ABSTRACT
This research examined the Impact of Tax Reforms on Economic
Growth of Nigeria. Specifically, attempt was made to
verify the relationship between federally collected revenue and specific tax
revenue generation sources. The study employed annual time series data spanning
the years (2005-2014). The various income taxes were used as a proxy for tax
reforms and GDP as a proxy for economic growth.
The research adopted developmental research
design. Data was basically collected by secondary means through Central Bank of Nigeria (CBN)
statistical bulletin and the FIRS Guage.
Three hypotheses were formulated and tested
with the used of regression analysis and T-test. Based on the result of the
analysis, the three null hypotheses were rejected and the alternate hypotheses
accepted. It was thereby concluded that; taxation reforms has significantly impact on revenue
generation in Nigeria.; taxation reforms has significant effect on the Gross Domestic
Product in Nigeria and that taxation reforms has significant impact on tax
evasion.
The study proposed that VAT provides
good tax handle for the government to maximize its revenue. However, to
maximize revenue from these taxes, the administration should be improved upon
with effort directed towards reducing tax avoidance and evasion.
TABLE OF CONTENTS
CHAPTER ONE - INTRODUCTION
1.1 Background of the Stud
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Research Questions
1.5 Statement of Hypotheses
1.6 Scope of the Study
1.7 Justification of the Study
1.8 Definition of Terms
CHAPTER TWO - LITERATURE REVIEW
2.1 Introduction
2.2 Conceptual Framework
2.3 Theoretical Framework
2.4 Empirical Studies
2.5 Review of the Existing Tax System
2.6 Recent Tax Reforms
2.7 Gaps of the Literature
CHAPTER THREE – RESEARCH METHODOLOGY
3.1 Introduction
3.2 Research Design
3.3 Population of the Study
3.4 Sample Representation
3.5 Sample Technique
3.6 Method of Data Collection
3.7 Statistical Analysis and Procedure
CHAPTER FOUR - DATA
PRESENTATION, ANALYSIS AND INTERPRETATION
4.1 Introduction
4.2 Presentation of Data
4.3 Test of Hypotheses
4.4 Regression Equation
4.5 Discussion of Results
CHAPTER FIVE - SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
5.2 Conclusion
5.3 Recommendations
5.4 Suggestions
for Further Studies
References
CHAPTER
ONE
INTRODUCTION
1.1
Background to the Study
The
political, economic and social development of any country depends on the amount
of revenue generated for the provision of infrastructure in that given country.
However, one means of generating the amount of revenue for providing the needed
infrastructure is through a well-structured tax system. According to Azubike
(2009), tax is a major player in every society of the world. The tax system is
an opportunity for government to collect additional revenue needed in
discharging its pressing obligations. A tax system offers itself as one of the
most effective means of mobilizing a nation’s internal resources and it lends
itself to creating an environment conducive to the promotion of economic
growth. Nzotta (2007) argues that taxes constitute key sources of revenue to
the federation account shared by the federal, state and local governments.
Odusola (2006) stated that in Nigeria, the government’s fiscal power is divided
into three-tiered tax structure between the federal, state and local
governments, each of which has different tax jurisdictions. The system is
lopsided and dominated by oil revenue. He further argues that over the past two
decades oil revenue has accounted for at least 70% of the revenue, thus
indicating that traditional tax revenue has never assumed a strong role in the
country’s management of fiscal policy. Instead of transforming the existing
revenue base, fiscal management has merely transited from one primary
product-based revenue to another, making the economy susceptible to
fluctuations of the international market. It is on the account of this lopsided
revenue structure that tax experts and scholars stated in clear terms that the
Nigerian tax system need to be reformed to achieve long term economic growth
and development.
Tax
is a compulsory levy imposed on a subject or upon his property by the
government to provide security, social amenities and create conditions for the
economic well-being of the society (Appah, 2004; Appah and Oyandonghan, 2011).
Anyanfo (1996) and Anyanwu (1997) stated that tax are imposed to regulate the
production of certain goods and services, protection of infant industries,
control business and curb inflation, reduce income inequalities etc. Tosun and
Abizadeh (2005) say taxes are used as proxy for fiscal policy. They outlined
five possible mechanisms by which taxes can affect economic growth. First,
taxes can inhibit investment rate through such taxes as corporate and personal
income, capital gain taxes. Second, taxes can slow down growth in labour supply
by disposing labour leisure choice in favour of leisure. Third, tax policy can
affect productivity growth through its discouraging effect on research and
development expenditures. Fourth, taxes can lead to a flow of resources to
other sectors that may have lower productivity. Finally, high taxes on labour
supply can distort the efficient use of human capital high tax burdens even
though they have high social productivity. Engen and Skinner (1996) suggest
that a number of recent theoretical studies have used endogenous growth models
to stimulate the effects of a fundamental tax reform on economic growth. All
these studies conclude that reducing the distorting effects of the current tax
structure would permanently increase growth.
Musgrave and Musgrave (2004) stated that the
economic effects of tax include micro effects on the distribution of income and
efficiency of resource use as well as macro effect on the level of capacity
output, employment, prices, and growth.
However, the use of tax as an instrument
of fiscal policy cannot be achieved because of dwindling level of revenue
generated as a result of ineffectiveness of government officials. Kiabel and
Nwokah (2009) argue that the increasing cost of running government coupled with
the dwindling revenue has left all tiers of government in Nigeria with
formulating strategies to improve the revenue base. Tax is dynamic, so reforms
are necessary to effect the required changes in the national economy (Ola,
2001). Azubike (2009) noted that tax reform is an ongoing process with tax
policy makers and tax administrators cont;inually adopting the tax systems to
reflect changing economic, social and political circumstances in the economy.
Therefore, the objective of this study is
to examine the impact of tax reforms on the economic growth of Nigeria
(2005-2014).
1.2
Statement of the Problem
Taxation is a veritable source of government revenue. However, it is
still debatable in the literature the optimal taxation to be imposed to enhance
development without unjustly inflicting welfare cost.
Over
100 attempts at tax reforms in developing countries have been recorded since
1945. Tax reform has turned from a desired or preferred task to being a
necessary one. One of the victims of numerous economic crises that have plagued
developing countries since the first oil shock in 1973 has been the tax system.
Consequently, tax collections have been hit hard resulting in large fiscal
deficits.
Several studies on tax literature, both
theoretical and empirical, have based their research works on tax revenue and
economic growth (Avila and Strauch, 2008; Chin and Lai, 2009; Song,
2002; Chen, 2007; Folster and Henneksen, 2001; Weller, 2007 and Arnold, 2011). Nevertheless, only a limited number
of studies explicitly recognize tax reforms or different changes in the nature
and characteristics of tax systems of recipient countries and, hence, the
ultimate effect of tax revenue on economic growth depends on how the public
respond to changes in the tax systems.
Over
the years, revenue derived from taxes has been very low and no physical
development actually took place, hence the impact on the poor is not being
felt. (Weller, 2007) Inadequate tax personnel, fraudulent activities of tax
collectors and lack of understanding of the importance to pay tax by tax payers
are some of the problems of this study. The issues mentioned above will
therefore constitute the problem to be addressed by this research work.
1.3 Objectives
of the Study
The
main objective of this research work is to examine the impact of tax reforms on
economic growth. Specific objectives are as follows:
i.
to identify main tax reforms in the
country;
ii.
to assess the impact of tax reforms on
revenue generation in Nigeria
iii.
to determine the extent to which tax
reforms affect the Gross Domestic Product in Nigeria
iv.
to assess the effect of tax reforms on tax
evasion
1.4 Research
Questions
Based
on the above stated research objectives, the following three research questions
are formulated to guide the study:
Based on the above
stated research objectives, the following three research questions are
formulated to guide the study:
i.
How has tax reform impacted revenue
generation in Nigeria?
ii.
To what extent has tax reform affected
Gross Domestic Product of Nigeria?
iii.
To what extent has tax reform reduced tax
evasion?
1.5
Statement of Hypotheses
The
following hypotheses were formulated to be tested in the course of this study:
Hypothesis
one
H0:
Tax reforms have
no significantly impact on revenue generation in Nigeria.
Hypothesis
two
H0:
Tax reforms have
no significant effect on the Gross Domestic Product in Nigeria.
Hypothesis three
H0:
Tax reforms have
no significant impact on tax evasion.
1.6
Scope of the Study
Tax
revenue generated by the Federal Government of Nigeria would be obtained in
order to assess the impact of tax reforms on revenue generation and Gross
Domestic Product of Nigeria. Time
series variables obtained from published journals and the Central Bank
statistical bulletin covering the period 2005-2014 would be
obtained to evaluate the extent that tax reforms contributed to the steady
growth in Gross Domestic Product in Nigeria. This period was chosen because tax
reforms being enforced in the recent years.
The geographical
area of this study covers Nigeria.
The research of study is Federal
Inland Revenue Service (FIRS). Data will also be sourced from Central Bank of Nigeria
(CBN) statistical bulletin and annual reports.
1.8 Justification of the Study
The political, economic and social
development of any country depends on the amount of revenue generated for the
provision of infrastructure in that given country. However, one means of
generating the amount of revenue for providing the needed infrastructure is
through a well-structured tax system. The tax system is an opportunity for
government to collect additional revenue needed in discharging its pressing
obligations. Tax is dynamic, so reforms are necessary to effect the required
changes in the national economy. Thus, this study provides information to
government, tax administrators and tax policymakers on the different tax
reforms and their effects on revenue generation. It also enhances knowledge on
the processes of assessing the tax reforms for optimal generation of revenues
by the Government of the Federation through Federal Inland Revenue Service
(FIRS).
The research would also help the
professional bodies like the chartered institute of taxation of Nigeria and the
institute of chartered accountants of Nigeria as well as their members to see
the areas of deficiency in the collections and call for improvement in tax
revenue.
This research would also be relevant to
the future researchers and the dents of accounting, economic, business
administration and other social and management sciences as well as the
legislations which will also benefit immensely from this research because it
will form basis of tax policy formation, implementation and administration.
1.9 Definition
of Terms
Tax: Tax is a financial charge or other levy imposed upon a taxpayer
(an individual or legal entity) by a state or the
functional equivalent of a state such that failure to pay is punishable by law.
Tax
Reform: is the process of changing the way taxes are collected or managed by the
government.
Tax
Evasion: Here, the tax payer adopts illegal means so as to pay
less than he should ordinarily pay.
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