ABSTRACT
This study evaluates the causal link between tax revenue and economic growth of African Countries. The aim is to ascertain the extent to which different components of tax revenue can be useful in moderating economic growth of emerging economies in Africa. Time series data of 38 years on Gross Domestic Product, Foreign Direct Investment, Per Capita Income and four components of tax revenue of ten selected African countries were extracted from the websites of the World Bank, International Centre for Tax and Development, and African Statistical Year Book publications and analysed using OLS regression techniques. Results show that company income tax has a negative insignificant effect on gross domestic product of African countries and a positive insignificant effect on foreign direct investment of African countries as well as a positive insignificant effect on per capita income of African countries. Personal income tax has a positive insignificant effect on gross domestic product of African countries and a positive insignificant effect on foreign direct investment of African countries with a positive insignificant effect on per capita income of African countries. Value added tax has a positive insignificant effect on gross domestic product of African countries, a positive insignificant effect on foreign direct investment of African countries, and a positive insignificant effect on per capita income of African countries. Custom and excise duty has a negative insignificant effect on foreign direct investment of African countries, a negative insignificant effect on per capita income of African countries and a negative insignificant effect on gross domestic product of African countries; with all tax components jointly accounting for substantial variations in economic growth of the countries. The paper concludes that tax revenue is a potent tool for improving economic growth of emerging African nations and recommends that government and tax administrators should target at enhancing tax revenue with emphasis on indirect tax components by blocking all avenues of tax evasion and maintaining proper accountability of collected tax revenues to achieve sustainable economic growth in the African continent.
TABLE OF
CONTENTS
Cover Page i
Title Page ii
Declaration iii
Certification iv
Dedication v
Acknowledgements vi
Table of Contents viii
List of Tables x
List of figure xi
Abstract xii
CHAPTER 1
INTRODUCTION
1.1
Background to
the Study 1
1.2 Statement
of the Problem 8
1.3
Objectives of
the study 11
1.4 Research
Questions 11
1.5 Hypotheses 12
1.6
Significance of the Study 12
1.7 Scope of the Study 13
1.8
Operational Definition of
Terms 14
CHAPTER 2
REVIEW OF LITERATURE
2.1
Conceptual Framework
18
2.1.1 Conceptual
model 18
2.1.2 The
overview of taxation in Africa and its features 18
2.1.3 Development
of diverse tax types and revenues in Africa 21
2.1.4 Concept
of taxation 22
2.1.5 Tax
Principles 25
2.1.6 Types of taxes in Africa 26
2.1.7 Economic
growth and economic development
27
2.1.8 Economic
growth and tax revenue in Africa 29
2.2 Theoretical
Framework 36
2.2.1 Neoclassical growth models of public policy 36
2.3 Empirical
Review 37
2.3.2 Gaps in literature 84
CHAPTER 3
METHODOLOGY
3.1 Research Design 87
3.2 Population 87
3.3
Sample Size
and Sampling Technique 87
3.4 Sources
of Data 88
3.5 Data Collection Methods and Variable
Specification 88
3.6 A
Priori Expectation
3.7 Model Specification 89
3.8 Data Analysis Techniques 91
CHAPTER 4
DATA PRESENTATION AND
ANALYSIS
4.1 Data Presentation 93
4.2 Data Analysis 93
4.2.1 Descriptive statistics 93
4.2.2 Data validity test 96
4.2.2.1 Stationarity/unit root tests 96
4.2.1.3 Co-integration test 98
4.2.3 Regression of the estimated model summary 99
4.2.3.1
Model 1: Testing for the effect of company income tax,
personal
income tax, custom and excise duty, value added
tax
on gross domestic product of African countries. 99
4.2.3.2
Model 2: Testing for the effect of company income tax, personal
income tax, custom and excise duty, value
added tax on foreign
direct investment of African countries. 108
4.2.3.3
Model 3: Testing for the effect of company income tax, personal income
tax,
custom and excise duty, value added tax on per capita
income of African countries. 115
4.3
Results and Discussion 124
4.3.1
Result discussion for model one:
effect of company income tax,
personal income tax, custom
and excise duty, value added tax on
gross domestic product of African
countries 124
4.3.2 Result discussion for model two: effect of
company income tax,
personal income tax, custom and excise duty,
value added tax on
foreign direct investment of African
countries 126
4.3.3 Result discussion for model three: testing
for the effect of
company income tax, personal income tax,
custom and excise
duty, value added tax on per capita income of
African countries 127
CHAPTER 5
CONCLUSION AND
RECOMMENDATIONS
5.1 Summary of Findings 129
5.2
Conclusion 130
5.3
Recommendations 131
5.4
Contribution to Knowledge 132
5.5
Area of Further Research 133
REFERENCE
APPENDIX
LIST OF TABLES
Summary of literature 57
Descriptive statistic table 94
Unit root
test table 97
Table for co-integration test 98
Error correction model table 1 99
Country
level fluctuation result 100
Panel
error correction model regression for model 1 105
Error
correction model 2 108 country level fluctuation result 109
Panel
error correction model regression for model 2 114
Error
correction model 3 116
Country
level fluctuation result 117
Panel
error correction model regression for model 3 122
LIST OF FIGURE
Source: Researcher's Operationalized Model
(2021) 18
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The need for economic growth of any nation (developed and developing)
has continued to bring to limelight the critical importance of tax revenues
among other factors that contribute towards economic growth and development.
Appah (2010) emphasized that the economic growth and development of any nation
is a function of the amount of revenue raised by the government for the
provision of infrastructural facilities. Without adequate revenue, recurrent
and capital expenditure components of annual budget of a country may lie fallow
and could lead to shutdown of government at various levels or organs.
Investment in critical infrastructure would suffer severely with its attendant
consequences such as slow industrial growth leading to retarded economic growth
in the absence of needed revenues.
Tax revenues are veritable tools for economic growth and development
because of its predictable and reliable nature when compared with non-tax
revenues from liquid (crude oil) and solid natural resources that are
transacted internationally and commonly predisposed to uncontrollable market
forces and international politics. Pfister (2009) affirms that tax revenue can
be predicted (certainty attributes of taxation). It is stable, therefore
provides reliable flow of revenue to finance development goals either in the
short run or long run.
Oil
revenues upon which many developing nations depend is susceptible to market
forces, international politics and economic policies of international
organizations such as United Nations (UN) and Organization of Petroleum
Exporting Countries (OPEC) and for that reason is vulnerable to price
fluctuations and this makes tax a surer means of generating revenue for
governments since it does not respond to the vagaries of international policies
and politics. The prevailing economic conditions and policies of developed
nations such as the USA can also impact adversely on oil revenues. In the past,
the fall in crude price per barrel (below US$40) almost crippled the
governments of many developing nations from playing their primary roles
particularly in Africa. It led African countries to downturn and other
challenges which their economies are still struggling to recover fully from.
Therefore, overdependence on oil revenue is likened to a house owner who opens
his doors and windows midnight amidst insecurity- no doubt; he is vulnerable to
attacks (Joseph, 2019). The overdependence on oil revenue or other unexploited
or unprocessed natural resources will continue to put at risk the overall
economic growth of African countries. African nations do not need such
exposures now.
It should be noted that Obama’s administration policy decision to cut
down the quantity of crude oil purchases globally and the world financial
crisis were some factors that contributed to the crash in the price of crude
oil especially in African countries where the USA was the major buyer and this
development had adverse effect on the revenue generating profile of nations
that depended on oil revenue to finance economic and developmental projects.
Babatunde, Ibukun, & Oyeyemi (2016) observed that the extent to which tax revenue arouses economic
performance in an economy, particularly in developing nations, has continued to
generate empirical debate. The study came
to a conclusion that tax revenue has a significant positive effect on Gross
Domestic Product (GDP) while emphasizing that that high and weak ranks of
taxation can impart positively on economic growth and this is supported by the
Ibn Khaldun’s theory on taxation, which gives approval to the positive impact
that lower tax rate has on work, output and economic performance. For that
reason, amidst poor economic conditions which include fall in oil prices, fluctuations
in exchange rates, decline in currency value, the government is supposed to
develop a robust tax structure or model that spurs economic growth and ensure
the sustainability of its tax base in order motivate effective economic
performance resulting to economic growth. This is because, as observed
by Enahoro & Olabisi, (2012) the conduit of economic growth of most
advanced nations of the world is made possible with the revenues obtained from
proficient tax systems which provides the needed revenue with which government
provides public services such as power, efficient transportation system,
healthcare facilities, educational institutions, security of lives and property, internal and external defence
against external aggression as their special primary responsibility globally (Igbasan, 2017). It therefore becomes
imperative that different tax sources should be explored nationally and
internationally by government in order to play its primary responsibilities
effectively (Enahoro & Olabisi, 2012).
Worlu and Emeka (2012)
opined that countries that saw speedy social and infrastructural development
globally were observed to have taken advantage of effectual tax system and by
so doing they are not relying on external sources of revenue for progressive drives
which have proved sterile for many years. The study went further to reiterate
tax revenue has direct and indirect connection with the infrastructural
development and gross domestic product (GPD) respectively. The study stressed
that channels through which tax revenue affects economic growth in emerging
countries, especially in Africa are infrastructural development, foreign direct
investment (FDI) and gross domestic product (GDP). They emphasized that the
availability of critical infrastructure stir up investment that in turn brings
about economic growth and development.
Bukie and Adejumo (2013) scrutinized the effect of tax revenue on
economic in Nigeria for the period 1970-2011; regressing pointers of economic
growth like domestic investment, labour force, and FDI on tax revenue. The
outcome of the study indicated that the indicators depict a positive and
significant relationship with economic growth in Nigeria.
It is worthy of note that savings would increase once a country
becomes self-sufficient via the production of most of the things she needs
thereby reducing importation hence saves more for reinvestment and provision of
critical infrastructure that would attract investors both locally and
internationally resulting in increased GDP and FDI that would engender economic
growth.
Again, Barro (1996) utilises neoclassical and endogenous growth theory
to establish the determinant of economic growth, which are listed to include higher
initial schooling and life expectancy, lower fertility, lower government
consumption (reduction in importation of goods the government has comparative
advantage to produce and also lowering recurrent expenditure), better
maintenance of the rule of law, lower inflation and improvement in terms of
trade. Tax revenue as a percentage of gross domestic product ranges from 16.1 to 31.3% in 2014, in various
eight African countries namely Cameroon, Cote d’ Ivire, Mauritius, Morocco,
Rwanda, Senegal, South Africa and Tunisia (Revenue Statistics in Africa, 2016). Organization for Economic Co-operation and Development (OECD) (2016)
reported that the tax revenue data for these eight African countries accounted
for almost a quarter of African’s total GDP. This developments show tax revenue
has the potential to positively impact on economic growth of African countries.
The fluctuation in tax revenue-to-GDP arises because most countries in Africa
African countries do not have efficient tax structures; thus the need to
overhaul the tax system of African nations arises.
The volatile nature of oil revenue has necessitated the need for a
paradigm shift from oil revenue to non-oil revenue, that is, tax revenues to
enable government generate sufficient revenue that is stable and predictable to
finance a variety of developmental projects. For this reason, the importance of
effective, functional and efficient tax administration system especially in
developing African nations where such is lacking cannot be over-emphasized.
In sub-Saharan Africa, taxation is seen as a brake on growth most at
times measured by GDP because tax rules are inadequately put together to meet
taxpayers’ needs. Often times, weak tax administrative capacity available in
countries of the region are not put into consideration. These challenges faced
by countries of this region have led to various reforms aimed at lessening the
burden of tax structures that are impeding economic growth.
Generally, these reforms are aimed at creating a tax environment that
encourages savings, investment, entrepreneurship and labour. The reforms are
not essentially targeted at reducing the tax burden but aim at redefining the
tax structure that has the capacity to reduce drastically the negative effect
of taxes on economic growth while conserving fiscal revenues. These reforms
have in practical terms introduced tariff and tax rate reductions that have not
always succeeded in widening the domestic tax base (Gbato, 2017). Therefore the
much desired positive impact of these tax reforms is yet to be felt by these
developing African countries.
According to IMF (2016), economic growth in the Sub-Saharan region has
slowed considerably in recent years and it dropped to 3.4% in 2015, being its
lowest level in the past 15 years, and could reduce further to 1.6%,
specifically below the growth rates of 5% to 7% recorded during the past
decade. For countries in the region, that give priority attention to fiscal
policy as an instrument of intervention, this situation renews the debate on
the role that tax policy could play.
In lieu of the above, the critical question is: Can tax revenue spur economic
growth in developing nations of Africa? Gbato
(2017) noted that the move by African countries to embark on poverty reduction
strategies and programmes will lead to considerable recurrent expenditure and
revenue losses brought about by the increasing liberalization of economies,
hence the need to increase domestic revenues higher to prevent a more than
proportionate increase in public debt. The reduction of negative externalities of
taxation on economic growth in order not to hamper development is equally
notable. To eliminate the challenge of the two identified imperatives, the need
to come up with a tax system that generates enough revenue and engender growth
becomes fundamental. As obtainable in developed world such as the United States
of America and United Kingdom, efficient and effective tax structures can be
beneficial to economic growth and development.
There are several difficulties in mobilizing the desired tax revenues
in developing countries of Africa to fast-track economic growth given the fact
that the primary objective of fiscal policy is the mobilization of revenue to
encourage economic growth and development. Confronted with increasing cost and
volatility of external sources of development funding, mobilization of
sufficient tax revenues, stable and predictable is as essential to the
financing the provision of public goods. Tanzi and Zee (2001) stressed that tax
level is dependent on the process of development and industrialization. This
means the more development and industrialization, the more the volume of tax
revenue generated from companies and its employees via tax. The implication is
that as development and industrialization is constrained, volume of tax revenue
diminishes. On the contrary, the rate of development is very low in most
African countries.
Besides, revenue mobilization is constrained
owing to the fact that the distribution of tax burden is not fair (Tanzi and
Zee, 2001).
According to Itriago
(2011), a large chunk of tax encumbrances is borne by the less privileged class
as a result of the actions of the privileged class. There are equally difficulties
emanating from lack of transparency and accountability in policies that are
meant to instil sense of justice in the taxpayer. As observed by Martinez and
Togler (2008) tax revenue mobilization is boosted with political accountability
and the capability of taxpayers to sanction decision makers and hold political
office holders responsible. But it is so sad that political accountability and
transparency are missing among public office holders in governments of almost
all African countries.
Regrettably, in
sub-Saharan Africa, this relationship is predisposed by public support, more
often influenced by geo-political interests, tribal political affiliation and
other interests. Many reforms have taken
place in various developing countries of Sub-Saharan Africa region amidst
diverse constraints.
It should be
underscored that various empirical studies have come up with heterogeneous
findings in relation to the effect of tax revenue in economic growth of
developing African nations. Babatunde,
Ibukun & Oyeyemi (2017), identified many empirical literatures that show
different and divergent findings regarding the impact of tax revenue on
economic growth of African countries as follows: Ugwunta & Ugwuanyi (2015) and
Dasalegn (2014), reported positive significant relationship between taxation
and economic growth. A negative nexus was reported in studies carried
out by Keho (2013), Junior and Tafirenyika (2010), Delesa
and Daba (2014), Saima et al., (2014).
McBride (2012) stated that progressive taxation diminishes investment, risk
taking and entrepreneurial activity because more than proportionate portion of
high income earners earnings are collected via tax returns.
Contrary to these,
some studies still find no significant relationship between the variables such
as VAT, CIT, PIT, PPT, CED (independent variables) GDP, FDI, PCI ( dependent
variables) (N’Yilimon, 2014). Hungerford (2012) has established proof that
taxes have no effect on economic growth when the USA experience was examined
from the end of World War II in 1945 to 2011. Osundina and Olanrewaju (2013)
also reported that the effect of taxation on national growth was insignificant.
Though effectual consumption taxes boost investment, the overall tax burden
have no effect on investment and economic growth.
The examination on the
effect of taxation on economic growth by Tens et al., (2011) studying 21 OECD countries from1971- 2004 reveals
that corporate taxes have been most harmful to the economy; similarly taxes on
personal income, consumption, and property ; a pointer that the effect of
taxation on economy is not homogeneous. No doubt, from empirical research
outcomes, the effect of taxation s not homogeneous. As the top marginal rate on
personal income increased, productivity and growth are negatively affected.
Therefore, the study opines that progressivity of personal income taxation is
harmful to the growth of the economy
(Babatunde, Ibukun & Oyeyemi, 2017).
From the foregoing,
the argument regarding the nexus between tax revenue and economic growth
remains inconclusive. This has compelled the need for further comprehensive
study that would build a comprehensive model with a view to critically
investigating nexus of these variables (dependent and independent) among
African countries with a view to advising policy makers to concentrate on tax
components that contribute positively to the economic growth of Africa and
where they have comparative advantage. For this reason, this study centres on
the effects of tax revenue on economic growth of African Countries.
1.2 STATEMENT OF THE PROBLEM
Tax
revenue is a veritable tool in the hand of government for the advancement of
economic development through the provision of critical infrastructure and
social amenities for the wellbeing of the citizenry. Tax revenues help
governments globally to discharge its core mandates of (a) protecting the
society from violence and invasion of other independent societies through
military forces (b) ensuring protection of every member of the society from
injustice and oppression of every other member through administration of
justices (c) establishing and maintaining public institutions and public works
which cannot be expected that any individual, or few number of persons, should
establish or maintain because of huge capital outlay required (Abiola &
Asiweh, 2012; Appah & Eze, 2013). Developed countries globally have been
found to have relatively felt the impact of tax revenues generated through
efficient and effective tax system, the controversies notwithstanding (Joseph, Omeonu & Ngaonye, 2018).
Worthy of
note is the fact that globally, there is a paradigm shift to tax revenue as a
better alternative source of revenue and the need for African countries to
generate adequate revenue from taxation has become a matter of urgency and
importance (Afuberon & Okoye, 2014).
However,
taking a critical look at the huge benefits of tax revenue based on theoretical
literatures, the need to ascertain its effect on economic growth of African
countries becomes very imperative. Again the vulnerability of the revenues
generated from crude oil and other unprocessed natural resources in Africa is a
wakeup call for African countries to gear effort towards alternative sources of
revenue. This alternative source of revenue is tax revenue and for this reason
its impact should be determined precisely.
The
argument regarding the effect of tax revenue economic growth is still raging
because of divergent results based on various empirical studies by researchers.
Many empirical studies show
disaggregated and conflicting findings in relation to the effect of tax revenue
on economic growth. Some
empirical studies that show positive effect of tax revenue on economic growth are as stated below among others; Ugwunta
and Ugwuanyi (2015) and Dasalegn (2014); Ihendinihu, Jones and Ibanichuka
(2014); Eke, Ekwe and Ihendinihu (2018); Nwawuru, Nmesirionye and Ironkwe (2018); Nmesirionye, Nwawuru and
Ekwuruke (2018); Babatunde, Ibukun and Oyeyemi (2017); Ogbonna and
Ebimobowei (2012); Kaibel and Nwokah
(2009); Babatunde et al
(2017); - indirect taxes have a positive and insignificant effect on economic
growth of sub-African countries.; Onaolapo, Fasina & Adegbite (2013); Keho
(2011); Adereti, Sanni and Adesina (2011); and lots of other studies.
Some empirical studies that show negative effect of tax revenue on
economic growth included but not limited to thus: Joseph, Azubike, Tapang & Dibia (2018); Kaibel and Nwokah
(2009); Micah, Chukwumah and Umobong (2012); Edame (2014); Okoi and Lawrence
(2015); Anne (2014); Yaya (2013); Lawrence (2015); Widmalm (2001); Angepoulos,
Economides and Kammas (2006); Arnold (2008; 2011); Xing (2012); Santiago and
Yoo (2012); Hakim, Karia and Bujang (2014); Gbato (2017); Saqib (2014);
Tomljanocich (2014); Poulson and Kaplan (2009).
A negative nexus was
reported in similar studies carried out by Keho (2013) and Saima et al., (2014). McBride (2012) stated that
progressive taxation diminishes investment, risk taking and entrepreneurial
activity because more than proportionate portion of high income earners
earnings are collected via tax returns.
In consideration of the conflicting findings
regarding the effect of tax revenue holistically on economic growth of African
countries, this study is motivated and it seeks to advance investigation on the
actual effect of tax revenue on economic growth of African countries, thus
would solve the problem of disaggregated and conflicting findings once and for
all. To achieve this, the study examined the effect of each of the tax
components captured in the study to help to ascertain the particular one or
ones that add much needed value to the economy of African countries or
otherwise with a view to recommending most suitable fiscal policy options.
For these reasons, the
study adopted change in gross domestic product (∆GDP), change in Foreign Direct
Investment (∆FDI), change in GDP Per Capita/Per Capita Income as dependent or
response variables and independent or explanatory variables Companies Income
Tax (CIT), Personal Income Tax (PIT), Custom, Excise Duties (CED) and Value
Added Tax (VAT). The study would compare the impact of tax components on
various countries selected with the ultimate intent of identifying which of the
tax components that have the potentials of enhancing rapid economic growth and
also the tax component that does not contribute to the economic growth of
African countries. Based on the outcomes, policy makers in Africa would be
advised. The proxy variables adopted for this study have been applied to study
the impact of tax revenue on economic growth of African sub-regions in recent
times but have not been used to study the impact of various tax components on
African countries. The population of the study is African economy and sample
size is ten (10) selected African nations chosen based on World Population
Review (2019) GDP ranking and availability of data. The countries are also picked to reflect various regions of
the continent. The study period is 38 years, 1980 - 2018.
1.6
OBJECTIVES OF THE STUDY
The
main objective of the study is to examine the effect of tax revenue on economic
growth of African countries. In
specific terms, the objectives are to:
i. Examine
the effect of tax revenue (company’s income tax, personal income tax, custom
and excise duties and value added tax ) on Gross Domestic Growth of African
countries.
ii. Ascertain the effect of tax revenue (company’s
income tax, personal income tax, custom and excise duties and value added tax)
on Foreign Direct Investment of African countries.
iii. Examine the effect of tax revenue (company’s
income tax, personal income tax, custom and excise duties and value added tax)
on Per Capita Income of African countries.
1.7 RESEARCH QUESTIONS
The following research questions were answered
to obtain the findings or results of the study.
i. To
what extent does tax revenue (company’s income tax, personal income tax, custom
and excise duties and value added tax) affect Gross Domestic Growth of African
countries?
ii. To
what extent does tax revenue (company’s income tax, personal income tax, custom
and excise duties and value added tax) affect Foreign Direct Investment of African
countries?
iii. To
what extent does tax revenue (company’s income tax, personal income tax, custom
and excise duties and value added tax) affect Per Capita Income of African
countries?
1.8 HYPOTHESES
The following null hypotheses, which will be
tested at 5% level of significance, have been formulated to guide this study.
i.
Tax revenue (company’s income tax, personal
income tax, custom and excise duties and value added tax) does not have
significant effect on Gross Domestic Growth of African countries.
ii.
Tax revenue (company’s income tax, personal income tax, custom and excise duties and value added tax) does not have any substantial effect on Foreign Direct
Investment of African countries.
iii.
Tax revenue (company’s income tax, personal income tax, custom and excise duties and value added tax) does not have significant effect on Per Capita Income of African
Countries.
1.6 SIGNIFICANCE OF THE STUDY
The study has many significant dimensions to
it. On a broad note, the result of this study provides empirical evidence and
contributes to the body of existing literature in this field thus; would be of
immense benefit to government, researchers, general public, and Joint Tax Board
and Tax Agencies.
Governments of African countries, in the light
of dwindling oil revenue, would derive benefit from this study towards urgently
making their various tax systems work effectively through the entrenchment of
tax reforms that would bring in transparency, accountability and integrity in
the overall tax system of African countries. Another significance of this study
is that it would assist governments in the region to block revenue leakages,
harness greater revenue sources, and evolve effective tax laws and economic
policies that would guarantee effective tax administration and foster economic
prosperity on the citizenry. The study would equally give useful information to
the government on how to generate more income from tax in order to be less
dependent on income from the unsteady oil sector alone. Some countries in
Africa relied so much on oil which had been the main source of revenue earner
for some countries and governments over the years. Consequent upon serious oil
price decline in the global market, countries relying on oil revenue
experienced the adverse effect on their budgets in 2016 and their economies
slumped into recession thereby forcing these countries to make huge provisions
for borrowing with the attendant borrowing costs, which is unfavourable to
growth and development. Consequently, government would therefore greatly
benefit from this research by appreciating the need for urgent tax reforms and
laws for more efficient and effective tax administration.
It also acts as a disincentive to the general
public in relation to tax evasion. This study educates taxpayer on the benefit
of remitting tax especially in the area of economic benefit of tax revenue, the
negative effect of evading tax on both taxpayer and on the economy in
notwithstanding.
Existing loopholes
resulting in fund leakages, inefficiency of tax administration, tax evasion are
revealed through this study. Besides, researchers and the academic community
have a lot of inspirations to be drawn from the in-depth analysis and
articulation of the research work. In
the end, the study provides necessary information to various Joint Tax Board
and Tax Agencies within the continent concerning helpful tax administration
schemes that could be engaged to reduce the number of tax evaders and secure
taxpayers allegiance to their legitimate and civil duty, thus increasing the
tax revenue generated.
1.7 SCOPE
OF THE STUDY
The focus
of the study is on the effect of tax revenue on economic growth of African
countries and as a result, the scope of this study is defined from three
dimensions specifically, geographical area of coverage, time period and the
data.
The geographical scope of this study is
Africa, representing both the study’s population and sample size. The time
frame is thirty-eight (38) years (1981-2018) and the reason for chosen the
numbers of year is make it possible to have robust and comprehensive data for
effective analysis and results. This period is considered appropriate because
it helped to establish the consistency and effectiveness or otherwise, the
impact of tax revenue generated on economic growth of African countries. This
study is limited to secondary data (Ex-post facto design) obtained from the World
Bank website, International Monetary Fund (IMF) World Economic Outlook
database, Organization for Economic Development and Co-operation (OECD) Online
Database and United Nations Conference on Trade and Investment (UNCTAD) online
database, African Statistical Year Book publication, Central Bank of Nigeria (CBN),
Federal Inland Revenue Services (FIRS), and Tax Revenue Boards of various selected
countries for a period of 38 years covering 1980 to 2018. The selected African
countries based on their region are Nigeria, Ghana, South Africa, Kenya,
Tunisia, Egypt, Uganda, Cameroon, Democratic Republic of Congo and
Botswana. These sources made available
data that were used to measure the tax revenue (independent variable) and
economic growth (dependent variable) of selected African countries (sample).
The tax revenues were computed by Companies Income Tax (CIT), Personal Income
Tax (PIT), Custom and Excise Duties (CED) and Value Added Tax (VAT) and Change
in Gross Domestic Product (GDP), Change in Foreign Direct Investment (FDI) and
Change in Per Capita Income were adopted as a proxies for economic growth over
the period of study. Using data from these reputable official sources enhanced
the reliability and validity of data used in this study.
1.8 OPERATIONAL DEFINITION OF TERMS
Companies income tax (CIT): CIT in this study means taxes on income,
profits and capital gains of corporate bodies. This is because in many
countries selected there is absence of dataset on only CIT. What cuts across is
data taxes on income, profits and capital gains of corporate bodies, which
is/are equivalent with CIT.
Thin
capitalization: This
describes a situation where firms are heavily financed through debts with the
aim to pay less tax since interest on debt is an allowable expense under tax
law.
Tax authorities:
This refers to the revenue collection agencies
of countries in Africa. For example, in Nigeria, it is called Federal Inland
Revenue Service (FIRS), State Internal Revenue Service (SIRS) and Local
Government Revenue Committee.
Joint
tax board (JTB): This is
the supervisory and regulatory body that defines the scope of operation and
administrative system between the various tiers of tax authorities.
Revenue:
Means resources or pool of funds available to
selected countries in Africa from both internal and external sources.
Tax: Obligatory transfer of financial resources
from private organization to public sector for common pool.
Tax administration: Is tax management process and procedures for
effective and efficient transfer of financial resources from the private
organization to the public pool.
Tax
reform policies: These are
policies established by some government in Africa on tax administration and
implementation.
Tax consultants: Tax consultants are firms employed by the
governments of countries in Africa charged with duties of tax administration
and collection.
Tax evasion:
This refers to the deliberate refusal to pay
taxes usually by making false reports. It means avoiding paying taxes.
Typically, tax evasion schemes involve an individual or corporation
misrepresenting their income to the Inland Revenue Service.
Tax avoidance: This refers to the minimization of tax
liability by tax payers through lawful methods. This is the legal usage of the
tax regime to one’s own advantage to reduce the amount of tax that is payable
by means that are within the law.
Oil revenue: This is revenue generated through oil
exploration and production.
Non-oil
revenue: This is the revenue generated
from other sources apart from oil sector in selected African countries; e.g.
tax.
Gross
domestic product (GDP): Gross
domestic product is the total value of everything produced in the country.
It does not matter if it is produced by citizens or foreigners. If they are
located within the country's boundaries, their production is included in GDP.
To avoid double-counting, GDP includes the final value of the product, but not
the parts that go into it. For example, a U.S. footwear manufacturer uses laces
and other materials made in the United States. Only the value of the shoe gets
counted; the shoelace does not. In the United States, the Bureau of Economic Analysis measures GDP quarterly. In Nigeria,
it is National Bureau Statistics. Each month, it revises
the quarterly estimate as it receives updated data.
Calculating GDP: The makeup
of include personal consumption (C) expenditures plus
business investment (I) plus government spending (G) plus export minus imports (X-M). It is easy to calculate a country's gross domestic product using
this standard formula: C + I + G +
(X - M).
Change in GDP (GDP Growth Rate) = Final
GDP – Initial GDP
Initial GDP
Foreign
direct investment (FDI): Is investment made to get a lasting interest
in or effective control over an enterprises operating outside of the economy of
the investor. With respect to this
definition, FDI has three components: equity investment, reinvested earnings,
and short term and long term inter-company loans between parents firms and
foreign affiliates.
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