EFFECT OF TAXATION ON ECONOMIC GROWTH IN NIGERIA

BY

ELEMOSHO ABOSEDE

MATRIC NO: NOU158922205

A PROJECT SUBMITTED TO THE DEPARTMENT OF ACCOUNTING, FACULTY

OF MANAGEMENT SCIENCES, NATIONAL OPEN UNIVERSITY OF NIGERIA,

ABUJA, IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE

AWARD OF BACHELOR OF SCIENCE (B.Sc. HONS) DEGREE IN ACCOUNTING

AUGUST, 2019
 DECLARATION

I, ELEMOSHO ABOSEDE do humbly declare that this research work entitled “EFFECT

OF TAXATION ON ECONOMIC GROWTH IN NIGERIA” is as a result of findings

from my research efforts, carried out in the Department of Accounting, Faculty of

Management Sciences, National Open University of Nigeria. It was carried out under the

supervision of Dr. Ajayi, J. A. I further declare that, to the best of my knowledge, this work

contains no material previously published by another person or group except where due

acknowledgement has been made in the text and stands subject to plagiarism scrutiny.

________________________________ _________________________

ELEMOSHO ABOSEDE DATE

ii
 CERTIFICATION

This is to certify that this research project entitled “EFFECT OF TAXATION ON

ECONOMIC GROWTH IN NIGERIA” was carried out by ELEMOSHO ABOSEDE in

the Department of Accounting, Faculty of Management Sciences, National Open University

of Nigeria, Abuja, Nigeria for the award of Bachelor of Science Degree in Accounting.

_____________________ ______________________

AJAYI, J. A. (PH.D.) DATE

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 DEDICATION

This research project is dedicated first to “THE ALMIGHTY GOD” for His enabling strength

he bestowed on me in completing this work.

Secondly, to my wonderful mother Deaconess Abimbola Elemosho for her prayers and moral

support.

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 ACKNOWLEDGEMENTS

I am most grateful to God Almighty the sole provider of knowledge, wisdom, love, mercy

and grace for His protections throughout the period of the programme.

I sincerely appreciate my Supervisor, Dr Ajayi, who offered timely criticism and corrections

that led me through the various stages of this project. I equally extend my regards to Prof.

Mercy Ogunsola Bandele, Director NOUN, Ibadan Study Centre and other members of staff

for their support.

I appreciate my parents, Mr. Joshua Elemosho and Mrs. Abimbola Elemosho, my husband,

siblings and friends for their unquantifiable love and financial assistance during this period.

May God bless you all in Jesus name (Amen).

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 ABSTRACT

This study examines the effect of taxation on economic growth in Nigeria. Data for the study

were secondary sources obtained from National Bureau of Statistics and Nigerian Bottling

Company Plc. Simple Linear Regression Technique was employed for the study. Data

for the study was analyzed by Ordinary Least Squares (OLS) method. Findings from the

study show that that taxation has a significant effect on Gross Domestic Product (GDP). The

study concludes that growth of the economy of Nigeria dependent not only in oil sector but

hugely on how efficient taxation rate and other policy variables are manipulated.

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 TABLE OF CONTENTS

Page

Title Page i

Declaration ii

Certification iii

Dedication iv

Acknowledgements v

Abstract vi

Table of Contents vii

List of Tables ix

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study 1

1.2 Statement of the Problem 2

1.3 Objectives of the Study 3

1.4 Research Questions 3

1.5 Statement of Hypotheses 3

1.6 Significance of the Study 4

1.7 Scope of the Study 4

1.8 Limitations of the Study 4

1.9 Definition of Terms 5

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction 7

2.2 Conceptual Clarification 7

2.3 Theoretical Framework 10

2.4 Literature Review 11

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2.5 Empirical Review 26

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction 30

3.2 Area of Study 30

3.3 Data Required and Sources 30

3.4 Model Specification 31

3.5 Method of Evaluation 31

3.6 Decision Rule 32

CHAPTER FOUR: DATA ANALYSIS, FINDINGS AND DISCUSSION

4.1 Introduction 34

4.2 Presentation of Empirical Results 34

4.3 Examination of the Algebraic Signs of the Parameter Estimate 35

4.4 Statistical Test of Significance 36

4.5 Evaluation of the Working Hypothesis 37

4.6 Policy Implication of the Results 38

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary 39

5.2 Conclusions 39

5.3 Recommendations 40

5.4 Suggestion for Further Studies 40

References 41

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 LIST OF TABLES

Table 4.1: CBN Statistical Bulletin as at 2017 34

Table 4.2: Empirical Result 35

Table 4.3: Statistical Test of Significance 36

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 CHAPTER ONE

INTRODUCTION

1.1 Background 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.

According to Azubike (2009), tax is a major player in every society of the world. The

taxation is an opportunity for government to collect additional revenue needed in discharging

its pressing obligations. Taxation 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. 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.

However, one of the major functions of any government especially developing countries such

as Nigeria is the provision of infrastructural services such as electricity, pipe-borne water,

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hospitals, schools, good roads and as well as ensure a rise in per capita income, poverty

alleviation to mention a few.

For these services to be adequately provided, government should have enough

revenue to finance them. The task of financing these enormous responsibilities is one of the

major problems facing the government. Based on the limited resources of government, there

is need to carry the citizens (governed) along hence the imposition of tax on all taxable

individuals and companies to augment government financial position. To this end,

government have always enacted various tax laws and reformed existing ones to stand the

taste of time. They include: Income Tax Management Act (ITMA), Companies Income Tax

Decree (CIID), Joint Tax Board (JIB) etc.

All these are aimed at ensuring adherence to tax payment and discouraging tax

evasion and avoidance. For the purpose of this study, the researcher would be concerned

with the impact of taxation as an aid to the economic development of Enugu State (Nigeria).

1.2 Statement of the Problem

The first need of any modern government is to generate enough revenue which is indeed “the

breath of its nostril”. Thus taxation is by far the most significant source of revenue for the

government. Nigerians regard payment of tax as a means whereby government raises

revenue on herself at the expense of their sweat.

It is good to note that no tax succeeds without the taxpayer’s co-operation. Here, one

can ask some thought-provoking questions such as: what makes taxation such a difficult

issue? Why do people feel cheated when it comes to tax? Is government making judicious

use of taxpayer’s money? In view of the above questions, this study is intending to examine

the effect of taxation on Nigeria economic growth.

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1.3 Objectives of the Study

The main objective of the study is to examine the effect of taxation on economic growth of

Nigeria.

However, the specific objectives of the study include:

i. To evaluate the relationship between taxation and economic growth in Nigeria.

ii. To determine the extent to which government has been using revenue generated from

tax.

iii. To examine the relationship between taxes and economic growth.

1.4 Research Questions

i. What type of relationship exists between taxation and economic growth?

ii. Has government been using revenue generated from tax for economic growth?

iii. Does tax has any effect on economic growth?

1.5 Statement of Hypotheses

Hypothesis One

H0: There is no significant relationship between taxation and economic growth in Nigeria.

H1: There is significant relationship between taxation and economic growth in Nigeria.

Hypothesis Two

H0: Revenue generated from tax does not have effect on the economic growth of Nigeria.

H1: Revenue generated from tax has effect on the economic growth of Nigeria.

Hypothesis Three

H0: There is no significant relationship between taxes and economic growth.

H1: There is significant relationship between taxes and economic growth.

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1.6 Significance of the Study

This study is significant because of dearth of work in this tax system since it was introduced

about two decades ago. This is because extensive studies have been done on various aspect of

tax generally and VAT in particular but not much has been done on the contribution of value

added tax system and its contribution to government total revenue and gross domestic

product. This study therefore intends to focus and address the level of impact VAT has on

government total revenue and economic growth as proxy by GDP.

1.7 Scope of the Study

The scope of this study covers critical examinations on the effect of taxation on economic

growth. It will also analyze other related issues such as structure and administrative

machinery of tax in Nigeria and their associated problems. The essence of this digression is

to possibly find out the obstacles if any, that hinder the effective collection and

administration of tax in Nigeria.

The reference period for this study is 1996 – 2017. Inability of the researcher to procure

current data forced the researcher to utilize only available ones. Data for this study were

collected from Board of Internal Revenue in Nigeria.

1.8 Limitations of the Study

- Inadequate Time: The time available is very limited, as a result of this, the

researcher is restricted to some places for interviews and questioning during the

collection of data.

- Insufficient Fund: The funds available to the researcher is not sufficient to carry out

this research work. As a result of high economic hardship as well as high cost of

transportation.

- The inability of some government officials to disclose certain reliable information

which they considered confidential may also limit the study.

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- There is also scarcity of current textbooks on tax because tax laws are constantly

changed and so many textbooks are obsolete for this topic.

1.9 Definition of Terms

 Tax: A compulsory levy by the government on its citizens for the provision of public

goods and services.

 Tax Base: The object, which is, taxed for instance personal income, company profit.

 Tax incidence: This is the effect and where the burden of taxation is finally rested.

 FBIRS: (Federal Board of Inland Revenue Services): It is an operational arm of Federal

Board of Inland Revenue, which is responsible for the Federal Tax Matters.

 CITA: (Company Income Tax Act) it is a Federal Law operated by the FIRS, which

deals with the taxation of all limited liability companies in Nigeria with the exception of

those engaged in petroleum operations.

 JTB: (Joint Tax Board) is established under section 85 (2) of Decree of 104 of 1993 to

arbitrate on tax disputes between one state tax authority and another.

 VAT: (Value Added Tax) is a multistage tax levied and collected on transactions at all

stages of sales and distribution.

 CGTA: (Capital Gain Tax Act) is an act that stipulates that all capital gains arising on

disposal of assets of individuals, partnership and limited companies should be taxed

 PPTA: (Petroleum Profit Tax Act) is an act that regulates the petroleum profit tax and

also specifies how profit from petroleum will be taxed.

 Withholding Tax: This is tax charged on investment income namely: rents, interest,

royalties and dividends. Presently it is charged as the tax offset.

 Progressive Tax: This tax incidence increases as the size of income increases.

 Regressive Tax: A tax is regressive when its tax rate decreases as the income increases.

 Excise Duties: They are taxes levied on some goods manufactured within a country.

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 Persons: It includes all taxable persons be it individual or corporate bodies.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

Tax revenue is a veritable source of government revenue; however, it is still debatable in the

literature especially in determining the optimal tax revenue to be imposed to enhance

development without unjustly inflicting welfare cost. Economic theories of taxation approach

the question of how to minimize the loss of economic welfare through taxation and also

discuss how a nation can perform redistribution of wealth in the most efficient manner. This

research work focuses on the effect of tax revenue on economic growth and development in

Nigeria. This chapter provides reviews of diverse literatures as well as the theoretical and

conceptual frame work of the study.

2.2 Conceptual Clarification

2.2.1 Concept of Taxation and Tax Administration in Nigeria

According to the (black law dictionary, 1999), tax is a ratable portion of the produce of the

property and labor of the individual citizens, taken by the nation, in the exercise of its

sovereign rights, for the support of government, for the administration of the laws, and as the

means for continuing in operation the various legitimate functions of the state. The Institute

of Chartered Accountants of Nigeria, (2006) and the Chartered Institute of Tax Revenue of

Nigeria, (2002) view tax as an enforced contribution of money, enacted pursuant to

legislative authority. If there is no valid statute by which it is imposed, a charge is not tax.

Tax is assessed in accordance with some reasonable rule of apportionment on persons or

property within tax jurisdiction.

Anyanwu, (1997) defined tax revenue as the compulsory transfer or payment from private

individuals, institutions or groups to the government. Sanni, (2007) advocated tax as an

instrument of social engineering which can be used to stimulate, general or special economic

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growth and development. From Onairobi, (1994), taxes are generally either of two types:

Direct and Indirect taxes. A direct tax is levied on income or profit while an indirect tax is

levied on goods and services. Good examples of Direct Tax include Personal Income Tax,

Capital Gain Tax, Profit Tax and Wealth Tax. Examples of Indirect Tax include Excise

Taxes, Export Taxes, Import Duties, Expenditure Tax, Sales Tax and Value Added Tax.

Jarkir, (2011) stated that tax is a contribution exacted by the state; it is a non-penal but

compulsory and unrequited transfer of resources from the private to the public sector, levied

on the basis of predetermined criteria. The classical economists were of the view that the only

objective of tax revenue was to raise government revenue. But with the changes in

circumstances and ideologies, the aim of taxes has also been changed. These days apart from

the objective of generating .revenue, taxes is levied to affect consumption, production and

distribution with a view to ensuring the social welfare through the economic development of

a country.

According to Nzotta, (2007), four key issues must be understood for tax revenue to play its

functions in the society. First, a tax is a compulsory contribution made by the citizens to the

government and this contribution is for general common use. Secondly, tax imposes a general

obligation on the tax payer. Thirdly, there is a presumption that the contribution to the public

revenue made by the tax payer may not be equivalent to the benefits received. Finally, a tax is

not imposed on a citizen by the government because it has rendered specific services to him

or his family. Thus, it is evident that a good tax structure plays a multiple role in the process

of economic development of any nation which Nigeria is not an exception Appah, (2010).

In the words of Enegbu, (2011), the Nigerian tax system has undergone several reforms

geared at enhancing tax administration with minimal enforcement cost. The recent reforms

include the introduction of TIN, (Taxpayer Identification Number), which became effective

since February 2008, automated tax system that facilities tracking of tax positions and issues

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by individual tax payer, E-payment system which enhances smooth payment procedure and

reduces the incidence of tax touts, Enforcement scheme which engages special tax officers in

collaboration with other security agencies to ensure strict compliance in payment of taxes

Section 8 of FIRS Establishment Act 2007 has led to an improvement in the tax

administration in the country, thus, the integrated tax offices and authorities now have

autonomy to assess, collect and record tax. Despite this improvement, there are still a number

of contentious issues that require urgent attention and among them are appropriate tax

authority to administer several taxes, the issue of multiple taxes severally administered by all

the three tiers of government which sometimes imposes welfare cost and the issue of the

paucity of data base, which contributes to tax avoidance in the country. Tanzi, (1995)

The concepts of tax and tax revenue in prior researches have been largely discussed in

different contexts by tax experts, academic scholars, international organizations as well as

different governments. For example, (The World Bank, 2000) noted that taxes are a

compulsory transfer of resources to the government from the rest of the economy, while

Jakir, (2011) described tax as a liability on account on the fact that the taxpayer has an

income of a minimum amount and from certain specified source(s).

However, in a simple term for the purpose of this study, tax is a compulsory fee individuals

as well as corporate bodies are obliged to comply with as stipulated by the tax laws, while tax

revenue is the process of administering the tax laws in the way that achieves government

objectives. And so, tax revenue is a major source of fund for any government and the

availability of fund is a very crucial aspect of running a State. Although, several options

according to Soyodeand Kajola, (2006) are available to governments for raising fund, tax

revenue remains the principal source Phillips, (2001).

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2.3 Theoretical Framework

According to Bhartia (2009), a taxation theory may be derived on the assumption that

there need not be any relationship between tax paid and benefits received from state

activities. In this group, there are two theories, namely, Socio political theory and the

expediency theory. Also, a taxation theory may be based on a link between tax liability and

state activities. This reasoning justifies the imposition of taxes for financing state activities

and also providing a basis for apportioning the tax burden between members of the society.

This reasoning yield the benefit received theory and cost of service theory. There is also the

faculty theory of taxation.

Socio Political Theory

This theory of taxation states that social and political objectives should be the major factors

in selecting taxes. The theory advocated that a tax system should not be designed to serve

individuals, but should be used to cure the ills of society as a whole.

Expediency Theory

This theory asserts that every tax proposal must pass the test of practicality. It must be the

only consideration weighing with the authorities in choosing a tax proposal. Economic and

social objectives of the state as also the effects of a tax system should be treated irrelevant

(Bhartia, 2009).

Benefit Received Theory

This theory proceeds on the assumption that there is basically an exchange relationship

between tax-payers and the state. The state provides certain goods and services to the

members of the society and they contribute to the cost of these supplies in proportion to the

benefits received (Bhartia, 2009). Anyanfo (1996) argues that taxes should be allocated based

on benefits received from government expenditure.

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Cost of Service Theory

This theory is similar to the benefits received theory. It emphasizes the semi-commercial

relationship between the state and the citizens largely. In this theory, the state is being asked

to give up basic protective and welfare functions. It is to scrupulously recover the cost of the

services and therefore this theory implies a balanced budget policy.

Faculty Theory

According to Anyanfo (1996), this theory states that one should be taxed according to the

ability to pay. It is simply an attempt to maximize an explicit value judgment about the

distributive effects of taxes. Bhartia (2009) argue that a citizen is to pay taxes just because he

can, and his relative share in the total tax burden is to be determined by his relative paying

capacity.

2.4 Literature Review

2.4.1 Nature and Scope of Taxes

Anyanwu (1997) defined taxation as the compulsory transfer or payment (or occasionally of

goods and services) from private individuals, institutions or groups to the government. The

main purpose of purpose of tax is to raise revenue to meet government expenditure and to

redistribute wealth and management of the economy.

According to Nzotta (2007), four key issues must be understood for taxation to play its

functions in the society. First, a tax is a compulsory contribution made by the citizens to the

government and this contribution is for general common use. Secondly, tax imposes a general

obligation on the taxpayer. Thirdly, there is a presumption that the contribution to the public

revenue made by the taxpayer may not be equivalent to the benefits received. Finally, a tax is

not imposed on a citizen by the government because it has rendered specific services to him

or his family. Thus, it is evident that a good tax structure plays a multiple role in the process

of economic development of any nation that Nigeria is not an exception (Appah, 2010).

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Musgrave and Musgrave (2004) note that these roles include: the level of taxation affects the

level of public savings and thus the volume of resources available for capital formation; both

the level and the structure of taxation affect the level private saving.

A system of tax incentives and penalties may be designed to influence the efficiency of

resource utilization; the distribution of the tax burdens plays a large part in promoting an

equitable distribution of the fruit of economic development; the tax treatment of investment

from abroad may affect the volume of capital inflow and rate of reinvestment of earnings

there from; and the pattern of taxation on imports relative to that of domestic producers affect

the foreign trade balance.

However, Anyanwu (1993) pointed out that there are three basic objectives of

taxation. These are to raise revenue for the government, to regulate the economy and

economic activities and to control income and employment. Also, Nzotta (2007) noted that

taxes generally have allocation, distributional and stabilization functions. The allocation

function of taxes entails the determination of the pattern of production, the goods that should

be produced, who produces them, the relationship between the private and public sectors and

the point of social balance between the two sectors. The distribution function of taxes relates

to the manner in which the effective demand over economic goods is divided, among

individuals in the society.

According to Musgrave and Musgrave (2006), the distribution function deals with the

distribution of income and wealth to ensure conformity with what society considers a fair or

just state of distribution. The stabilization of function of taxes seeks to attain high level of

employment, a reasonable level of price stability, an appropriate rate of economic growth,

with allowances for effects on trade and on the balance of payments.

Nwezeaku (2005) argues that the scope of these functions depends, inter alia, on the

political and economic orientation of the people, their needs and aspirations as well as their

12
willingness to pay tax. Thus the extents to which a government can perform its functions

depend largely on the ability to design tax plans and administration as well as the willingness

and patriotism of the governed.

According to Anyanfo (1996), the principles of taxation mean the appropriate criteria

to be applied in the development and evaluation of the tax structure. Such principles are

essentially an application of some concepts derived from welfare economists. In order to

achieve the broader objectives of social justice, the tax system of a country should be based

on sound principles. Jhingan (2004), Bhartia (2009) and Osiegbuet al. (2010) listed the

principles of taxation as equality, certainty, convenience, economy, simplicity, productivity,

flexibility and diversity.

2.4.2 Principles of Taxation

Equity principle: It states that every taxpayer should pay the tax in proportion to his income.

The rich should pay more and at a higher rate than the other person whose income is less

(Jhingan, 2004). Anyanfo (1996) states that it is only when a tax is based on the tax payer’s

ability to pay can it be considered equitable or just. Sometimes this principle is interpreted to

imply proportional taxation.

Certainty principle: The taxation states that a tax which each individual is bound to pay

ought to be certain, and not arbitrary. The time of payment, the manner of payment, the

quantity to be paid ought to all be clear and plain to the contributor and every other person

(Bhartia, 2009).

Convenience principle: of taxation states that the time and manner should be convenient to

the taxpayer. According to Anyanfo (1996), this principle of taxation provides the rationale

for Pay - As - You - Earn (PAYE) system of tax payable system of tax collection.

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Economy principle: states that every tax should be economical for the state to collect and

the taxpayer to pay (Appah, 2004; Jhingan, 2004; Bhartia, 2009). Anyanfo (1996) argues that

this principle implies that taxes should not be imposed if their collection exceeds benefits.

Productivity principle: states that a tax should be productive in the sense that it should bring

large revenue that should be adequate for the government. This is the major reason why

governments in all parts of the globe continuously employ tax reforms.

Simplicity principle: states that the tax should be plain, simple and intelligible to common

taxpayer. Anyanfo (1996) argue that there should be no hidden agenda in the tax law.

Flexibility principle: implies that there should be no rigidity in taxation. Diversity Principle

of taxation states that there should be different variety of taxes. Bhartia (2009) argue that it is

risky for state to depend upon too few a source of public revenue.

2.4.3 Incidence of Taxation

The incidence of a tax according to Begg (2010), measures the final tax burden on

different people and who ultimately pays the tax. Teriba, (1976) refers tax incidence as the

effect and where the burden of it final rest. He differentiated between formal and effective

incidence of a tax. According to him, formal incidence tells us about the initial effects of a

tax on the tax object (income goods etc). While the effective incidence of a tax tells us how

the ultimate (final) burden of a tax was met.

2.4.4 Types of Tax Incidence

Ola (2001) and Jhingan (2004) examine the type of tax incidence as follows:

 Progressive Taxes: A tax is progressive if its rate increases as the size of income or

stock of wealth that is being taxed increases. Here, the burden of a progressive

income tax falls on those who earn higher income.

 Regressive Taxes: A regressive tax takes a smaller part of incomes as income

increases that is, as income increases the tax rate decreases.

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  Proportional Taxes: A tax is proportional when the rich pay more than the poor in

absolute terms (in actual amounts). But all tax payer, rich and poor, are made to

surrender the same percentage of their income in tax payments.

2.4.5 The Importance of Taxation:

Tax plays an important role in Nigerian society. It is a strong force for economic

development in the country forms the pre-colonial, colonial and post-colonial eras. It is by

far the most significant source of revenue for modern government hence recent call for

increase in taxation.

Role as used in this study as it relates to tax according to Oxford Dictionary is a part

played or the contribution of taxation. Revenue generated form tax can be used by the

government to carry out its expenditure programmes that includes defence, social and

infrastructural services, general administration etc. for government to effectively carry out

these obligations, a lot of revenue will be required. Revenue generated from oil and non-oil

source cannot be enough to execute these enormous tasks, hence tax revenue, which is

believed to be the most significant source of revenue to the government. Rabul (1981)

strongly agree with this in his statement. “A great majority of federal and state government

strongly agree with this in his statement revenue to finance government expenditure”. This

proves why government in its annual budges limits the level of expenditure to commensurate

with the projected revenue which tax plays a significant role. In essence, what taxes meant to

the government to exactly what capital and gains are to individuals and business

organizations.

Acting as instrument of fiscal policy: Teriba (1976) traced the origin of fiscal policy to “the

treasury of Ancient Rome which was called “FISC” from it we get the word “fiscal which

means something concerning public revenue. By definition, fiscal policy is that part of

15
government policy which is concerned with raising revenue through taxation and other means

and deciding on the level and pattern of expenditure”.

Fiscal Policy as an instrument of increasing Economic Activity: Teriba (1976) continued

by saying assuming that total demand for goods and services is low as well as the level of

employment and production. In this situation, the government may plan for a budget deficit,

it can do this through reducing taxes. This is because if people and firms pay excess tax,

there will be more money available to spend and total demand will go up.

Fiscal Policy as an instrument of reducing Economic Activity: Anyanwu, (1993) He

further asserts that if total spending is much higher than the supply of goods and services

prices will tend to rise (inflation). The government may try to reduce total demand and

thereby economic activity by increasing taxes. This is because it is generally easier for the

government to make tax changes than to reduce its expenditure, especially when it involves

long term investments and socially desirable public service.

Equitable Distribution of Income/Wealth: Taxes often aim to redistribute income Teriba

(1976). A progressive income tax, which takes more from those with higher income thereby

reducing the unequal income among people, satisfies these roles of taxes. The government

therefore, spreads tax revenue on services that includes health, education, social welfare etc

which often benefit low-income groups more than those with higher incomes. Tax system is

thus a very powerful and effective device for ensuring a more equal distribution of income.

On the other hand, equitable distribution of wealth is very essential in order to maintain a

desire level of economic stability. This is achieved through redistribution of wealth

concentration on high-income earners.

Favorable Balance of Payment: The foreign trade of a country is controlled and protected

by the government in order to safeguard the economy. Taxes on import and export affect the

balance of payments and may affect production at home. High taxes on imports reduce or

16
prevent the import of particular manufactured goods so the industries (infant industries) can

become properly established. Conversely, government encourages export by giving tax

subsides/relief to producers especially in the areas of agriculture and industries. Being able

to produce its basic needs and not relying on foreign supplies makes a country self-reliant.

This in turn raises enough revenue to the government, keeps income and employment at a

high level with a positive result of correcting on unfavorable balance of pay (Anyawu, 1993).

2.4.6 Problems of Taxation

Appah (2010) discussed the two major problems of taxation as Tax evasion and tax

avoidance. Tax evasion and taxpayer can achieve the same goal of reducing his tax liability

while tax evasion is considered illegal, by nature all taxes exert an income in that they

compulsorily withdraw revenue from the private sector. Also as indirect taxes are levied on

goods, people tend to shift from the purchase of one goods to another, this is the substitution

effect to a tax.

A good tax system is one, which does not result in either income effect or substitution effect.

However, this is not attainable in the real word, hence the application of this rule is to achieve

the highest possible neutrality from the imposition of tax system.

Tax Avoidance: this is defined as tax payer effort to avoid paying tax by finding a legal hook

hole in the tax is a deliberate legal act and one of the ways of doing it is by taking more life

assurance policies.

Tax Evasion: This is an illegal attempt by tax payer not to pay tax. One of the methods is by

not declaring all of ones’ earnings and under estimation of earning.

2.4.7 Items of Government Expenditure

The following are the areas in which most of the West African Governments expend annually

huge sums of sums of money generated from tax.

17
  Education: This tax is a very large portion of the yearly government expenditure

budget. At times. It claims as high as 45% of the total budget. Each government now

struggles to provide education to its citizen not only in the elementary school level but

also in the secondary school and University levels.

 Transport: Transportation is another item which claims a very large portion of the

budget. Transport includes Roads, Railways, waterways and airways. The building

and maintenance of roads is now a very costly affair.

 Health: Under Health, we have hospitals, maternity homes and dressing stations. It is

the aim of modern governments to bring these facilities as close to the people as

possible.

 Administration: Cost of administration consist of money spent on maintenance of

government building, furniture and payment of salaries to all grades of public

servants.

 Defense: This refers to Army, Navy, and Airforce

 Police: The police force is in charge of maintenance of law and order.

 Others: There are numerous other services such as water supply, electricity supply,

Telephone which are provided at government expense. (Nwezeaku, 2005).

2.4.8 Functions of Taxation

According to Arnold (2011), the functions of taxation can be discussed based on the

following questions pertaining taxation:

i. Why are taxes imposed?

ii. What functions do they perform in the economy?

Below is the main function of Taxation

 To raise Revenue: The most important reason why government levy taxes is to raise

the money to run its services. The bulk of government revenue comes from taxation.

18
  To Curtail Consumption of Harmful Commodities: Commodities like cigarette

and alcoholic drinks are considered harmful to the human body. In order to reduce

their consumption government often imposed heavy exercise and import duties on

them.

 To Check Inflation: Inflation is often because of too much money being in the hand

of the public. Heavy income tax can reduce such money and thereby check inflation.

 To Redistribute Wealth: Heavy Progressive taxes can be used to narrow the gap

between the rich and the poor

 To Protect Infect Industries: Import duties are often used to present foreign

industries from competing with the young domestic ones.

2.4.9 Value Added Tax in Nigeria

This is a tax that was introduced by the Federal Government of Nigeria 1994 by Decree 102

of 1993 to replace the old sales tax. It is a consumption tax imposed on all VATable goods

and services at the rate of 5% (Soyode & Kajola, 2006). They went further to capture the

major attributes of value Added Tax (VAT) as:

i. A consumption tax

ii. A multi-stage tax and

iii. A tax with incidence on the final consumer.

As a consumption tax Ochei (2010) Opined that VAT is an indirect tax system where the

consumer actually bears the cost of the tax. Bird (2006) on his part confirmed the multi-stage

nature of VAT when he asserted that, value added tax (VAT) is a multi-stage tax imposed on

the value added to goods and services as they go through various stages of production and

distribution as well as services rendered. Obviously from the shades of opinions highlighted

above, it is clear that the final incidence or burden of VAT is borne by the final consumer of

goods and services in Nigeria.

19
Tabansi (2001), Okezie (2003), Ojo (2003) and Offiong (2004) were all in agreement when

they cited the enabling law (Value Added Tax Act, 1993) and listed the following as Goods

and Service exempted from VAT in Nigeria.

 Medical and Pharmaceutical products;

 Basic food items;

 Books and educational materials;

 Baby products;

 Commercial vehicles and their spare parts;

 Agricultural equipment and products and vertinary medicine

 Fertilizers, farming machinery and farming transportation equipment;

 All exports of goods and services;

 Plant and machinery used in export processing zone

 Plant, machinery and equipment purchased for utilization of gas in the downstream

petroleum operations;

 Tractors, ploughs, agricultural equipment and implements purchased for agricultural

purpose.

 Services of community banks and primary mortgage institutions;

 Plays and performances conducted by educational institutions as part of learning

 Service related to education and medical services

On his part Oyebanji (2010) helped us to arrange those taxable goods and services as

specified in VAT decree of 1993:

(a) Goods

 All Goods manufactured and assemble in Nigeria

 All goods imported into Nigeria

20
  All second hand goods

 All household furniture and equipment

 Petroleum and petroleum products

 Jewel and jewelry

 Textile, cloth, carpet and rug

 Bear, wine, liquor, soft drinks, treated water

 All vehicles and their spare parts exchanging commercial vehicles and their spare

parts

 Perfumes and cosmetics (including toiletries)

 Soap and detergents

 Mining and minerals

 Office furniture and equipment

 Electrical materials of description

(b) Services

 All service rendered by financial institutions to consumers

 Accounting services

 Provision of reports, advice, information or similar technical service in the following

areas:

i. Management, financial and taxation

ii. Recruitment, staff and training

iii. Marketing research

From the above items listed it becomes obvious that value added tax covers almost every

aspect of our economic and human life. It is a tax that most consumers pay without knowing,

yet it helps the government to generate substantial revenue for economic growth. Aruwa

21
(2008) added his voice to the broad nature of VAT in Nigeria when he stated that the Nigeria

VAT which is a replacement for the sale tax of 1986 have a very wide based with relative few

exemptions and only exports are zero-rated.

2.4.10 Economic Growth

According to Dwivedi (2004), economic growth is a sustained increase in per capita

national output or net national product over a long period of time. It implies that the rate on

increase in total output must be greater than the rate of population growth. Another

quantification of economic growth is that national output should be composed of such goods

and services which satisfy the maximum want of the maximum number of people. Economic

growth can be determined by four important determinants namely, human resources, national

resources, capital formation and technological development. The theories of economic

growth can be examined under the Harrod-Domar theory of growth, Kaldor model of

distribution, Pasinetti model of profit and growth, Joan Robinson’s model of capital

accumulation, Meade’s Neo Classical model of economic growth and the Solow model of

long run growth. All this models of economic growth the various views of scholars on the

most suitable explanation of growth.

2.4.11 Functions of a Good Tax Administration

A tax administration is the whole organizational set-up for the management of the tax system.

The tax administrative set-up is a department of government and of course works under

regulations prescribed by tax legislation. Tax administration is the process of assessing and

collecting taxes from tax individuals and companies by authorities in such a way that correct

amount is collected efficiently and effectively with minimum tax avoidance or tax evasion.

The broad objectives of a tax system is to guarantee the long-run fiscal soundness of

the policies and programmes of government while the purpose of tax administration is to

fully implement the tax system, that is, to ensure that tax payers comply with the provisions

22
of tax laws and that the funds derived from tax sources are paid into the government purse.

Certain aspects of the tax system are preconditions for a successful tax administration. First

the tax laws should be simple, clear and understandable both to those who must apply them

and those who are subject to them. To quote Adam (1910), the tax which each individual is

bound to pay ought to be certain and not arbitrary. The form of payment, the manner of

payment, the quantity to be paid ought all to be clear and plain to the contributor and every

other person.

The scope of tax should also be clear. It should be certain that the tax can and will be

enforced, for a tax that is easily evaded causes resentment among the honest taxpayers and

often decline in taxpayers’ morality. Secondly, the taxes should be fair, that is the burden

should be spread as fair as possible, with regard to the tax payer’s ability to pay and in light

of his family circumstances, obligations and wealth. The taxes should also be equitable as

between one tax payer and another; they should be of universal (general) application, and

imposed without distinction of persons between citizens in similar circumstances.

Thirdly, the taxes should be easy, economical and convenient to administer that is the cost of

collecting to the tax authority and the cost of compliance to the tax payer should be as low as

possible and should be consistent with effective enforcement which means that the purpose

and manner of payment of the taxes should be related to the habits of the community. Hence

the colonialists were careful enough to introduce taxes as closely connected as possible to

what their native laws had been paying to their chiefs in those areas where such was the

practice (Orewa, 1979).

The role of the tax administrator in this matter is a crucial one. Balls (1965) has pointed out

that subject to the direction of the government and the will of the legislature, the purpose of

the tax administrator is, to devise taxes in conformity with the principles that will raise

revenues sufficient to meet the needs of government to establish the basis of assessment and a

23
procedure for collection that are as simple, effective and economical as possible, and to

develop auditing and other procedures.

The function of a tax administrator also includes ensuring full compliance and effective

enforcement of tax matters by tax payers.

It is important to note that however good principles of a tax system may be, the success of tax

administration depends essentially on the ability of the tax administrators to utilize the

principles. The problem of personnel then becomes central to tax administration. Hence it has

been argued according to Surrey (1965) that the problems of tax administration in

underdeveloped countries are basically problems of personnel; there is usually poor pay, lack

of training, inefficiency and understaffing.

2.4.12 The Role of Taxation on Economic and Social Development Sustainability

Adeyemi (2012) stated that in achieving sustainable development in the social and economic

sectors of a country, the government must consider the trade-off involved in attracting foreign

direct investment (FDI) in terms of giving incentives and the impact of these on the country’s

sustainable development.

Tax is a fiscal instrument used to encourage or discourage specific production or

consumption behaviours that affect the economic, environmental or social sustainability.

Taxation has the following impacts on the sustainability of economic development:

i. Tax system provides a fiscal platform that encourages foreign direct investment (FDI)

and also fosters bilateral, regional and international trade relations among countries:

The tax policies of a nation determine whether foreign direct investment would be

attracted or not. If investors are brought into a country, it means that the investors will

bring their stable and free capital, their technology, efficiency and contribution to

nation’s capital accumulation and job/wealth creation.

24
 ii. Taxation fosters a fair relationship between development and developing countries so

as to ensure that developing countries get a fair allocation of tax base and tax room in

emerging trade relations: Consequently, the developed countries would not take

undue advantage of the development needs in developing countries as a reason not to

work out the international tax regime and mechanism against the third world

countries.

iii. Taxation helps developing countries in formulating effective policies and collection

system that foster the funding of sustainability: Effective and well-functioning tax

system and administration are an essential foundation blocks for financing sustainable

development.

Therefore, if there is no adequate tax structure or tax collection system in place, it limits the

ability of implementing any policy meant to enhance sustainable development goals and this

may make developing countries to keep relying on foreign support which are usually attached

with strings.

2.4.13 VAT and its Challenges

Tax evasion and tax avoidance are two broad challenges faced by every tax authority or

administrator. Olatunji (2014) identified the following challenges relating to VAT

administration in Nigeria.

i. Inadequate machinery for tax remittance: Lack of adequate resources in the form

of qualified tax personnel and facilities is a major challenge in the administration of

tax in Nigeria. Consequently there are a lot of leakages in the form of tax fraud,

refusal to complete tax return forms etc.

ii. Dishonest tax officials: The dishonesty by most tax officials in Nigeria pose a serious

threat to effective tax administration in the country. In most cases they will

deliberately reflect wrong tax figures in consumers’ invoices or documents. This goes

25
 a long way to discourage honest tax payers from being committed to prompt and

adequate tax payments.

iii. The regressive effects of VAT: Practically, value added tax is a tax on consumption

of items. Its computation is based on a fixed rate on taxable commodities,

consequently, the burden of VAT falls more on low income earners than other groups.

Hence low income earners in Nigeria see VAT as a tax skewed against them.

iv. General increase in price levels: VAT simply means add some amount to the cost or

price of items at each stage. In other words VAT as a tax system tends to increase the

general price level of goods and service in the economy. This can have the adverse

effect of reduction in the demand for goods and services.

v. The difficulties in calculating VAT on retailers: Nigeria is a country infested with

numerous retailers and small professional service providers. The ability to compute

VAT amount for these set of people prove to be very difficult. The problem of

registration with tax authorities and remittance of collected VAT amount is equally a

major challenge here.

2.5 Empirical Review

Several empirical studies have been conducted on the impact of taxes on economic growth.

The empirical studies of Anyanwu (1997), Engen and Skinner (1996), Tosun and Abizadeh

(2005) and Arnold (2011) provided different explanations of taxes on economic growth.

Engen and Skinner (1996) in their study of taxation and economic growth of U.S. economy,

large sample of countries and use of evidence from micro level studies of labour supply,

investment demand, and productivity growth. Their result suggests modest effects on the

order of 0.2 to 0.3 percentage points’ differences in growth rates in response to a major

reform. They stated that such small effects can have a large cumulative impact on living

standards.

26
Tosun and Abizadeh (2005) in their study of economic growth of tax changes in Organization

for Economic Co-operative and Development countries from 1980 to 1999 reveal that

economic growth measured by GDP per capita has a significant effect on the tax mix of GDP

per capita. It shows that while the shares of personal and property taxes have responded

positively on economic growth, shares of the payroll and goods and services taxes have

shown a relative decline. Arnold (2011) in their study found that short term recovery requires

increase in demand while long run growth requires increase in supply. As short term

concessions can be hard to reverse, this implies that policies to alleviate this crisis could

compromise long run growth.

Ojong, Ogar and Oka (2016) examined the impact of tax revenue on economic growth:

Evidence from Nigeria. The objectives of the study were; to examine the relationship

between petroleum profit tax and the Nigeria economy, the impact of company income tax on

the Nigerian economy and the effectiveness of non oil revenue on the Nigerian economy.

Ordinary least square of multiple regression models was used to establish the relationship

between dependent and independent variables. The finding revealed that there is a significant

relationship between petroleum profit tax and the growth of the Nigeria economy. It showed

that there is a significant relationship between non oil revenue and the growth of the Nigeria

economy. The finding also revealed that there is no significant relationship between company

income tax and the growth of the Nigeria economy.

Salami, Apelogun, Omidiya and Ojoye (2015) empirically investigated the impacts of

taxation on the growth of the economy between 1981 to 2012. Gross Domestic Product

(RGDP), is specified to depend on the taxation indicators which are the petroleum profit tax

(PPT), company income tax (CIT), customs and excise duties (CED), value added tax (VAT).

The study employed the use of both simple and multiple linear regression analysis of the

ordinary least square method. These were used to determine the impact and relationship

27
between the endogenous variable, RGDP, and the exogenous variables, PPT, CIT, CED and

VAT. It was discovered that if all the exogenous variables were tested individually on the

economic growth, they show a significant impact individual on economic. The F-statistic

shows that the overall model is statistically significant.

Lababatu (2014) examined tax revenue and economic growth in Nigeria. The main objective

of this study is to explore the relationship between taxation and economic in Nigeria. The

study covered the period between 1981 to 2010. The study employed petroleum profit tax,

company income tax, custom and excise duty and value added tax while gross domestic

product was employed as the dependent. Multiple linear regression analysis was used to

analyze the data by employing the use of Vector Error Correction Model. The findings reveal

that petroleum profit tax, company income tax and value added tax have a positive impact on

Nigeria’s economic growth while custom excise and duties impacted negatively but overall, a

significant relationship between tax revenue and the Nigeria economic growth exists. The

study recommends that only skilled and professionals and trustworthy hands be responsible

for tax administration.

Akhor and Ekundayo (2016) examined the impact of indirect tax revenue on economic

growth in Nigeria. The study uses value added tax revenue and custom and excise duty

revenue as independent variables and economic growth was proxy with real gross domestic

product as the dependent variable. The study employ secondary data collected from Central

Bank of Nigeria statistical bulletin for the period covering 1993 to 2013 for the empirical

analysis using the convenient sampling techniques. Error correction model regression was

employed in analyzing the data. The result revealed that value added tax had a negative and

significant impact on real gross domestic product. In the same vein, past custom and excise

duty had a negative and weakly significant impact on real gross domestic product. The Error

Correction Model (ECM (-1)) coefficient had a correct negative and statistically significant

28
sign. This shows that short-run deviation can be quickly corrected. The Durbin-Watson

positive value indicates the absence of autocorrelation in the model.

Chigbu and Njoku (2015) examined taxation and the Nigerian economy using time series

data from 1994 to 2012. The dependent variables used in the model includes: Gross Domestic

Product (GDP) as a parameter for measuring economic growth, inflation and unemployment.

The objective of this study is to determine how taxation affects these macroeconomic

variables. Ordinary least square analysis was employed to analyze the data. The results of the

statistical analysis reveal that positive relationships exist between the explanatory variables

(Custom and Excise Duties, Company Income Tax, Personal Income Tax, Petroleum profit

tax and Value Added Tax) and the dependent Variables (Gross Domestic Product,

Unemployment). But, the individual explanatory variables have not significantly contributed

to the growth of the economy; also the explanatory variables have not significantly

contributed to the reduction of the high rate unemployment and inflation in Nigeria for the

period under review.

29
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter is concerned with the methods used in collecting data for the research project. It

essentially sheds light on the research design, the study population, the research instrument,

the validity and reliability of the instrument, the methods of data analysis to be used carrying

out study is the Simple Linear Regression Technique employing Ordinary Least Squares

(OLS) method.

3.2 Area of Study

The area of study is based on the effect of fiscal deficit on the Nigerian. Nigeria is a federal

republic, with executive power exercised by the president. The president is the head of state,

the head of government, and the head of a multi-party system. Nigerian politics takes place

within a framework of a federal, presidential, representative democratic republic, in which

executive power is exercised by the government. Legislative power is held by the real

government and the two chambers of the legislature: the House of Representatives and the

Senate. Together, the two chambers make up the law-making body in Nigeria, called the

National Assembly, which serves as a check on the executive arm of government. The

highest judiciary arm of government in Nigeria is the Supreme Court of Nigeria which was

created after independence and also practices Baron de Montesquieu's theory of the

separation of powers based on the United States system and also practices checks and

balances. The Economist Intelligence Unit has rated Nigeria as "hybrid regime" in 2016.

3.3 Data Required and Sources

The data to be used in this study are secondary data and time series data of gross domestic

product and unemployment within the period under review that is from 1996-2017.

30
The data to be utilized in the study is sourced through the publications of the Central Bank of

Nigeria (CBN), National Bureau of Statistics (NBS), among others. The data is secondary in

nature in that it was not collected initially or specifically for this research but for analysis by

the bodies mentioned above.

3.4 Model Specification

By theoretical definition, it is believed that unemployment affects the growth of Nigeria

Economy negatively. Based on this, the functional relationship is stated thus;

GDP = f (TAX)…………………………………….… (3.1)

Where;

GDP = Gross Domestic Product (GDP) (Dependent Variable)

f = Functional Notation

Tax = Taxation, (Independent Variable)

The OLS Regression equation based on this functional relationship is stated below

Y = β0 + β1Tax + μo………….………………....... (3.2)

Where GDP and TAX are as defined above

Β0 = Constant Term

β1 = Parameter

μo = Error Term

Based on Aprioreconomic theory, β0, β1< 0

3.5 Method of Evaluation

In this section, the necessary statistical and econometric criteria that will be employed in the

evaluation of the model will be stated or defined. The researcher will apply the following

statistical and econometric techniques to evaluate the model

 (R2) coefficient of determination

 Student t- statistic

31
  f - ratio/f statistic

 Durbin - Watson.

 Coefficient of determination R2 is be used to measure the proportion of changes in the

dependent variable (gross domestic product) that is explained by the changes in the

independent variable (unemployment) it is also called the measure of goodness of fit.

The value ranges from zero to one.

 The student statistics is be used to measure the statistical significant of individual

parameter estimated in the model. The t - statistic is employed because sample size is

small i.e. n<24.

 F - Ratio is be used to test for the statistical significant of the entire regression plane.

 Durbin - Watson statistic is be used to test for the presence of first –order

autocorrelation.

3.6 Decision Rule

In this section, the researcher set out the rules for accepting or rejecting the hypothesis.

t-statistic:

The decision rule for t-statistic requires that the null hypothesis be accepted if the observed t

value (*) is less than the tabulated value at the chosen significant level and degrees of

freedom.

f-statistic:

The decision rule for f-statistic require that null hypothesis be accepted if the observed f

value (f*) is less than the tabulated value of f at the chosen level of significant and degree n-

freedom.

Durbin-Watson:

The decision rule for Durbin -Watson states that the null hypothesis be accepted if du <d" <

(4-du)

32
Note: The entire test in this study will be carried out a 5% level of significance.

33
 CHAPTER FOUR

DATA ANALYSIS AND DISCUSSION OF FINDINGS

4.1 Introduction

This chapter presents analysis of the data from the research study. This chapter presents the

major findings and the discussions of the data collected for the study. The summary of the

descriptive statistics is presented in order to see the overall results at a glance with particular

reference to the research questions and hypothesis that have been formulated for the purpose

of the study. Data obtained from the study were presented in tabular form and analyzed

through simple Arithmetic.

4.2 Presentation of Empirical Results

Table 4.1:

YEAR GDP VAT

1996 1399.70 5.03
1997 2907.36 6.26
1998 4032.30 11.29
1999 4189.25 13.91
2000 3989.45 16.21
2001 4679.21 23.37
2002 6713.57 30.64
2003 6895.20 44.91
2004 7795.76 52.63
2005 9913.52 65.89
2006 11411.07 96.20
2007 14610.88 87.45
2008 18564.59 110.57
2009 20657.32 144.37
2010 24296.33 198.07
2011 24794.24 229.32
2012 54612.26 275.57
2013 62980.42 318.00
2014 71713.94 347.69
2015 80092.56 389.53
2016 89043.62 388.85
2017 94144.96 261.65
Source: CBN Statistical Bulletin

The empirical result of the required analysis carried out in the study is presented below:

34
Table 4.2: Empirical Result

Variables Coefficient Std Error T-Value

Constant 3.4508044 0.183798 19.08644
GDP 6,917.6 642,712.7 0.010763
2
R = 0.938191, f = 364.2921 d = 1.423296, du = 1.46
Source: SPSS, 2019

The figures in parenthesis are the standard errors of the estimated regression line, additionally

t*, f* and d* are the calculated or observed values, of students t-statistic, f-statistic and Durbin

Watson statistic respectively. r2 is the estimated value of the coefficient of determination.

4.3 Examination of the Algebraic Signs of the Parameter Estimate

In the parameter estimate of the empirical results above, the sign of the coefficient of taxation

failed the economic apriori test. This is because, it is expected theoretically that increase in

taxation rate reduce economic activities and thereby leading to reduction in Gross Domestic

Product (GDP) in Nigeria. This means that negative relationship exists between economic

growth and taxation in Nigeria and not positive as shown by the sign of the coefficient of

taxation.

4.4 Statistical Test of Significance

In this section the researcher applied the test statistics stated in chapter three of this research

work to test for the statistical significance of the estimated parameter.

Table 4.3: Statistical Test of Significance

Variable Coefficient Calculated value Tabulated Value Test Results

(t*) (t0.025)
Taxation 3.508044 19.08644 2.064 SS
f* f0.05
364.2921 4.26 SS
d* du
1.423296 1.46 Auto correlation

exists in the

model
Source: SPSS, 2019

35
From Table 4.3above “SS” stands for statistical significant. It was observed from the table

above the taxation has a significant impact on economic growth in Nigeria, this is because the

computed value of t statistic (t*) is greater than the tabulated value (t0.025) i.e 19.08644 >

2.064.

F-test which is the test of overall significant of regression plane has it that the entire

regression plane is significant. This is because the computed value of f-statistic (f *) is greater

than the tabulated value (f0.05) i.e. 364.2921 > 4.26.

The coefficient of determination has it that the highest percent approximately of

changes in Gross Domestic Product (GDP) can be explained by the changes in taxation

(Independent Variable). It shows a better goodness of fit and good explanatory power of

independent variable on the dependent variable.

Durbin Watson statistics on the other hand showed that Auto correlation exists in the

model. This is because, the Auto-correlation in a model was violated.

du = 1.46

d* = 1.423296

4 – du = 4-1.46 = 2.54

1.46 > 1.423296 < 2.50]

Putting the values in the above assumption shows that auto correlation exists in the model.

4.5 Evaluation of the Working Hypothesis

In this section, the working hypothesis formulated in chapter one of this study is tested on the

basis of evidence of sample statistics. The hypothesis stated that;

H01: Taxation has no significant effect on economic growth in Nigeria.

From the statistical test of significance carried out in Table 4.3 it was observed that both

computed values of t-statistic and f-statistic are greater than their tabulated values, i.e t *> t0.025

and f* f0.05. Based on this evidence, null hypothesis (H 0) is rejected thereby accepting the

36
alternative hypothesis (H1) which states that taxation has significant effect on economic

growth in Nigeria.

H02: Revenue generated from tax does not have effect on the economic growth of Nigeria.

From the statistical test of significance carried out in Table 4.3 it was observed that both

computed values of t-statistic and f-statistic are greater than their tabulated values, i.e t *> t0.025

and f* f0.05. Based on this evidence, null hypothesis (H0) is rejected thereby accepting the

alternative hypothesis (H1) which states that revenue generated from tax have effect on the

economic growth of Nigeria

H03: There is no significant relationship between taxes and economic growth.

From the statistical test of significance carried out in Table 4.3 it was observed that both

computed values of t-statistic and f-statistic are greater than their tabulated values, i.e t *> t0.025

and f* f0.05. Based on this evidence, null hypothesis (H0) is rejected thereby accepting the

alternative hypothesis (H1) which states that there is significant relationship between taxes

and economic growth

4.6 Policy Implication of the Results

The result of the study shows that taxation has a significant impact on Gross Domestic

Product (GDP) and the relationship between taxation and Nigerian economy is positive.

The revelation point there is that increase in taxation rate encourages development in

the entire sector of the economy nationally. This is because most of the rates collected in

form of taxation by government will be used to sponsor some of the developmental projects

by government. Infrastructures and social amenities that attract both foreign and local

investors are embarked upon by government using the money generated through taxation.

37
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary

This research work effect of taxation on economic growth in Nigeria was set to find the effect

of taxation on economic growth in Nigeria. Hypothesis was stated to guide the study. The

hypothesis is stated thus:

Ho: Taxation has no significant impact on Economic Growth in Nigeria.

To evaluate this hypothesis, annual time series data on gross domestic product a proxy

for economic growth and taxation were collected from the year, 1996 to 2017. To analyze

these data, simple linear regression was adopted employing Ordinary Least Squares (OLS)

techniques.

This analysis yielded some interesting results. From the results, it was observed that

taxation has a significant impact on economic growth of Nigeria. Also that dependent

variable (Gross Domestics Product) can be controlled by independent variable (taxation) as a

result of positive relation that exists between the variables.

5.2 Conclusion

38
From the findings of the study, it was concluded that taxation has a significant impact on

Nigerian economy. Based on this, any action taking with respect to taxation by government

will have external effect that might be positive or negative depending of the direction of the

action since the relationship between the two variables is linear.

Finally, it was concluded that growth of the economy of Nigeria dependent not only

in oil sector but largely on how efficient taxation rate and other policy variables are

manipulated. Taxation can serve as a control variable to economic growth in Nigeria.

5.3 Recommendations

From the findings of this study, the following recommendations are made:

i. Government should ensure that citizens co-operate and comply with fiscal policy of

government.

ii. Tax policies should be changed in line with economic conditions

iii. Government should impose taxes that do not discourage foreign investors and small

scale industrialists.

iv. Government should ensure that every citizen/companies pay their taxes at appropriate

time in order to avoid tax evasion or avoidance.

v. There should be transparency and accountability from tax collectors in charge of

public properties. The fund collected should be paid into government’s treasury and

not siphoned away by dishonest tax collectors

5.4 Suggestions for Further Research

It has been said, time and again, that knowledge is accumulative in an inland to itself.

(Onodugo et al 2010). It is on this note that the researcher acknowledges the fact that in spite

of the efforts made; there are still vital areas that the study could not get into due to the

39
constraint of time, resources and other hindering factors. It was suggested that the study could

be carried out in the other parts of the country since the researcher focused on Nigeria.

Further researchers should look out the relationship between tax and in Nigeria. Further study

should also look critically at both negative and positive effect of tax in our economic body

policy.

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