CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
One of the most commonly discussed issues in
economics is on how taxes as means of fiscal policy at stabilizing the general
economy relate to economic growth of developing countries such as Nigeria. A
lot of studies have tend to yield an audience of the relationship between
taxation and economic. Some of the studies have rather yielded results that
have established negative effects of taxes on economic growth. Taxes as means
of fiscal policy raises the cost or lower the return to the taxed activity
(Juliana, Mustaffa and Zulkifli, 2012). Income taxes create a disincentive to
earning taxable income. Individuals and firm have an incentive to engage in
activities that minimize their tax burden. As they substitute activities that
are taxes at a cover rate for activities taxed at a higher rate, individuals
and firms will engage in less productive activity, leading to lower rates of
economic growth (Juliana Mustaffa and Zlukifli, 2012).
Economic growth is the basis of increased
prosperity. Investments in new capital such as (human and physical) the
implementation of new production techniques and the introduction of new
products are the fundamentals of the growth process. Though its effect on the
return to investment or the expected profitability of research and development,
taxation can affect what choices are made and ultimately the rate of growth.
Taxation is necessary simply because it would neither be feasible nor desirable
to finance government solely by charges on services (Mwima-Swaya, 1995).
Basically, taxation refers to a system used by the government through levying
assessments to obtain money from people, industries and organizations. It is
not only relatively paramount but also compulsory and does not guarantee a
direct relationship between the amount contributed by a citizen and the extent
of government services provided to him/her. A tax is an involuntary fee paid by
individuals or business to the government for the sole purpose of answering
resources to society and economically beneficial use, to stabilize the economy
and to redistribute wealth between the rich and the poor (Mwima-Swaya, 1995).
Moreover, the relationship between taxation
and economic growth has of recent times become one of the most important
economic issues. This is particularly due to the poor fiscal performance in a
number of developing countries such as Nigeria. The relationship to a large
extent empirical and forces one to employ methods of scientific investigation
that do not yield aprioristic conclusions and external truths, but only
statements of validity limited by the character of the model used or by
significance of evidence provided (Dalibor, 2005). While it could be clear that
taxation might affect the level of GDP, Early growth models presumed that the
langram growth depends on exogenous technical change such that it may be hard
to access the effect of fiscal policy on the rate of capital accumulation or
more generally, Economic activity (Myles, 2000). Some prior studies established
a positive linkage between taxation and economic growth; others have however
submitted mixed findings. It is against this backdrop, this study is under
taken to evaluate the impact of taxation on the Economic growth of Nigeria with
specific attention on direct taxation such as PPT, CIT and Tax
1.2
STATEMENT OF THE RESEARCH PROBLEM
The achievement of Macro Economic objective
of full employment, stability of price level, high and sustainable Economic
growth from time immemorial has been a policy priority of every economy such as
Nigeria given the susceptibility variables to fluctuations in the economy. The
achievement of this very goal is influenced by the employment of fiscal policy
instrument such as taxation. A lot of revenues derived by the Nigerian
government through taxation has not yielded economic growth and full employment
stability (Chigbu, Akujuobi and Ebunohowei, 2002). In the light of the above
existing gaps, the following specific research questions are raised: Does
petroleum profit tax enhance the economic growth of Nigeria? What is the
relationship between economic growth and the company income tax in Nigeria? Is
there a relationship between value added tax and the growth of the Nigeria
economy? What is the relationship between personal income tax and economic
growth?
1.3
OBJECTIVES OF THE STUDY
The general objective is to examine the
impact of taxation on the growth of the Nigerian economy. But the specific
objectives are as follows:
To examine how petroleum profit tax
contribute to the economic growth of Nigeria.
To find out the relationship between company
income tax and the Nigerian economic growth.
To ascertain if there is a significant linear
relationship between value added tax and the economic growth of Nigeria.
To ascertain the relationship between company
income tax and economic growth.
1.4 RESEARCH
HYPOTHESES
The research hypotheses to establish the
relationship between taxation and the economic growth of Nigeria are put in an
alternative form as follows:
Ho: No significant relationship between
petroleum profit tax and economic growth.
Ho: No significant relationship between
company income tax and economic growth.
Ho: No significant relationship between value
added tax and economic growth.
Ho: No significant relationship between
personal income tax and economic growth.
1.5 SCOPE OF
THE STUDY
This study examined the impact of taxation on
the economic growth of Nigeria. This study covers the time between 1995-2011.
In terms of the samples size, such taxes as petroleum profit tax, company
income tax, value added tax and personal income tax are critically examined
under this study within the Nigeria economy with a geographical bias or restriction.
1.6
SIGNIFICANCE OF THE STUDY
Researchers on the impact of revenue from
taxation collected by the Nigerian government in the economy have been on
going. In this regard, it is necessary to state the usefulness of this study in
light of the present day Nigerian economy. Firstly, the Federal Government of
Nigeria will find this study useful in terms of policy formulation especially
fiscally policy to help achieve stability of the economy. It will further guide
them to know the extents with which these varying forms of tax revenue have
contributed to the economic growth of Nigeria and how to sustain it.
1.7
LIMITATIONS OF THE STUDY
There are still scanty literature reviews on
the impact of taxation over the Nigerian economy. Most of the study done thus
far on taxation and economic growth has mainly been peculiar to advanced
countries of the world. Data serve as another limitation of the study. Most
times, the accuracy and reliability of the data extracted from the secondary
source are unreliable, such that the outcome of this study might be very valid
and the problem of generalizing the outcome of the study.