The Impact of Federally Collected Taxes on Economic Growth
Objectives of the Study:
The main objective of this research was to evaluate the impact of federally collected taxes on the Nigerian economy with a view to determining their contribution to the growth and development of the national economy.
The specific objectives are to:
- Evaluate if Petroleum Profit tax is contributing positively to the growth and development of Nigerian economy.
- Access if Company Income Tax is contributing positively to the growth and development of the Nigeria economy.
- Determine if Value Added Tax is contributing positively to the growth and development of Nigerian economy.
- Access the impact of Customs and Excise duty on the growth and development of Nigerian economy.
Nature and scope of Taxes
Anyanwu (1997) defined taxation as the compulsory transfer or payment (or occasionally of goods and services) from private individuals, institutions or groups to the government. The primary purpose of the tax is to raise revenue to meet government expenditure and to redistribute wealth and management of the economy (Ola, 2001; Jhingan, 2004; Bhartia, 2009). According to Nzotta (2007), four critical issues must be understood for taxation 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 use. Secondly, a tax imposes a general obligation on the taxpayer. Thirdly, there is a presumption that the contribution to the public revenue made by the taxpayer 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 suitable
tax structure plays a multiple roles in the process of economic development of any nation which Nigeria is not an exception (Appah, 2010).
Objectives/importance of taxation.
Anyanwu (1993) opines that there are three fundamental objectives of taxation. These are to raise revenue for the government, to regulate the economy and economic activities and to control income and employment. Also, Nzotta (2007) while agreeing with Anyanwu (1993) notes that taxes have allocation, distributional and stabilisation functions. The allocation function of taxes entails the determination of the pattern of production, the goods that should be produced, who produces them, the relationship between the private and public sectors and the point of social balance between the two sectors. The distribution function of taxes relates to the manner in which the effective demand for economic goods is divided, among individuals in the society. While stabilisation of function of taxes seeks to attain a high level of employment, a reasonable level of price stability, an appropriate rate of economic growth, with allowances for effects on trade and the balance of payments (Nzotta, 2007).
Cannons of taxation
According to Anyafo (1996), the principles of taxation 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. 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 Osiebgu et al. (2010) listed the principles of taxation as equality, certainty, convenience, economy, simplicity, productivity, flexibility and diversity.
Equity Principle: This 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). Anyafo (1996) states that it is only when the tax is based on the payer’s ability to pay, can it be considered equitable and just Sometimes this principle is interpreted to imply proportional taxation.
Certainty Principle: This principle of taxation states that a tax which each 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 understandable to the contributor and every other person (Bhartia, 2009).
The study adopts descriptive research method. The data for the study are purely secondary were obtained from Central Bank of Nigeria (CBN) bulletin, Federal Inland Revenue Service and annual statistical reports. The tax revenues to be regressed on the Gross Domestic Product (GDP) are Petroleum Profit Tax, Company Income Tax, and Value Added Tax. The study adopts co-integration and error correction modelling by way of the preliminary test in ascertaining the stationarity state of our time series variables. To ascertain if a common stochastic drift exists among our variables, we employed the Johansen Co- integration test. By using the co-integration and error correction model, we have combined both short-run dynamics and long-run equilibrium in broad macro- econometric modelling.
Nature And Sources Of Data
Data refers to facts, information, ideas which can be represented in figures, charts and graphs (Ozo, Odo, Ani and Ugwu, 2007). The nature and sources of data for this research is secondary data sources. The secondary data source is through the Annual Reports and Accounts of the Central Bank of Nigeria (CBN) under consideration in the research.
Data will be collected first hand from the original source, and from data collected and extracted from the Annual statements and accounts the Central Bank of Nigeria (CBN).
RESULTS AND DISCUSSION
UNIT ROOT TESTS
Data Presentation, Analysis and Interpretation
To ascertain the stationary state of our time series variables, we employ the unit root test. This is imperative since we are ignorant of the data generating process.
The Augmented Dickey-Fuller test was employed, and the results are shown in table 1 below.
CONCLUSION AND RECOMMENDATIONS
The objective of this Study was to empirically investigate the short and long run relationship of the various federally collected taxes revenues on Economic Growth of Nigeria using the Gross Domestic Product (GDP) as the proxy for economic growth, for the period covering the year 2000 to 2016. To carry out this exercise, an annual time series data from Central Bank of Nigeria spanning for years was employed. The Johansen co-integration test showed that a meaningful long-run relationship exists between tax reform and Gross Domestic Product (GDP) in Nigeria. Essentially Custom and Excise Duties (CED) and Value-Added Tax (VAT) granger cause Gross Domestic Product (GDP).
This goes to show that any tax reforms were undertaken to improve the tax system, by reducing tax avoidance and evasion, reducing the tax burden, blocking revenue leakages and by scaling down Company Income Tax (CIT) from 30 to 20percent will improve the ability of the government to generate more revenue through taxation. This has the potential to improve both the quantity of revenue available for public expenditure and de-link Nigeria’s public expenditure from the vagaries in the international oil market, thereby hedging the economy away from oil price volatility.
However, to consolidate the benefits derivable from taxes, effort should be made to achieve full autonomy for the Federal Inland Revenue Service (FIRS) while tackling the hydra-headed monster of multiple-taxation. Promotion of accountability and transparency in government business will also serve to restore the confidence of the taxpayer in the tax system. Essentially, Customs and excise duty and VAT granger cause Gross Domestic Product (GDP) and provide handles for the government to maximise tax revenue. Thus, the administration of VAT and CED should be improved upon with focus directed towards reducing evasion and avoidance. Furthermore, all loopholes through which government loose revenue should be securely blocked as the current fight against corruption should be sustained so that gains accruing from the tax policies will not end up in individual pockets.
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