TAXATION, INVESTMENT AND INCOME INEQUALITY: EVIDENCE FROM NIGERIA

CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

Nigeria is the largest country in Africa with a population of around 170 million people, accounting for just under half of the total West African population. After South Africa, Nigeria is Africa’s second largest economy. Between 2002 and 2010, its per capita gross domestic product (GDP) based on purchasing power parity (PPP) increased by 76.3%

Despite strong economic growth, 68% of the populations still live in poverty, and until 2004 this situation was steadily worsening. In stark contrast, Nigeria is home to some of the wealthiest people in the world such as Aliko Dangote, Africa’s richest man in 2012 according to Forbes Magazine, with a net worth of $11.2 billion. These wealth disparities can partly be explained by the poor distribution of the benefits of growth. Since 1992, crude oil exports have been the key driver of the rapidly growing economy, accounting for 95% of the country’s export earnings, 80% of government revenues, and more than 40% of GDP throughout the 1990s. Since 2000, oil revenues have leveled at approximately a third of GDP, while the contribution from agriculture and technology has become more significant. However, the benefits of the wealth generated by oil production have not been evenly distributed among the population, nor has the oil sector generated jobs. About two-thirds of the population lives on less than $1 a day, and the unemployment rate in 2011 was 23.9%, up from 21.1% in 2010.

Poverty slows economic growth, and unequal income and wealth distribution are endemic in African countries. Indeed, Africa has made the least progress in improving living standards among the developing regions of the world. Poor economic performance is not limited to resource-poor countries of the Sahel region; it is also a feature of resource-rich countries such as the Democratic Republic of Congo and Nigeria. Inequality implies a concentration of a distribution, whether one is considering income, consumption or some other welfare indicators or attributes (Oyekale, Oyekale & Adeoti, 2007). There was an increase in income disparity after the economic growth which Nigeria experienced between 1965 and 1975, and this income inequality has increased the dimension of poverty in the country (Oluwatayo, 2008). The income inequality between the people in rural and urban areas in Nigeria is remarkably high, as those who live in the rural areas base all their income on agriculture which is today not a thriving sector in Nigeria as oil has taken over the economy. They do not invest their money to acquire skills as people in the urban areas would and this makes them more vulnerable to poverty and leads to some social and economic problems such as violence, corruption and so on (Oluwatayo, 2008).

There is a wide consensus among economists that the distribution of income in the United States recently has become more unequal. Most observers believe that this trend was well under way by 1980; many trace its origin to as early as 1970. There are fewer consensuses about the causes of the growth in inequality. Among the competing hypotheses are a shift in demand toward high-skilled labour and away from unskilled labour, an increase in the relative supply of low-skilled workers, and a shift in output toward sectors where individuals’ productivities are more variable and more easily identified. There is virtually no consensus about the role of the tax system in the growth in inequality, and swirling controversy about the appropriate tax policy response to this trend. For example, Gramlich, Kasten, and Sammartino (1991) have claimed that, in the 1980s, the tax system became slightly less effective in reducing the inequality in pre-tax incomes. Lindsey (1990) has argued that the precipitous drop at the start of the 1980s in the marginal tax rate imposed on higher income individuals was a principal cause of the increased apparent inequality of pre-tax incomes, because it has encouraged these individuals to work more, report more income, realize more capital gains, and convert non-taxed compensation to taxable compensation. Finally, many of the tax policy changes currently being advocated, in particular the child credit financed by higher tax rates on higher-income taxpayers, are justified in part as an attempt to offset the increase in income inequality.

There is a broad consensus that income inequality has been increasing in the last two decades. There is evidence of increased dispersion since the mid-1970s in both the lower and upper tails of the distribution for families and for individuals, and in the distribution of labour income for workers. At least since 1979, inequality has grown both between less and more educated workers and also among apparently similar workers. As Karoly (1991) has documented, this conclusion is robust to a great variety of disaggregation, including by families with children and race-ethnicity. The increase in inequality among workers cannot simply be explained by shifts in the gender, education or experience composition of the work force, and is evident even when the sample is restricted to full-time workers. Several alternative explanations have been offered to the increased inequality. Most attention has been paid to labour market factors, as labour market income accounts for about 70 percent of family income. Among the supply explanations offered are shifts in the size of worker-age cohorts and the educational distribution of these cohorts. Among the demand explanations offered are shifts in the composition of final output, in the occupational mix within industries, in skill requirements, and in the density of unionization. The strength of the evidence supporting these not mutually exclusive explanations is assessed in (Levy & Mumane, 1991).

Technological advances may affect labour income inequality as they can benefit higher-skilled workers more than others. For example, to the extent that medium-skilled workers focus on routine tasks that can also be accomplished by computers, technological change will reduce the demand for such workers. The opposite effect can be expected for highly-skilled and low-skilled workers who tend to focus respectively on abstract and manual non-routine tasks, both of which are harder to replace by machines. If the demand shifts are not offset by equal shifts in the composition of labour supply (e.g. by a large enough rise in tertiary education attainment), technological progress may reduce the earnings or employment of medium-skilled workers relative to both the low- and high-skilled ones. Indeed the data point to a polarization of employment by skill level (Autor, 2006; Goos, 2009). Globalization may also widen inequality. A first channel through which this may happen is off-shoring. The tasks that are relocated from developed to developing countries are typically not skill intensive from the perspective of the skill-developed countries, but they are from the perspective of the skill-undeveloped countries. As a result, off-shoring makes labour demand more skill intensive in both poorer and richer countries, thus increasing inequality in both groups of countries (Feenstra & Hanson, 1996). Second, if firms differ in their profitability and low-income workers work disproportionately in low-productivity firms that are battered by import competition, trade may increase labour income inequality by lowering employment or the relative earnings of low-income workers (Egger & Kreickemeier, 2009; Helpman, 2010). The implied positive link between globalization and inequality is supported by a growing body of studies of individual firms, but it is more difficult to establish a robust link at the aggregate level.

There is sparse empirical evidence on the relationship between taxation, investment and inequality in developing economy especially with Nigeria as a reference point. To the best of our knowledge this is one of the far studies that have simultaneously investigated the relationship between taxation, investment and income inequality.

1.2   Statement of Problem

A growing chorus of voices is pointing to the fact that whilst a certain level of inequality may benefit growth by rewarding risk takers and innovation, the levels of inequality now being seen are in fact economically damaging and inefficient. If money were more evenly spread across the population then it would give people more spending power, which in turn would drive investment growth and drive down inequality.

1.3   Research Questions

The following are the research questions for the study;

1.     Is there a relationship between taxation and income inequality in Nigeria?

2.     Does investment have any impact on income inequality in Nigeria?

3.     Does Gross Domestic Product (GDP) per capital have any impact on income inequality in Nigeria?

1.4   Objective of the Study

The broad objective of the study is to test the relationship between taxation, investment and income inequality. The specific objectives are as follows:

1.     To examine the relationship between taxation and income inequality in Nigeria.

2.     To evaluate the impact of investment on income inequality in Nigeria.

3.     To investigate the impact of Gross Domestic Product (GDP) per capital on income inequality in Nigeria.

1.5   Statement of Hypotheses

The following hypotheses were formulated to aid the study:

Hypothesis One

H_O:   There is no significant relationship between taxation and income inequality in Nigeria

H_I:    There is significant relationship between taxation and income inequality in Nigeria.

Hypothesis Two

H_O: There is no significant relationship between investment and income inequality in Nigeria

H_I:    There is significant relationship between investment and income inequality in Nigeria.

Hypothesis Three

H_O:   There is no significant relationship between Gross Domestic Product per capital and income inequality in Nigeria.

H_I:    There is significant relationship between Gross Domestic Product per capital and income inequality in Nigeria.

1.6   Significance of the Study

Rising income inequality in the developed economy and developing economy like Nigeria has stimulated a large body of research examining the underlying driving factors.

i.      Researchers: This study will serve as a reference to other researchers researching about the same subject matter within and outside the educational sector.

ii.     Government: It will give government and other policy makers an in-depth view, exposing the relevance of understudying the contributing factors of income inequality in the country so as to make better economic decision for the advancement of the nation at large. Taxation has always been driven by the need to fund public expenditure, and progressive tax rates have been advocated primarily to reflect the ability to pay. But progressive taxation has another hugely important function: it is part of the system for reducing inequality, thus this work is geared towards creating a commitment to greater equality as this will help in a tremendous way to bridge the gap between the rich and the poor thereby reducing the pace of inequality in the society.

1.7   Scope of the Study

The study takes an in-depth look at the impact of taxation, investment on income inequality with an empirical examination of the macro economy. The study covers a 5 years time frame from 2010 – 2015 with Benin City, Edo State as the geographical area.

1.8   Limitations of the Study

The study is faced with some constraints which may likely affect the generalization of findings, the constraints include the following below:

·                    Geographical Coverage: Factor that may likely affect the work is the issue of investigating all accounting firms in the country. Due to the spread of accounting firms all over major cities in the country, the researcher could not be able to cover the whole areas. Hence, emphasis was focused on only Benin City and Lagos which the researcher thinks could affect the generalization of result.

·                    Problem of sourcing for material: The research was faced with problems of getting current materials, textbooks, journals, seminar papers in relation with this research topic. The Auchi Polytechnic library is outdated for this research work. In the final analysis most interviewed and investigated could not give some vital information that would have acted as ingredients in the work.

1.9   Definition of Terms

i.      Economic growth: Can be defined as an increase in a country’s physical output over a long period of time.

ii.     Economic development: Money is also spent to accelerate the pace of economic development in the country particularly in the areas of agriculture, mining, power supply, industry, transport and transportation.

iii.    Economic development: Can be defines as the elimination or reduction in poverty, inequality and unemployment within the context of a growing economy.

iv.    Globalization: May be referred to as the interplay cooperation and integration of the various financial systems of the world via international trade. Investment and distribution of vital information aimed towards the creation of synergy in the world, markets, production process and general economic development.   

v.     Monetary Policy: Is government strategies used in controlling money supply in an economy to influence key economic variables such as income and employment.

vi.    Fiscal Policy: Can be defines as that part of government policy concerning the raising of revenue through taxation and other means and deciding on the level and pattern of expenditure for the purpose of influencing economic activities or attaining some desirable macroeconomic goals.

vii.   Taxation: Is a levy an individual or corporate bodies by central or local government pay in order to finance the expenditure of that government.