INTRODUCTION
For development and growth of any society,
the provision of basic infrastructure is quite necessary. This perhaps explains
why the government shows great concern for a medium through which funds can be
made available to achieve their set goals for the society. Government needs
money to be able to execute its social obligations to the public and these
social obligations include but not limited to the provision of infrastructure
and social services. According to Murkur (2001), meeting the needs of the
society calls for huge funds which an individual or society cannot contribute
alone and one medium through which fund is derived is through taxation. Tax is
a major source of government revenue all over the world. Government use tax
proceeds to render their traditional functions, such as the provision of public
goods, maintenance of law and order, defence against external aggression, regulation
of trade and business to ensure social and economic maintenance (Azubike, 2009;
Edame, 2008). In Nigeria, tax revenue has accounted for a small proportion of
total government revenue over the years. This is because the bulk of revenue
needed for development purposes is derived from oil. Crude oil export has
continued to account for over 80% of the total federal government revenue,
while the remaining 20% is contributed by non-oil sector in which taxation is a
part. For instance, Oil sector share in total revenue was 54.4% in 1972 against
45.6% share from non oil sector the same year. By 1974 oil share of total
revenue had reached 82.1% while only 17.9% accrued from non oil sector.
Following the glut in the world oil prices in the later part of the 1970s, the
oil share in total revenue fell to 61.8% in 1978 while non oil sector‟s share
rose to 38.2%. And since 1984, the oil sector share in total revenue has
continued to rise, though with occasional falls in between periods. By 2006,
oil share of total revenue had reached 88.6% against non oil share of 11.4%. As
at 2009, oil sector share in total revenue stood at 78.8% while non-oil sector
accounted for just 21.3% of the total revenue (CBN, 2010). From the above
picture, it is evidenced that revenue from the non-oil sector (in which
taxation is a part) has not contributed significantly to total output. Thus,
the study is an attempt to examine the effect of tax revenue on economic growth
in Nigeria.
Taxation
is not a new word in Nigeria or the world as a whole. In Nigeria, taxation has
been in existence even before the coming of the colonial men or the British. 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. This is why 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. One of the central questions in
macroeconomics and public finance is how changes in tax policy affect economic
activity and social welfare. In theory, it is usually considered that taxes are
in a negative correlation with growth- so higher taxes mean lower growth rates
of economy. This is explained with the fact that taxes introduce distortions to
economy, that is, they do not have neutral effect on the behavior of
individuals. All taxes except lump sum tax (being the only neutral tax,
although impossible to carry through in practice) introduce distortions to an
economic system. Tax distortions change the system of incentives for
individuals, so their decisions on, for example, work and leisure or saving and
consumption are different than they would be in a world without taxes. The distortions
that taxes introduce to economy result in loss of efficiency, which is called
dead weight loss or excess tax burden. Therefore, higher taxes mean higher
rates of distortion, which leads to higher loss of efficiency and,
consequently, lower growth. Further in this paper we briefly explain this
established theoretical relation between higher taxes and lower growth.
Consequently, taxation leads to inefficiency in economy. Taxes stimulate people
to change their behavior: for example, they could either work as much as before
introduction of taxes and reduce their spending, or work more and spend less
time at leisure, thus not needing to reduce spending substantially. Whichever
way they choose to come to terms with taxes, they will be worse off than in a
world without taxes and the balance in the market will be established on a
lower level of output and higher level of prices. The allocation of resources
is not Pareto optimal anymore and the inefficiency that leads to lower growth
has entered the system.
The level of development of any nation depends on the
amount of revenue generated for the provision of infrastructure. Within the
last decade or so, the issue of domestic resource mobilization has attracted
considerable attention in many developing countries. In the face of unbolting
debt difficulties, coupled with the domestic and financial imbalance
confronting them, it is not surprising that many developing nations have been
forced to adopt stabilization and adjustment policies which demand better and
more efficient methods of mobilizing domestic financial resource with the view
to achieving financial stability and promoting economic growth (Kiabel and
Nwokah, 2009). In the olden days, government imposed taxes to generate enough
revenue solely to cover the cost of administration and defense. In modern
economics taxes are the important source of government revenue. They are
compulsory levies that are regularly imposed as a rule, not designated for a
special purpose; they are regarded as a contribution to the general revenue
pool from which most government expenditures are financed (Ogbonna and Appah,
2012).
The amount of tax revenue that a provisional
government collects depends on both its tax rates and tax bases. Tax revenue changes can be due to changes in
tax bases or tax rates changes by government. As tax rates changes occur less
frequently, changes in tax revenue are predominately due to changes in tax
bases. Thus it is important to focus on tax bases rather than tax revenue. Tax
revenue is a powerful tool of economic reform and major player in every economy
of the world. The tax system is an opportunity for government to collect
additional revenue besides other sources of income which is needed in
discharging its pressing obligation. A good system of tax also offers itself as
one of the most effective means of mobilizing a nations internal resources and
it lends itself to creating enabling and conducive environment to the promotion
of the economic growth and development (Ogbonna 2010). Tax revenue is the result of the application
of a tax rate to a tax base. Increases
in tax base result is more socially acceptable increase in revenue than an
increase in rate, which in turn, in certain macro-economic conditions, could
even backfire. Tax base is the item which tax is charged on. The tax base
affect the resultant tax revenue generated, while tax rate affect tax base
which in turn affect revenue. Nigeria operates a cash budget system where
expenditure proposal are anchored on projected revenue. To meet this projected
revenue, Government has three options to borrow, to tax or both. To borrow: As
noted earlier, fiscal deficit is recurring feature of public sector financing
all over world. Its widespread use has attributable partly to the desire of
various governments to respond to the developmental need of the people (Orjinta
& Agubata, 2017). They observed that the tendency toward deficit financing
is more pronounced in developing countries where the populace looks the
government for the provision of most needs. Government tries to determine the
optional tax for a given level of expenditure.
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