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Impact of government expenditure on economic growth in Nigeria

 Format: MS WORD   Chapters: 1-5

 Pages: 68   Attributes: COMPREHENSIVE RESEARCH

 Amount: 3,000

 Feb 19, 2020 |  10:52 pm |  1163



1.1    Background to the Study

Despite her strong fundamentals, oil rich Nigeria has been hobbled by inadequate power supply, poor education, lack of infrastructure delay in the passage of legislative reforms, an inefficient property regulation system, poor electoral processes, restrictive trade policies, militancy, insecurity, an inconsistent regulatory environment, a slow and ineffective judicial system, pervasive corruption, the poor becoming poorer as the economic diversification and strong growth have not translated into a significant decline in poverty levels of the country. (CBN Statistical Bulletin, 2014). The constant reliance on the oil revenue for political, economic, and social development for the provision of infrastructure in the country has become worrisome as the price of crude oil continues to decline below the budget benchmark. This concern prompted this study to investigate the impact of taxation another source of revenue for the economic development of Nigeria.

According to Ogbonna and Ebimobowei (2012) “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”. They further stated that a well-structured tax system would boost the generation of the income for a meaningful development of such country. This Ogbonna and Ebimobowei view are the same as the Biblical account, where Jesus paid tax to the government of Caesar the Roman Emperor. There were many taxes needed from the provinces to administrate the Roman Empire these taxes paid for a good system of good roads, law and order, security, religious freedom, a certain amount of self-government and other benefits. The provisions of these basic amenities depend on the amount of revenue being generated. Kiabel and Nwokah (2009) stated that rise in the cost of running government coupled with the incessant dwindling revenue had left all tiers of government in Nigeria with formulating strategies to improve the base of income. One of such strategies is taxation. According to PricewaterhouseCoopers, Nigeria has made some improvement to the tax system. What then is taxation? Oxford Dictionary of Accounting (1995) defined taxation as a levy on an individual or corporate body by the central or local government to finance the expenditure of that government and also as a means of implementing its fiscal policy. Thus the government can transfer resources through taxation from private consumption to public investment.

In Nigeria, this important role of taxation lacks in our system. Odusila (2006) noted that the system is lopsided and dominated by oil revenue, that over the past two decades, oil revenue has accounted for at least 70% of the revenue, by implication traditional tax revenue has never assume a strong role in the country’s management fiscal policy. The view of Jhingan (2002) that taxation effectively curtails conspicuous consumption and other wasteful expenditure of the richer classes does not hold water in Nigeria. The richer are acquiring and accumulating properties and paying less or no tax while the poor are getting poorer and paying tax. The redistribution of income through taxation in Nigeria has not been achieved. On the other hand, there is no tangible improvement in our infrastructural facilities. Nigerian roads are bad and have become a death trap to the citizens.

Every economy of the world needs revenue to develop and grow. Government use tax proceeds to render their traditional functions, such as the provision of public goods, maintenance of law and order, defence against external aggression, regulation of trade and business to ensure social and economic maintenance (Otu & Adejumo, 2013). Base on this, Umoru and Anyiwe (2013) noted that “the policy of taxation in Nigeria is directed towards achieving some specific objectives which include amongst others revenue generation and upholding economic growth”. Tax revenue is a core instrument in the hands of the government to fulfill expenditures and it helps in acquiring sustained growth targets. The nature of taxes can help predict a growth pattern (Romer & Romer, 2010). Musgrave and Musgrave (2004) maintained that the “economic effects of taxation include micro effects on the distribution of income and efficiency of resource use as well as macro effects on the level of capacity output, employment, prices and growth”.

Government exists in order to effectively collect taxes from available economic resources and make use of same to create economic prosperity. The governments of developed countries like Canada, United States, Netherland, United Kingdom, who derive substantial revenue from Company Income tax, Value Added Tax, Import Duties and have used same to create prosperity (Appah, 2004). Thus, tax revenue can be used to influence or achieve macroeconomic stability. The tax system provides an opportunity for government to collect additional revenue besides other sources of income, which is needed in discharging its pressing obligations. A good system of tax also offers itself as one of the most effective means of mobilizing a nation's internal resources and it lends itself to creating enabling and conducive environment to the promotion of economic growth and development (Ogbonna, 2010).

The contribution of tax revenue in Nigeria has not met the expectations of Government. Government has equally expressed this disappointment and has accordingly vowed to expand the non-oil tax revenue (Festus and Samuel, 2007). The emergence of oil as a major tax revenue is one of the means a country's government devises in solving the economic problems of the country and to enhance government expenditure which is expected to be beneficial to the citizens of such country through the provision of social and economic infrastructures (Adereti et al 2011). But, the advent of the oil boom encouraged some laxity in the management of non-oil revenue sources like the company income tax and custom and excise duties. This calls for an urgent need in the improvement of the tax system to enhance the evaluation of the performance and facilitate adequate macroeconomic planning and implementation (Adereti et al 2011).


1.2    Research Problem

The empirical nexus between tax structure and economic growth has been a contentious issue especially in developing countries. It remains unclear why empirical evidence in developing country like Nigeria often yield conflicting findings. These conflicting conclusions show that the effect of tax structure on economic growth is not yet resolved. The inconclusive evidence has made the issue of growth effect of taxation open to further research. The gap in terms of the period covered and methodology is also a contributory factor to the disparity in the outcomes of the effect of tax structure on economic growth. Following the aforementioned gap created by the earlier researchers in the light of mixed views in findings and conclusion reached by different researchers, this study will aim at filling the gap by introducing a profound and clearer variables and analysis on the effect of tax structure on economic growth in Nigeria. Against this background, the study seeks to access the effect of taxation on economic development in Nigeria.


1.3    Objective of the Study

The general objective of the study is to access the effect of taxation on economic development in Nigeria.

          The specific objectives of the study are to:

i.       analyze the revenue generated by the government from taxation.

ii.     evaluate the effect of taxes on economic growth.


1.4    Research Questions

i.      Do revenue generated affect the rate of investment in the economy

ii.     What’s the nature of relationship that exist between taxation and economic growth

1.4    Research Hypothesis

H1: = There is no significant relationship between revenue generated and rate of           investment in the economy.        

H2: = There is no significant relationship between taxation and economic growth.

1.5    Significance of the Study

The study is to provide information on how money generate from taxation is being used for social amenities and road maintenance. In addition, relevance to government institution, stakeholders, revenue bodies and research centers.

1.6    Definitions of Terms

Direct tax: these are taxes levied directly on the income of an individual and business firm.

Indirect tax: these are taxes levied on goods and services.

Custom tax: these are taxes imposed on goods sold to other countries.

Fiscal policy: it is the use of government tax and expenditure policies to influence the level of economic activity.

Progressive tax: it is a compulsory tax country imposes on an individual according to his ability. Example is P.A.Y.E. (pay as you earn).

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