the paucity of data base, which contributes to tax avoidance in the country. (Unegbu et al (2011)
Unegbu et al also added that the issue of corruption is still a perennial issue in the country and this reduces the confidence and trust of the tax payers in discharging his civic duty. The issue of infrastructural development is also a crucial issue, in Nigeria; the level of infrastructural facilities is in a deplorable state, most of the facilities (electricity, water, etc) are often privately sourced, thus a number of people wonder what the tax collected are used for and tendency to evade tax payment.
Also in the view of Oni (1998), a critical challenge before tax administration in the 21st century Nigeria is to advance the frontiers of professionalism, accountability and awareness of the general public on the imperatives and benefits of tax revenue in our personal and business lives which include: promoting economic activity; facilitating savings and investment; and generating strategic competitive advantage. If tax administration does not for any reason meet the above challenges, then there is a desperate need for reform in the area of the tax regime we run, and in the administration of taxes.
Brief History of Tax revenue System in Nigeria
Tax and tax administration are fundamental components of any attempt to nation building, and this is particularly the case of any developing or transitional nation like Nigeria. As Bariyima (2008) noted, taxes underwrite the capacity of states to carry out their goals; they form one of the central arenas for the conduct of state-society relations, and they shape the balance between accumulation and redistribution that gives states their social character. That is, taxes build capacity and build legitimacy and consent. Nigeria which was colonized by the British just like some other African countries gained her independence by an act of the British Parliament on 1st October, 1960 and became a republic within the commonwealth in 1963 (Odusola, 2006).
However, the tax system of Nigeria dated back to 1904 when the personal income tax Ordinance was introduced in the northern part of the country before the unification of the country by the colonial masters. It was later implemented through the Native Revenue Ordinance to the western and eastern regions in 1917 and 1928 respectively. Coupled with other amendments in the 1930s, it was later incorporated into Direct Tax revenue Ordinance No. 4 of 1940. Since then, different governments have continued on the improvement of the tax system in Nigeria (Salami, 2011).
Although the Nigerian tax system has undergone several reforms geared toward enhancing tax collection and administration with minimal enforcement cost, there is still nonvoluntary compliance of the taxpayers due to the meager nature of the system leading to an extensive practice of tax evasion and avoidance. It has been a major impediment to economic growth, where tax evasion and avoidance are now prevalent. (Ogbonna and Ebimobowei, 2011). Some of the major tax reforms put in place by the government in addressing the problems of tax administration in Nigeria include: the introduction of Taxpayer‘s Identification Number (TIN) which became effective since February 2008,
The Nigerian Tax Structure and tax System
Tax revenue has been in existence even before the amalgamation of Nigeria as a political entity in 1914. Direct taxes, which were first introduced into the northern part of Nigeria, were successfully administered because the citizens were already used to one form of tax or another before the formalization of direct taxes. The effectiveness of the administrative arrangement under the emirate system was the major factor. With the amalgamation of the north and the south in 1914, direct tax revenue was introduced into the western territory in 1916, and into the eastern provinces around 1927. The enabling laws and regulations were fashioned after those of Britain. (The legislation and nature of administration of each tax source by each tier of government was discussed earlier.) Ariyo (1998)
Adiegbe ( 2011) expressed that tax is a legal system approved by the government body to have the charge, to have the direction, to manage and to provide policies; laws and regulations for the tax system to ensure all applicable taxes are collected and remitted to the appropriate authorities. Hence one of the acid tests in determining the success of a tax system is the management of policy. The two major legal bodies connected to the administration of company income tax, Petroleum profit tax, Personal income tax, Value added Tax, Witholding tax, Education Tax and custom excise duty in Nigeria are Joint Tax Board (JTB) and Federal Inland Revenue Service (FIRS). The Joint Tax Board was established in 1961 to offer advice and coordinate various aspects of tax revenue and also to promote uniformity both in the application of the personal income tax Act 1993, and in the incidence of tax on individual throughout Nigeria . CITA (2004) further confirmed that FIRS is established to carry out the following functions: to exercise the powers and duties conferred on it by any enactment of the federal Government in respect of the above mentioned taxes; to advice the Federal Government on request on double tax revenue arrangement; to promote uniformity both in the application of the personal income tax Act 1993 and the incidence of tax on individuals; to advice the federal Government on request on capital allowances rates and other tax revenue matters, and to impose its decisions on matters of procedure and interpretation of the PITA 1993 on any state of the federation for the purposes of conforming to such agreed interpretation. The Federal Board of Inland Revenue was established with the power to administer company income tax act 1990. The operational arm of FBIR is the Federal Inland Revenue Service (FIRS) which was established in 1993. FIRS has the responsibility of income tax assessment, collection, accounting and administration.
The Nigerian tax system has experienced series of reforms since 1904 to date. The effects of the various reforms in the country are as follows: introduction of income tax in Nigeria between 1904 and 1926; grant of autonomy to the Nigerian Inland Revenue in 1945; the Raisman Fiscal Commission of 1957; formation of the Inland Revenue Board in 1958; the promulgation of the Petroleum Profit Tax Ordinance No. 15 of 1959; the promulgation of Income Tax Management Act 1961;establishment of the Lagos State Inland Revenue Department; the promulgation of the Companies Income Tax Act (CITA) 1979; establishment of the Federal Board of Inland Revenue under CITA 1979; establishment of the Federal Inland Revenue Service Between 1991 and 1992; and tax policy and administration reforms amendment 2001 and 2004. Ogbonna et el (2009).
According to Ola (2006) Tax administration in Nigeria does not measure up to appropriate standards because tax is inequitable. The language of these pieces of legislation is often forbidden and confusing. Many of the supposed tax payers know nothing of the rules under which they are to pay tax or the range of deductible expenses and the allowance available to them; they cannot be at ease to disclose their taxable income. The hallmark of tax convenience in Nigeria now is ability of a taxpayer to go to the tax office, say what he is ready to pay, be assessed accordingly, pay and obtain a tax clearance certificate (Ola, 2006). From the above we can deduce that these has led to administrative inefficiency The literacy level is low and record keeping is not yet a popular culture. There are not enough tax officials to cover the field. Most of the officials are little trained, ill equipped, badly remunerated and corrupt. Ogbonna (2011) added that the Failure of tax administration to recognize the importance of communication and dialogue between government and the citizen in matters relating to tax revenue is a key problem. There is a wide gap in tax administration in Nigeria and countries like USA, United Kingdom, and Canada where tax system is computerized and every tax payer i.e organizations are well captured at source through integrated computer system. This to a large extend is being put in place by the Nigerian Federal Inland Revenue Service (FIRS).
According to Olasatiyan (2011), in his definition of the modern taxes, defined tax as a compulsory charge imposed by a public authority on the income of individuals and companies as stipulated by the government decrees, acts or cases laws irrespective of the exact amount of services rendered to the payer in return. Thus, taxes constitute the principal source of government revenue and the beauty of any government is for its citizen to voluntarily execute their tax obligations without much coercion and harassment. However, one of the greatest problems facing the Nigerian tax system is the menace of tax leakages in the form of tax evasion and tax avoidance. While tax evasion is the willful and deliberate violation of the tax laws in order to escape tax obligation (Aguola,1999; Kiabel and Ogu,1999), tax avoidance is the active means taxpayers seek to reduce, or remove altogether their tax liability within the provision of the tax laws (Ola, 2001).
Graeme (2003) stated that tax evasion is one of the major social problems inhibiting development in developing countries and eroding the existing welfare state in developed economies in the world, and this has led to a growing attention among policy makers, western countries, international agencies and scholars. As observed by Omoruyi (1983), tax evasion has become the favorite crime of Nigerians, so popular that it makes armed robbery seem like minority interest. And despite government efforts, notwithstanding, the problem of tax evasion and avoidance still persists (Alli, 2009).
Reynold and Wilbur (1990) suggested that tax as a principal source of government revenue should be accorded strict and close monitoring to achieve maximum compliance. The bane of the Nigerian tax system is associated with various tax leakages and mismanagement of tax revenue (Festus and Samuel, 2007).
Federal Government Collectible Taxes in Nigeria
Buba (2007) accentuate the fact that the development of the private sector which is the main engine for national development growth and wealth creation requires large investment in areas like infrastructure, energy, and power. Investment of this magnitude can only come from government. In order to enhance the level of income of the poorer sections of the society, sufficient investment is also required in sectors like education, health, and others that can generate employment. The government can successfully implement all these projects if only it can raise the required revenue whose major source is tax. According to Olawunmi and Ayinla (2007), policy guidance represents the objective of economic policy. The main fiscal policy instruments are tax revenue and public expenditure. It is with this in mind that some forms of government generated taxes and their function are discussed below:
Petroleum Profits Tax
According to Buba (2007), Nigerian law by virtue of the Petroleum Profits Tax Act 1990 requires all companies engaged in the extraction and transportation of petroleum to pay tax. Adigbe (2011) further stated that the taxable income of a petroleum company comprises proceeds from the sale of oil and related substances used by the company in its own refineries plus any other income of the company incidental to and arising from its petroleum operations. Adereti (2011) explained that the taxable income of a petroleum company is subject to tax at 85%, but this percentage is lowered to 65.75% during the first 5 years of operation but where oil companies operate under production sharing contracts they will be liable to tax at a rate of 50%.
This makes the foreign trade sector the major source of revenue in the 1960s. Some structural changes emerged in the revenue profile in the early 1970s whereby indirect taxes gave way to direct taxes with the emergence of the oil boom (Egwakhide, 1988). The fall in non-oil tax revenue due to the neglect of the traditional (agricultural) sources was matched by an increase in import duties until 1973. Further, there was an appreciable increase in revenue from excise duties in the 1970s due to the enhanced performance of the industrial sector. ( Buba 2007)
This overall picture has been sustained up till now given the dominant role of the oil sector as major source of government revenue. This scenario appears to conform to Musgrave‘s (1969) theory to the effect that as an economy develops, more reliance may be placed on direct tax revenue. Some caution is advisable in confirming the relevance of Musgrave‘s theory to the Nigerian environment.
Ogbonna and Ebimobowei (2011) conducted a study on the impact of petroleum revenue on the economy of Nigeria for the period 1970 to 2009. The study showed that a strong correlation exists between petroleum revenue and GDP. This was determined from the regression results that showed an R=0.839, R Squared of 0.705, F-value of 90.630 and a corresponding significant value of 0.000 and a t-value of less than 0.05 significant level. They concluded that oil based revenue if invested efficiently in the economy will to a large extent make material difference on GDP. From the result of Ogbonna and Ebimobowei (2011), it can be deduced that PPT has a positive impact on Nigeria‘s economy but it‘ll be good to further investigate the roles other taxes play on the economy‘s GDP both individually and as a lump sum which is one of the objectives this study aims to achieve.
Companies Income Tax
Companies Income Tax Act, 1990 is the current enabling law that governs the collection of taxes on profits made by companies operating in Nigeria excluding companies engaged in Petroleum exploration activities. This Tax is payable for each year of assessment of the profits of any company at a rate of 30% (Adereti 2011).
According to Ola (2006) Companies‘ income tax administration in Nigeria does not measure up to appropriate standards. If good old tests of equity, certainty, convenience and administrative efficiency are applied, Nigeria will score low considering the following points: Due to inadequate monitoring, persons in the self-employed and unquoted private companies group evade tax. In a study conducted by Festus and Samuel (2007) on company Income Tax and the Nigerian economy, they conclude that Company income tax is a major source of revenue in Nigeria but non-compliance with tax laws and regulations by tax payers is deep in the system because of weak control. There is the need for a general tax reform in the Nigerian company income tax system.
Value Added Tax (VAT):
VAT is a consumption tax that is relatively easy to administer and difficult to evade and it has been embraced by many countries world-wide (Federal Inland Revenue Service, 1993). Value-added Tax Act, 1993 is the law that regulates the collection of tax due on ―vatable‖ goods or services. (Adereti 2011). It was introduced to replace the old sales tax. It is a consumption tax levied at each stage of the consumption chain, and is borne by the final consumer. It requires a taxable person upon registering with the Federal Board of Inland Revenue to charge and collect VAT at a flat rate of 5% of all invoiced amounts of taxable goods and services. (Ariyo, 1998).
Adereti (2011) explained that evidence so far supports the view that VAT revenue is already a significant source of revenue in Nigeria. For example, actual VAT revenue for 1994 was N8.189 billion, which is 36.5% higher than the projected N6 billion for the year. Similarly, actual VAT
revenue for 1995 was N21 billion compared with the projected N12 billion. In terms of contributions to total federally collected revenue, VAT accounted for about 4.06 % in 1994 and 5.93% in 1995. As much as N404.5 billion was collected on VAT (5.1% of total revenue) in 2008. Every person, whether resident in Nigeria or nonresident in Nigeria, who sells goods or renders services in Nigeria under the VAT Act (as amended) is obligated to register for VAT within six months of its commencement of business in Nigeria. Registration is with the Federal Board of Inland Revenue (FBIR).
Ajakaiye (2000) worked on the impact of VAT on key sectoral and macroeconomic aggregates, using a Computable General Equilibrium (CGE) model considered suitable for Nigeria. The study developed three scenarios. In order to approximate the presumed Nigerian situation, the study assumed that government pursued an active fiscal policy involving the re-injection of the VAT via increases in government final consumption expenditure in combination with a presumed non-cascading treatment of the VAT. Two other simulations considered an active fiscal policy combined with a cascading treatment of VAT and a passive fiscal policy combined with a non-cascading treatment. As it turned out, the scenario of a cascading treatment of VAT with an active fiscal policy not only had the most deleterious effects on the economy, it was also the one that most closely approximated the situation in Nigeria. VAT revenues under this scenario are more than 3% lower than the first scenario, the general price index increases by 12%, and wage and profit incomes fall by 8.54% and 12.27% respectively. Overall, the GDP declines by 11.34%. Such a situation, as observed by the researcher, poses a great threat to the sustainability of VAT.
Personal Income Tax
The tax is on the Pay As you Earn (PAYE) basis, that is the tax payable depends on how much is earned by the tax payer. The tax is easy to collect from civil servants as it is deducted from source by the appropriate authorities unlike the private sector who will have to file returns of each tax payer which is not done in most cases (CISLAC and Abu 2012). Documentations from different scholars indicated that even with all efforts through the various tax reforms undertaken by Nigerian government to increase tax revenue over the years, prior statistical evidence has proven that the contribution of income taxes to the government‘s total revenue remained consistently low and is relatively shrinking. However, of all the taxes, personal income tax has remained the most disappointing, nonperforming, unsatisfactory and problematic in Nigerian tax system (Asada, 2005; Kiabel and Nwokah, 2009; Nzotta, 2007; Odusola, 2006). Specifically, the contribution of personal income tax remained marginal and comparatively low in Nigeria‘s tax revenue. At the state and local government levels, where the major source of internal revenue is expected to be individual income tax, its contribution to the total revenue of these levels dropped from 20.18 and 7.7% in 1999 to 12.4 and 1.6% in 2008, respectively (CBN, 2008). The PAYE tax payer is payable to both the Federal Inland Service and the state Board of Internal Revenue depending on the sector in which the tax payer is employed. The tax is regulated by personal Income Tax Act 2004.
Custom and Excise Duties:
Customs duties in Nigeria are the oldest form of modern tax revenue. Their introduction dates back to 1860 known as import duties, which represents taxes on imports into Nigeria, charged either as a percentage of the value of imports or as a fixed amount of contingent on quantity (Buba, 2007). Customs duty is a major source of revenue for the Federal Government which is payable by importers of specified goods (Buyonge, 2008).
Adegbie (2011) studied the Customs and Excise Duties Contribution towards the development and growth of Nigerian economy. The study reveals that there is a strong relationship between customs and excise duties and economic development of Nigeria. This shows that this is a source of income that Nigeria should develop. Also, the study further shows that fraud and financial malpractices have negative impact on the contribution of customs and excise to Nigerian economic development. Going by the statement of Buba (2007), excise duties were also introduced on several goods to broaden the revenue base in Nigeria in 1962. Customs and excise duties is an important component of the non-oil revenue and has remained an important source of revenue before and after the discovery of oil in Nigeria and over the years contributed significantly to national development. He further stated that the Nigeria Custom Service is saddled with the responsibility of collecting duties, excise, fees, tariffs, and other levies imposed by the Federal Government on imports, exports and statutory rates. It is a crucial facilitation of trade and key instrument of state sovereignty. However, the institution is much criticized for corruption and inefficiency and its upper echelon is often driven with intrigue and in-fighting. All these need to change if Nigeria dream of economic development is to be achieved.
Role of Tax revenue in Economic Growth and Development
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. Indeed, it has been argued that the level of economic development has a very strong impact on a country‘s tax base and tax policy objectives vary with the stages of development. (Kiabel, 2009, Vincent, 2001).
According to Olopade and Olopade (2017) Growth means an increase in economic activities. Kuznets ( Cited in Likita, 1999) defined a country‘s economic growth as a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growth capacity is based on advancing technology and the institutional and ideological adjustment that it demands.
Economic growth represents the expansion of a country‘s potential GDP or output. Rostow – Musgrave model (1999:46) carried out a research on growth of public expenditure where they focused mainly on the utilization of taxes as the major revenue source, concluded that, at the early stages of economic development, the rate of growth of public expenditure will be very high because government provides the basic infrastructural facilities (social overheads) and most of these projects are capital intensive, therefore, the spending of the government will increase steadily. The investment in education, health, roads, electricity, water supply are necessities that can launch the economy from the practitioner stage to the take off stage of economic development, making government to spend an increasing amount with time in order to develop an egalitarian society.
Development in human society is a one-sided process; this in turn remains the goals of every society at all times. The term “development” until recently meant growth measured by GNP or rise in per capital income. Yet development is not growth. Perhaps it could be growth coupled with social justice, (Kayode,1993). Development implies changes that lead to improvement or progress; it is believed that an economy that raises its per capita level of real income over time without transforming its social and economic structure is unlikely to be perceived as developing.
The main purpose of tax is to raise revenue to meet government expenditure and to redistribute wealth and manage the economy (Ola, 2001; Jhingan, 2004; Bhartia, 2009). Jarkir (2011) outlined that for economic growth of a country, tax can be used as an important tool in the following manner:
Optimum allocation of available resources: Tax is the most important source of public revenue. The imposition of tax leads to diversion of resources from the taxed to the non-taxed sector. The revenue is allocated on various productive sectors in the country with a view to increasing the overall growth of the country. Tax revenues may be used to encourage development activities in the less developments areas of the country where normal investors are not willing to invest.
In the contemporary society, the public finance is not merely to raise sufficient financial resources for meeting administrative expense, for maintenance of law and order and to protect the country from foreign aggression. Now the main object is to ensure the social welfare. The increase in the collection of tax increases the government revenue. It is safer for the government to avoid borrowings by increasing tax revenue, encouraging savings and investment: Since developing countries has mixed economy, care has also to be taken to promote capital formation and investment both in the private and public sectors. Tax revenue policy is to be directed to raising the ratio of savings to national income.
Reduction of inequalities in income and wealth: Through reducing inequalities in income and wealth by using a efficient tax system, government can encourage people to save and invest in productive sectors.
Acceleration of Economic Growth and Price Stability: Tax policy may be used to handle critical economic situation like depression and inflation. In depression, tax is set to increase the consumption and reduce the savings to increase the aggregate demand and vice verse. Thus the tax policy may be used to strengthen incentives to savings and investment. In under developed countries, there is another role to maintain price stability to ensure growth with stability.
Control mechanism: Tax policy is also used as a control mechanism to check inflation, consumption of liquor and luxury goods and to protect the local poor industries from the uneven competition. Tax revenue is the only effective weapon by which private consumption can be curbed and thus resources transferred to the state. Thus the economy can ensure sustainable development.
According to the Wikipedia (2011), Nigeria is ranked 30th in the world in terms of GDP (PPP) as of 2011. This shows that as a developing nation it is not doing badly and can improve if it utilizes its revenue effectively. Currently, Nigeria is the third-largest on the continent of Africa, producing a large proportion of goods and services for the West African region making it is the largest economy in the Region, 3rd largest economy in Africa (behind South Africa and Egypt), and on track to becoming one of the 20 largest economies in the world by 2025.
Musa (2004) pointed out that tax policy influences economic behavior both at the micro and macro level, hence an important stabilization tool for economic policymakers. The level of tax revenue in any nation will affect people's economic behavior, including their choices in working, saving, and investing. (Ola 2001). A high tax regime not only imposes high welfare cost but also drastically affects consumer spending, through reduction of the disposable income. Adereti et al (2011).
Inglehart et al, (2002) believe that the level of spending in any economy is affected by the level of tax revenue. A high tax burden can have a drastic adverse effect on the overall economy. It also contributes or worsens tax evasion and avoidance. Bhartia (2009) also added that while tax rate in the developed countries is high, there is also an adequate social security system that mitigates the welfare cost in form of Job seekers’ allowance, Child allowance and various students’ scholarships and loan facilities. Naqvi (2003) stated that taxes also influence the types of physical investments that businesses make. This is because the governments taxes return on some types of investments are at higher rates than others. By distorting physical investment decisions, the tax system may sometimes lead to an inefficient pattern of investment.
Akinola (2001) explains how tax revenue plays a crucial role in promoting economic activity and growth. Through tax revenue, government ensures that resources are channeled towards important projects in the society, while giving succor to the weak. The role of tax revenue in promoting economic activity and growth is not felt primarily because of its poor administration.
Persson et al (2002) stated that during the early period, there is limited scope for the use of direct taxes because the majorities of the populace reside in the rural areas and are engaged in subsistence agriculture. Because their incomes are difficult to estimate, tax assessment at this stage is based on presumptions prone to wide margins of error. Musa (2004) further stated that the early period of economic development is, therefore, characterized by the dominance of agricultural tax revenue, which serves as a proxy for personal income tax revenue, and in Nigeria the various marketing boards served as effective mechanisms for administering agricultural tax revenue. Agricultural tax revenue substituted for personal income tax given the difficulty in reaching individual farmers and the inability to measure their tax liability accurately.
An important source of government revenue during the early stage of economic development is the foreign trade sector because exports and imports are readily identifiable and they pass through few ports. However, revenue from export and custom duties is not stable because of periodic fluctuations in the prices of primary products. This tends to complicate plan implementation in many developing countries (Massel et al., 1982).
Economic development brings with it an increase in the share of direct taxes in total revenue. This is consistent with the experience of developed economies in which direct trades yield more revenue than indirect taxes. For example, personal income tax becomes important as the share of employment in the industrial sector increases. Also, as the dominance of the agricultural sector decreases, sales tax may be broadened because a great deal of output and income will go through the formal market as the economy becomes more monetized.
Economic growth has received much attention among scholars. According to Appah (2017), classical studies estimate that economic growth is largely linked to labour and capital as factors of production. Therefore, tax revenue is considered as an instrument of fiscal policy an important variable which may determine changes in national income in developing countries like Nigeria. Increased tax revenue on imported goods and services have affected the level of such goods and services that industrialist within our sovereignty are encouraged to produce. And because of high import duty on dairy products, textiles, materials, food drinks etc our economic potential are encouraged through industrial investment locally and the multiplier effect on employment and national growth. Also, high tax rate imposed on imported components of oil industrial inputs and the encouragement of local content in the oil industry are all geared towards increasing economic growth in Nigeria (Kiabel and Nwokah, 2009)
Bonu and Pedro (2009) think that tax policy does affect economic growth. There is enough evidence linking tax revenue and output growth to make the reasonable inference that beneficial changes in tax policy can have modest effects on output growth the composition of the tax system is probably as important for economic growth as is the absolute level of tax revenue. Countries that are able to mobilize tax resources through broad based tax structures with efficient administration and enforcement will be likely to enjoy faster growth rates than countries with lower overall tax collections assessed inefficiently. In short, the design of the tax system is likely to exert a modest, but cumulatively important influence on long-term Growth rates.
Taxes will increase in relative importance as economic development progresses, however, due to growth or non-static nature of the bases of these taxes, several retail outlets also make a sales tax system difficult to implement and a multiple-stage sales tax system even more so (Musgrave, 1969). Further, the rudimentary nature of the economy precludes retail form of taxes. At this stage also, taxes are difficult to collect because of the lack of skills and facilities for tax administration (Hausmann et al, 2000). Given this, a complicated tax structure is not feasible and the amount of revenue from personal income tax will depend on taxpayers‘ compliance and the efficiency of the tax collector.
Taxes may be imposed on firms or individuals, on expenditures or receipts, and on factor inputs or products, among others, which could lead to a shift from indirect to direct taxes (Musgrave, 1969). His theory relates to a normal development process, which does not consider a situation where the sudden emergence of an oil boom provides an unanticipated source of huge revenue.
Adereti et al (2011) explained that the reality in most developing countries is that while there are several budgetary pressures as a result of ever increasing demand for government expenditure, there is a limited scope for raising extra tax revenues. Desai, Foley and Hines (2004) stated that governments have at their disposal many tax instruments that can be used singly to finance their activities. These tax alternatives include personal and corporate income taxes, sales taxes, value added taxes, capital gains taxes and numerous others. Unegbu et al (2011) believes that with the present policy of liberalization of the Nigerian economy being vigorously pursued by the Federal Government, Nigeria is fast becoming an investors haven albeit with a few teething problems. What is required for the foreign investor however, is a careful approach to the following areas,: Proper enterprise set-up, procurement of necessary permits and approvals and access to the best professional advice. 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.
Review of Empirical Literature
The core function of tax revenue as a revenue generating tool in developing countries has been studied by eminent scholars. Naiyeju (1996) argued that the positive result received from any tax depends on the extent of how it is properly managed. The extent of how the tax law is interpreted and implemented as well as the publicity brought into it will determine how a particular tax is able to meet its objectives. Ariyo (1997) in his study on productivity of the Nigerian tax system reported a satisfactory level of productivity of the tax system before the oil boom. The report underscored the urgent need for the improvement of the tax information system to enhance the evaluation of the performance of the tax system and facilitate adequate macroeconomic planning and implementation.
Adereti et al (2011) did a study on Value Added Tax and Economic growth in Nigeria. They analyzed Time series data on the Gross Domestic Product (GDP), VAT Revenue, Total Tax Revenue and Total (Federal Government) Revenue from 1994 to 2008 using both simple regression analysis and descriptive statistical method. The Findings of the study showed that VAT Revenue accounts for as much as 95% significant variations in GDP in Nigeria. A positive and significant correlation exists between VAT Revenue and GDP. Both economic variables fluctuated greatly over the period though VAT Revenue was more stable. No causality exists between the GDP and VAT Revenue, but a lag period of two years exists and also, this could be true as VAT is not easily evaded as it is collected at source on the consumption of goods and services. The study will further verify to see if the result will comply with the above findings.
Olaoye (2009) worked on the administration of VAT in Nigeria. The objective of the study was to seek ways of improving government revenue generation base in order to improve on the economy. Government introduced VAT as a way of improving Government revenue and make funds available for development purposes. The study like in Adereti et al (2011) showed a positive correlation between VAT and GDP. Recommendation was made that more awareness was needed on VAT.
Adegbie and Fakile (2011) examined the relationship between company income tax and Nigeria‘s economic development for the period 1991 to 2007. They used the GDP to capture the Nigerian Economy which was measured against total annual revenue from company Income Tax for the same period. They employed the use of chi-square and multiple linear regression analysis method to analyze data obtained from both primary and secondary sources. Their variables included various taxes regressed against GDP. With an R squared of 98.6% and an adjusted R squared of 98.4%, revealing that company income tax‘s impact on GDP is very high and impressive. It further showed that there is a significant relationship between company income tax and Nigerian economic development and that tax evasion and avoidance are the major hindrances to revenue generation. Overall the study examined only Company income Tax which calls for the need to see the impact of all Tax revenues on the Nigerian economy.
Owolabi and Okwu (2011) evaluated the contribution of VAT to the development of Lagos State economy. Development aspects considered included infrastructural development, environmental management, education sector development, youth and social development, agricultural sector development, health sector development and transportation sector development. Result showed that VAT revenue contributed positively to the development of the respective sectors. However, the above studies show there is paucity of comprehensive research on the impact of tax revenue on the Nigerian Economy. Rather, most research has focused only on a single aspect of the tax sources.
In their study of the relationship between company income tax and Nigerian economic development, Festus and Samuel (2007) reported that In Nigeria, the role of tax revenue in promoting economic activities and growth is not felt primarily because of its poor administration, perception and often an undesirable imposition which bears no relation to the responsibilities of citizenship or to the service provided by the government. Their study further revealed that an efficient and effective tax administration results in increased revenue yield, but this is not possible because of the presence of evasion and avoidance due to loop holes in the tax laws. On the other hand, Adedeji and Oboh (2017) stated that people expect that by sacrificing their private resources to the state in the form of taxes, government is expected to reciprocate by spending public revenue in a way that will enhance their welfare. However, government and tax collectors have been dubiously mismanaging the public treasury. There is high level of manipulation and diversion of tax revenue by the collectors. The dwindling tax revenue as presently witnessed results from lack of encouragement to the taxpayer, due to the fact that there is very little evidence to show for taxes collected. For these reasons, there are increased cases of tax evasion. Therefore, this gap in existing literature on tax revenue and economic growth needs to be filled (Appah, 2004).
Tax revenue is the most important source of revenue for modern governments, typically accounting for about 70-90% or more of their income, while the remainder of government revenue comes from borrowing, both domestic and external. Countries differ considerably in the amount of taxes they collect Jhingan (1995).
Nzotta (2007) stated that as at 2005, in the United States, about 30 percent of the gross domestic product (GDP) is spent on the cost of tax. In Canada about 35 percent of the country's gross domestic product goes for taxes. In France the figure is 45 percent, and in Sweden it is 51 percent. (Engen E, Skinner J. 1996). Reuven and Yoram (2006) agreed that the structure of tax revenue in developing countries is radically different from that of developed countries because about two thirds of the tax revenue in developed countries is obtained from direct taxes, mostly personal income tax and social security contributions. The remaining one-third comes primarily from domestic sales tax. The situation is exactly reversed in developing countries where about two-thirds of the tax revenue comes from indirect taxes, mostly VAT, sales tax, excises and taxes on trade. The remaining one-third consists largely of corporate income tax. If This is true, then the outcome of the study of Adegbie and Fakile (2011) and Ogbonna and Ebimobowei does not agree with the study of Reuven and Yoram because it shows that company income tax and petroleum profit tax which are both direct taxes contribute largely to Nigeria‘s GDP.
Tosun and Abizadeh (2005) in their study of economic growth of tax changes in OECD countries from 1980 to 1999 reveal that economic growth measured by GDP per capita has a significant effect on the tax mix of the OECD countries. The analysis reveals that different taxes respond to the growth of the GDP per capita. It is shown that while the shares of personal and property taxes have responded positively to economic growth, shares of the payroll and goods and services taxes have shown a relative decline.
Bonu and Pedro (2009) investigated the impact of income tax rates (ITR) on the economic development of Botswana, the study reveals that the influence of income tax revenue over GDP is not much in economically advanced countries such as Japan, China, UK, USA and Canada. Among the advanced countries, Japan has 4% followed by Canada (9%), UK (10%), China (11%) and USA (12%). In developing nations, the lowest influence of income tax over the GDP is found in Mozambique (2%) followed by Mauritius (4%), Seychelles (5%), Tanzania and Zambia (6% each), Congo (7%), Lesotho (8%), Botswana (9%) whereas a greater influence is found in Malawi (50%), Angola (36%), Zimbabwe (14%), South Africa (13%) and Namibia (12%). According to Gilligan and Richardson (2005), the tax system that is perceived as unfair by the citizens may likely to be less successful and this will encourage the taxpayers to engage in noncompliant behavior, which may have adverse effect on economic growth. Wasylenko (1997) made a strong analysis of the effect of tax revenue on foreign direct investment. He said that investors from countries that use territorial tax systems are only sensitive to host country taxes. Where home countries use residential tax systems, investors are subject to taxes from both host and home countries but receive a tax credit in the home country for direct taxes paid in the host country. In this case, host country taxes would not matter if they were lower than home country taxes but would affect location of the investment if they were higher. He also noted that tax reforms affect types of jobs created. Generally, reductions in capital or business taxes would attract more capital-intensive firms, which may pay higher wages and benefit those with more education and better job skills. From this literature, it is noted that the basic aspect of the fiscal environment of any country is the quality and quantity of services provided by government which can positively impact on economic growth.
According to Ola (2001), governments impose many types of taxes and the revenue each of these taxes contribute to its GDP vary from country to Country. In most countries, individuals pay income taxes when they earn money, consumption taxes when they spend it, property taxes when they own a home or land, and in some cases estate taxes when they die. In the United States, federal, state, and local governments all collect taxes. Hausmann and Mcpherson (2000) further confirmed that taxes on companies and people's incomes play critical roles in the revenue systems of all developed countries. In the United States, personal income tax revenue is the single largest source of revenue for the government. In 2006 it accounted for nearly 50% of all federal revenues. Nzotta (2007).
Brian (2007) analyzed the effects of tax revenue on economic growth in Uganda‘s experience for the period 1987-2005. From the study, tax revenue was found to have had an impact on the economic growth level of the country, with direct taxes having a positive effect while indirect taxes had a negative impact. However he stated that due to time, financial and data constraints, not all essential issues could be analyzed. The issue arising from this work is the fact that indirect taxes are not easily evaded when it comes to payment because they are paid either on consumption of goods and services or at source and so one expects that they should have a positive impact on a country‘s economic growth not negative as reported.
According to Appah (2004), the principles of tax revenue mean the appropriate criteria to be applied in the development and evaluation of the tax structure. Such principles are essentially an application of some concepts derived from welfare economists. In order to achieve the broader objectives of social justice, the tax system of a country should be based on sound principles. Jhingan (2004), Bhartia (2009) and Osiegbu et al. (2017) listed the principles of tax revenue as equality, certainty, convenience, economy, simplicity, productivity, flexibility and diversity.
Equity principle states that every taxpayer should pay the tax in proportion to his income. The rich should pay more and at a higher rate than the other person whose income is less (Jhingan, 2004). Anyanfo (1996) states that it is only when a tax is based on the tax payer‘s ability topay can it be considered equitable or just. Sometimes this principle is interpreted to imply proportional tax revenue. Certainty principle of tax revenue states that a tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought to all be clear and plain to the contributor and every other person (Bhartia, 2009).
Convenience principle of tax revenue states that the time and manner should be convenient to the taxpayer. According to Anyanfo (1996), this principle of tax revenue provides the rationale for Pay - As - You - Earn (PAYE) system of tax payable system of tax collection.
Economy principle states that every tax should be economical for the state to collect and the taxpayer to pay (Appah, 2004; Jhingan, 2004; Bhartia, 2009). Anyanfo (1996) argues that this principle implies that taxes should not be imposed if their collection exceeds benefits. Productivity principle states that a tax should be productive in the sense that it should bring large revenue which should be adequate for the government. This is the major reason why governments in all parts of the globe continuously employ tax reforms.
Theoretical Framework
According to Bhartia (2009), a tax revenue theory may be derived on the assumption that there need not be any relationship between tax paid and benefits received from state activities. In this group, there are two theories, namely; Socio-political theory and the expediency theory.
Socio political theory: This theory of tax revenue states that social and political objectives should be the major factors in selecting taxes. The theory advocated that a tax system should not be designed to serve individuals, but should be used to cure the ills of society as a whole.
Benefit received theory: This theory proceeds on the assumption that there is basically an exchange relationship between tax-payers and the state. The state provides certain goods and services to the members of the society and they contribute to the cost of these supplies in proportion to the benefits received (Bhartia, 2009). Anyanfo (1996) argues that taxes should be allocated on the basis of benefits received from government expenditure.
Faculty theory: According to Anyanfo (1996), this theory states that one should be taxed according to the ability to pay. It is simply an attempt to maximize an explicit value judgment about the distributive effects of taxes. Bhartia (2009) argue that a citizen is to pay taxes just because he can, and his relative share in the total tax burden is to be determined by his relative paying capacity.
Expediency theory: This theory asserts that every tax proposal must pass the test of practicality. It must be the only consideration weighing with the authorities in choosing a tax proposal. Economic and social objectives of the state and the effects of a tax system should be treated irrelevant (Bhartia,2009). (Anyafo, 1996; Bhartia, 2009) explained that the expediency theory is based on a link between tax liability and state activities. It assumes that the state should charge the members of the society for the services provided by it. This reasoning justifies imposition of taxes for financing state activities by inferences, provides a basis, for apportioning the tax burden between members of society. This proposition has a truth in it, since it is useless to have a tax which cannot be levied and collected efficiently.
There are pressures from economic, social and political groups. Every group tries to protect and promote its own interests and authorities are often forced to reshape tax structure to accommodate these pressures. In addition, the administrative set up may not be efficient to collect the tax at a reasonable cost of collection. Tax revenue provides a powerful set of policy tools to the authorities and should be effectively used for remedying economic and social ills of the society such as income inequalities, regional disparities, unemployment, and cyclical fluctuations and so on.
Adolph Wagner advocated that social and political objectives should be the deciding factors in choosing taxes. Wagner did not believe in individualist approach to a problem. He wanted that each economic problem be looked at in its social and political context and an appropriate solution found thereof. Accordingly, a tax system should not be designed to serve individual members of the society, but should be used to cure the ills of society as a whole. This theory relates to a normal development process and represents a benchmark against which country specific empirical evidence may be compared.
This study therefore focuses on the expediency theory which enables us to assess the extent to which the Nigerian tax system conforms to this scenario where the link between tax liability and economic activities are linked. If applicable, such a characterization will enhance accurate tax revenue projection and targeting of specific tax revenue sources given an ascertained profile of economic development. It will also assist in estimating a sustainable revenue profile there by facilitating effective management of a country‘s fiscal policy, among others. This is because the expediency theory focuses on the fact that taxes are collected to achieve economic objectives which enhances the growth and development of a society in all its spheres. The socio-political, benefit and faculty theory are relevant but they lay more emphasis on political, relationship and ability to be objectives.