CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter provides a substantial evaluation of the literature review, theoretical and empirical
literature related to the research. It involves a review of existing books articles, journals, and
papers which are related to the research and also entails the interrogation of comments,
critiques and issues revised by researchers/scholars on and about assessing the cost accounting
and its effect to management planning, control and decision making.

2.1 Conceptual Review

2.1.1 Taxation

Taxation has been in existence even before the coming of the British men. Taxation can be
defined as the system of imposing compulsory levy on all income, goods, services and
properties of individual, partnership, trustees, executorships and companies by the government
(Samuel & Simon, 2011). Lawrence (2019) defined taxation as a compulsory payment made by
individuals and organization to relevant Inland Revenue authorities at the federal, state or local
government level. Hye and Jalil (2010) sees taxation as a levy imposed by the government
against the income, profit or wealth of the individual, partnership, corporate organization. Osho
(2019) defined taxation as 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.

A precise definition of taxation by Zinaz and Samina, (2010) is that taxation is one of the
sources of income for government, such income as used to finance or run public utilities and
perform other social responsibilities. According to Temidayo (2019) taxation is the most
important source of revenue for modern governments, typically accounting for ninety percent
or more of their income. Tax is also the nexus between state and its citizens, and tax revues are
the lifeblood of the social contract. The very act of taxation has profoundly beneficial effects in
fostering better and more accountable government (Tax Justice Network (TJNS) revenue 2012.
Osho (2019) also stated that the economic effects of tax include micro effects on the
distribution of income and efficiency of resources use as well as macro effect on the level of
capacity output, employment, prices, and growth. However, the use of tax is an instrument of
fiscal policy to achieve economic growth in most less develops countries cannot be reliable
because of dwindling level of revenue generation. A critical examples of governments that
have influenced their economic development through revenue from tax are; Canada. United
States, Netherland, United Kingdom, they derive substantial revenue from Company Income
tax, Value Added tax, Import Duties and have used same to create prosperity (Falade, 2019).

According to Adegbie and Fakile (2011), the more citizens lack knowledge or education about
taxation in the country, the greater the desire and the opportunities for tax evasion, avoidance
and non-compliance with relevant lax laws. In this respect, the country will be more adversely
affected because of absence of tax conscience on the part of individuals and the companies and
the (allure of tax) administration to recognize the importance of communication and dialogue
between the government and the citizens in matters relating to taxation. The attitude of
Nigerian towards taxation is worrisome as many prefer not to pay tax if given the opportunity,
the economy continues to lose huge amount of revenue though the unwholesome practice of
tax avoidance and tax evasion, these loss of revenue can change the fortune of many economy
particularly, developing countries like Nigeria.

This problem has been lingering for so long which urgent attention and solution is overdue.
The cost of collecting tax in Nigeria both social and economic cost is too high to the extent that
if left unchecked the cost many soon out weight the benefit or value, derived from such
operation and that will not be appropriate for the system. The government spends more to
realize a miserable meager amount. The rate of corruption on the art of tax officials is alarming
as most of them connive and collude with supposed tax payers to evade and avoid tax.
Sometimes, the tax officials’ art, not properly rained on the modern ways of tax administration.
The inadequate social infrastructures in Nigeria call for attention as to how tax revenue
generated is to be expanded and accounted of especially where those in authority continue to
spend these hand earned resources with reckless abandon. Taxes are classified into direct and
indirect.
Olemija (2019) defined direct taxes as taxes levied on the income of individual, group of
individuals, and business firms and are paid directly by the person or persons on which it is
legally imposed by the tax authority. Direct taxes can be classified into Personal Income tax,
Company Income tax, Capital Gain tax, Petroleum Profit tax, and Capital Transfer tax. Indirect
taxes are taxes levied on expenditure that is, goods and services. These taxes are paid as part of
payment for goods and services purchased by the ultimate users or consumer. The incidences
of this type of taxes are usually borne by the third party. Indirect taxes can be classified into the
following: Import duties, Export duties and Value added tax (Bukunmi, 2019).

2.1.2 Economic Growth

Economic growth represents the expansion of a country’s potential GDP or output. For
instance, if the social rate of return on investment exceeds the private return, then policies that
encourage can raise the growth rate and levels of utility. Growth models that incorporate public
services, the optimal tax policy lingers on the characteristic of services (Adeniyi, 2013). It has
provided insight into why state growth at different rates over time; and this influence
government in her choice of tax rates and expenditure levels that will influence the growth
rates. Economic growth is an essential ingredient for sustainable development. Economic
growth brings about a better standard of living of the people and this is brought about by
improvement in infrastructures, health, housing, education and improvement in agricultural
productivity. Economic growth as a concept is viewed differently by different scholars. This is
attributed to the condition prevailing at the time of these scholars. Majority accept it as an
increase in the level of national income and output of a country.

According to Dewett (2005), it implies an increase in the net national product in a given period
of time. Todara and Smith (2006) defined economic growth as a steady process by which the
productive capacity of the economy is increased over time to bring about rising levels of
national output and income. Jhingan (2006) viewed economic growth as an increase in output.
He explained further that it is related to a quantitative sustained increase in a country’s per
capita income or output accompanied by expansion in its labour force, consumption, capital
and volume of trade. The main characteristics of economic growth are high rate of structural
transformation, international flows of labour, goods and capital (Ochejele, 2007). The motive
to improve the quality of lives of citizens through the numerous expenses of government has
motivated the study of the impact of government expenditure on the economic growth of
Nigeria. Globally, government spending has been on the increase without a corresponding
increase in the economic development of these nations especially in developing nations. This
situation has also stimulated research in the area of government spending and economic growth
and development.

2.1.3 Government Expenditure

This is the acquisition by governments of goods and services for current consumption to
directly satisfy the individual or collective needs of the society, referred to as government
consumption expenditure, while government acquisition of goods and service intended to
create future benefits in referred to as government investment expenditure (government gross
capital formation). All governments’ acquisitions (government consumption expenditure plus
government investment expenditure) are classified total government expenditure. Government
expenditure can be financed by borrowing, printing of new money, taxes or revenues from
government direct investments even though some the government investment are supposed to
be subsidized. This presupposes that while it is not in doubt that governments spending
stimulates economic growth, economic growth on the other hand stimulates government
spending as changes in economic growth rate determines change in revenues accruable to the
government upon which spending in based (Lawrence, 2019).

Government expenditure could be current, recurrent, and capital expenditures. Capital

government expenditure refers to spending on fixed assets such as roads, schools, hospitals,
building, plant and machinery, the benefits of which are durable and lasting for several years
while recurrent government expenditure refers to the expenses that government incurs for its
maintenance, for the society and the economy as a whole (Uwaezuoke, Nweke & Ogar, 2018).
Government expenditures have far a very high effect on the overall economic activities of any
nation. Government expenditure on production depends on three factors; the ability to work,
save and invest; the willingness to work, save and invest and the diversion of economic
activities between different uses and localities (Musa & Asare, 2013). Government expenditure
in the form of grants and subsidies to farmers, firms and industries is highly productive as it
minimizes the cost of production which leads to a fall in prices. In contrast, expenditures on
education and health have a direct welfare effect on society.
Expenditure on education and health is seen as an investment in human capital improves skill
formation and raises the ability to produce which has the effect of raising disposable income
and in turn increases consumption and investment (Uwaezuoke, Nweke, & Ogar, 2018).

2.1.4 Economic Growth and Government Expenditure

No doubt, the bulk of government revenues come from proceeds from government direct,
investments in Nigeria, while printing of new money and taxes have remain major components
of government revenues in Nigeria, revenues from governments direct investments have
dominated governments revenue streams in Nigeria. This phenomenon explains fluctuations in
government expenditure over the years in Nigeria. Since rise in public expenditure greatly
depends on revenue collection, and revenue collection depends on the level of economic
activities it therefore follows that government expenditure depends on the level of economic
activities (Osmond, Nnamocha & Emmanuel 2015).

2.1.5 Taxation, Expenditure and Economic Growth

The size and structure of government capital and recurrent expenditure will determine the
pattern and form of growth in output of the economy is the argument made by Taiwo and
Abayomi (2011). According to the Keynesian view, the government needs to spend in order to
achieve stability in the economy, stimulate or increase productivity or investment (Mehrara,
Soufiani, & Rezaei, 2016). The government, along with the cost of economic stabilization,
incurs distribution and allocation costs. However, increase in government spending in form of
intervention, going by the neo-Classical economists could result in higher debt, high inflation
outcomes given the full employment assumption (Olayungbo, 2013). Studies following the
path of neoclassical theory do not see taxation as an important source of revenue, rather they
argue that it distorts the economy and business growth.

Authors such as Malaolu and Oduh (2012) did not find any relationship between taxation and
economic growth. In short Edame and Okoi (2014) claimed that there is an inverse relationship
between taxation and investment, that is, taxation lowers investment and revenue for the
government. Taxation is therefore a vital instrument in the economic development, which
provides a steady flow of revenue to finance development priorities such as strengthening
physical infrastructure, and other numerous policy areas, ranging from good governance and
formalizing the economy, to spurring growth (Uwuigbe and Olusegun, 2013). Taxation also
plays an important role in achieving equality and distributive social and economic needs as
observed by Samuel and Inyada (2010). 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). Musgrave and Musgrave (2004) also note that these roles include: the level
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.

A country seeking to improve its revenue generation would opt for a more recognized source
which is peculiar to the socio-economic make-up and taxation easily comes to bear. It is no
wonder Chigbu, Akujuobi, and Appah, (2012) argued that the Nigerian tax system has been
structured and reformed over the years to increase government revenue and expenditure thus to
achieve economic growth and development. It can therefore be implied that taxation is meant
to allow for stimulation of the economy and not stifle growth, as it is only through sustained
economic growth that the potential ability to offer improvements in the well-being of Nigerians
will arrive. Taxation no doubt is not specifically meant to discourage investment and the
propensity to save but to assist government in its expenditure (capital and recurrent) decision
as a source of additional revenue.

From Solomon (2018)’s assertion, tax is increasing being recognized as a tool for raising more
revenue by all the three tiers of government in Nigeria especially in this democratic
dispensation to enable them increase on their capital and recurrent expenditure which will no
doubt stimulate economic growth and development. A government that is consistent in the
payment of its employees’ wages and salaries, provision of securities, provide essentials in
healthcare and education under recurrent expenditure helps keep the economy going without
holdup. Investment under capital expenditure in the provision basic infrastructures, good road
networks, light, water, security facilities, telecommunications, health facilities which are
ingredients for encouraging and boosting businesses and economic growth and development

2.1.6 The Importance of Taxation in an Economy Raising of Revenue to Finance

Government Expenditure Programmes.

Tax plays an important role in the Nigerian society. It is a strong force for economic
development in the country from the pre-colonial, colonial and post-colonial eras. It is by far
the most significant source of revenue for modern government; hence there is recent call for
increase in taxation. Revenue generated by the government can be used to carry out its
expenditure programmes which include: defense, 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 sources 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.

Falade (2019) agree with this in his statement that a great majority of Federal and state
government taxes are imposed primarily for the purpose of raising revenue to finance
government expenditure. This reproves why government in its annual budget 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.

2.2 Theoretical Review

The study examined six relevant theories which were:

2.2.1 Expectancy theory of taxation

This theory stated that every tax proposal passes the test of practicality and must be the sole
consideration before tax authorities in hid for tax proposal. It strongly emphasis that the
economic and social objective of the state is considered irrelevant since it is meaningless to
have tax that cannot be levied and effectively collected;
2.2.2. Ability to pay theory

This theory focused on the income of the tax payer to meet up the tax payable and that entity or
individual with higher tax base should be subjected to higher tax payment than an entity or
individual with lower tax base The economists are not unanimous as to what should be the
exact measure of a person's ability or faculty to pay (Naiyeju, 1996 as cited by Osho, Omotayo
& Ayorinde, 2018).

2.2.3 Peacock and Wiseman Theory of Public Expenditure

Allan Peacock and Jack Wisemen theory, otherwise known as PWT, was based on the political
theory of public expenditure determination which states that government likes to spend more
money, that citizens do not like to pay more taxes, and that government needs to pay some
attention to the aspiration and wishes of their people. This theory attempted to explain the
circular trend or time pattern of change in government expenditure in response to development
in the political economy while the taxable capacity of the electorate acts as a constraint. Their
theory is known as Displacement Hypothesis and is based on the experience of Great Britain.
The Displacement hypothesis states that government expenditure grows in step wise fashion
(Zinaz & Samina, 2010).

The acceptance of the existence of a tolerable level of taxation which acts as a constraint on
government behavior is consistent with Clark’s “Catastrophe School” of taxation. PW make a
destination in government expenditure growth between normal or peak time and war, crisis or
social upheaval period. According to PW, during peak, public expenditures would tend to
experience an upward trend, even though there may be some discrepancy between a desirable
level of government expenditure and a desirable level of taxation (Fola, 2007 & Keho, 2010).

During war, famine or social upheaval this normal and steady growth in government
expenditures, would be disturbed. This was as a result of the displacement hypothesis as
unproductive government spending during social upheavals displaced productive government
expenditure leading to rapid increase in public expenditure. Government imposes higher taxes
which are regarded as acceptable during period of crisis. During this period, public expenditure
is displaced upward (i.e. displacement effect). War-related expenditure displaces private and
other government expenditure. However after the war or crisis, aggregate public expenditures
does not fall back to its original level since a war is not fully paid for from taxation alone
(Yunusa, 2003). Inspection effect may also occur as government attempts to increase
expenditures to improve social conditions which have deteriorated during the period of the
crisis. Government finances the high expenditures from the increase and tolerable level of
taxation that does not return to its former level. There are two possible scenarios which may
occur after the war or social upheaval. First, total private expenditures may return to its original
growth path and second, government expenditures experienced during the war may continue in
the post-war period along with an increase in civilian government expenditures until the
desired growth is reached (Zinaz & Samina, 2010).

2.2.4 Benefit theory

Benefit Theory is the underpinning theory which stated that the more benefits a person derives
from the activities of the state, the more he should pay to the government; economic growth
and development theory which disclosed that the real purpose of taxation is to take purchasing
power from the taxpayers so that taxpayer relinquishes control over economic resources and
make them available to the state. It is fiscal policy instrument which the government
manipulate to achieve macroeconomic objective. According to Nwankwo, (1992) as cited by
Osho, Omotayo and Ayorinde (2018), this theory states that the more benefits a person derives
from the activities of the state, the more he should pay to the government.

2.2.5 Keynesian theory

The Keynesian Multiplier is an economic theory that asserts that an increase in private
consumption expenditure, investment expenditure, or net government spending (gross
government spending – government tax revenue) raises the total Gross Domestic Product
(GDP) by more than the amount of the increase. Therefore, if private consumption expenditure
increases by ten units, the total GDP will increase by more than ten units.The Keynesian theory
propounded by John Maynard Keynes during the 1930s (specifically in 1936)posited that there
exists a multiplier effect of a change in expenditure on the national income. Hence, an increase
in the government expenditure would lead to increased employment and investment which
would improve aggregate output (Ahuja, 2013). Keynes advocated for increased government
expenditures and lower taxes to stimulate demand and pull the global economy out of the
depression. The law of increasing state spending was propounded by German economist
Adolph Wagner (1835- 1917). He posited that the development of an industrial economy
would be accompanied by an increased share of public expenditure in gross national product.
With the development of an economy, new functions and activities spring up and are
undertaken by the government while the old operations of the economy are performed more
thorough. Wagner’s law implies that there is a functional relationship between economic
growth and the growth of government sectors which tends to increase public expenditure
(Anyanwu 1993 in Ajudua and Davis, 2015).

Wagner highlighted certain forms of government activities that lead to increasing public
expenditure such as, keeping law and order, participation in the production of economic goods
including the provision of certain social products, increase in demand for public goods,
urbanization and pressure on social amenities, social security and provision of welfare etc.
(Nnamocha 2001 in Ajudua and Davis, 2015).Wiseman and Peacock put forward a hypothesis
about the growth of public expenditure in their study of public expenditure of the UK between
1891 and 1955. They posited that government expenditure increases in a jerk and step-like
manner rather than in a steady, continuous rate (Ajudua and Davis, 2015).

2.2.6 Benefit Received theory

The benefit principle is a concept in the philosophy of taxation from public finance. It bases
taxes to pay for public goods expenditures on a politically revealed willingness to pay for
benefits received. The principle is sometimes likened to the function of prices in allocating
private goods. In its use for assessing the efficiency of taxes and appraising fiscal policy, the
benefit approach was initially developed by Knut Wicksell (1896) and Erik Lindahl (1919),
two economists of the Stockholm School. The benefit principle takes a market-oriented
approach to taxation.

The objective is to accurately determine the optimal amount of revenue that should be spent on
public goods. The free-rider problem is the primary criticism given for limiting the scope of the
benefit principle. When information about marginal benefits is available only from the
individuals themselves, they tend to under report their valuation for a particular good; this
gives rise to the preference revelation problem. Each individual can lower his tax cost by under
reporting his benefits derived from the public good or service. One solution would be to
implement a tax choice. If taxpayers had to pay taxes anyway but could choose where their
taxes went (without the possibility of secret rebates or similar), then they would have no
incentive to hide their exact preferences.

2.3 Empirical Review

Oziengbe (2013) explores the relative impacts of the federal capital and recurrent expenditures
on Nigeria's economy in the 1980-2011 periods. The variance decomposition results indicate
that the proportion of forecast error variance of GDP explained by innovations in RECEXP
dominates the proportion explained by changes in CAPEXP in all the periods.Nwofor &
Gordon (2013) studied tax revenue and government expenditure. They explored how revenue
generated from taxation affects Nigeria expenditure. Secondary data used for data collection
hypotheses and hypotheses tested using Pearson moments collation coefficient. The study
found out that the volume of expenditure incurred by the government can negatively affect
total tax revenue, especially those when those expenditures are mainly a recurrent expenditure.

Ogbonna and Appah (2016) examine the effect of tax administration and revenue on the
economic growth of Nigeria. The data collected from the questionnaire and secondary data
were analyzed using relevant regression analysis. The results reveal that there is a significant
relationship between Personal income tax revenue (PITR) and per capita income, Company
income Tax Revenue and Gross Domestic product of Nigeria, VAT revenue and PCI of
Nigeria, Petroleum Profit Tax revenue and GDP of Nigeria and tax administration and Gross
domestic product of Nigeria. Hence, the study concludes that tax administration and revenue
does affect the economic growth of Nigeria for the period under review.Ojong, Ogar, Oka
(2016) examined the impact of tax revenue on the Nigerian economy. s. Data were sourced
from the Central Bank Statistical Bulletin and extracted through a desk survey method.
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 significantrelationship between company
income tax and the growth of the Nigeria economy.
Ofoegbu, Akwu and Oliver, (2016)examined the effect of tax revenue on the economic
development of Nigerian, and to ascertain whether there is any difference in using HDI and
GDP in establishing the relationship. The approach adopted in this study was that of using
annual time series data for the period 2005 - 2014 to estimate a linear model of tax revenue and
human development index using ordinary least square (OLS) regression technique. Findings
show a positively and significantly relationship between tax revenue and economic
development. The result also reveals that measuring the effect of tax revenue on economic
development using HDI gives lower relationship than measuring the relationship with GDP
thus suggesting that using the gross domestic product (GDP) gives a painted picture of the
relationship between tax revenue and economic development in Nigeria. Nweze and Edame
(2016) examined oil revenue and economic growth in Nigeria between 1981 and 2014.
Secondary data on the gross domestic product (GDP), used as a proxy for economic growth; oil
revenue (OREV), and government expenditure (GEXP) which represented the explanatory
variables were sourced mainly from CBN publications. The co-integration result indicated that
there is a long run relationship among the variables with three co-integrating equation(s). The
result of the error correction mechanism (ECM) test indicates that all the variables except lag
of government expenditure exerted a significant impact on economic growth in Nigeria.
However, all the variables exhibited their expected sign in the short run but showed a negative
relationship with economic growth in the long run except for government expenditure, which
has a positive relationship with economic growth both in the long run and short run.

Okwara and Amori (2017) examines the impact of tax revenue on the economic growth in
Nigeria for the period of 19942015. Secondary data were used and sourced from journals,
textbooks and Central Bank of Nigeria (CBN) statistical bulletin. To avoid spurious results,
Ordinary Least Square (OLS) with the aids of Statistical Package for Social Sciences (SPSS)
was used to test the significant impact of value added tax and non-oil income on Gross
Domestic Product (GDP). The results revealed that non-oil income has significant impact on
the gross domestic product. In contrast, value added tax has a negative relationship and
statistically insignificant for the period under review. Onakoya, Afintinni and Ogundajo,
(2017) also investigated the impact of taxation on economic growth in Africa from 2004 to
2013. The appropriate fixed and random effect test was employed to determine the fitness of
the model using the Hausman test. The study conducted the Hausman-Test to determine the
proper estimator between Fixed and Random Effect. Findings indicated that tax revenue is
positively related to GDP and promotes Economic Growth in Africa. It was significant at 5%
level.

Inyiama, Chinedu and Nnenna (2017) examined the effect of the Federal Government of
Nigeria’s tax resources on infrastructural development of Nigeria. The study adopts ex-post-
facto research design as secondary data were used for the analysis. Data were analyzed using
multiple linear regression techniques. The result reveals that tax revenue resources (PPT, CIT
and VAT) had a positive and insignificant effect on Infrastructural Development in Nigeria.
Kyissima, Pacific and Ramadhan (2017) empirically examine the long-run and short-run
relationship between government expenditure and Economic growth in Tanzania for 19962014
making the use of annual secondary time series data. In the long-run, government expenditure
is found to be statistically significant and has a positive relationship with economic growth.
The short -run estimates show there is no significant relationship between government
expenditures and economic growth.