Taxation and economic growth in Nigeria: an empirical analysis

Complete Chapter One



One of the most commonly discussed issues in economics is on how taxes as means of fiscal policy at stabilizing the general economy relate to economic growth of developing countries such as Nigeria. A lot of studies have tend to yield an audience of the relationship between taxation and economic. Some of the studies have rather yielded results that have established negative effects of taxes on economic growth. Taxes as means of fiscal policy raises the cost or lower the return to the taxed activity (Juliana, Mustaffa and Zulkifli, 2012).
Income taxes create a disincentive to earning taxable income. Individuals and firm have an incentive to engage in activities that minimize their tax burden. As they substitute activities that are taxes at a cover rate for activities taxed at a higher rate, individuals and firms will engage in less productive activity, leading to lower rates of economic growth (Juliana Mustaffa and Zlukifli, 2012).
Economic growth is the basis of increased prosperity. Investments in new capital such as (human and physical) the implementation of new production techniques and the introduction of new products are the fundamentals of the growth process. Though its effect on the return to investment or the expected profitability of research and development, taxation can affect what choices are made and ultimately the rate of growth. Taxation is necessary simply because it would neither be feasible nor desirable to finance government solely by charges on services (Mwima-Swaya, 1995).
Basically, taxation refers to a system used by the government through levying assessments to obtain money from people, industries and organizations. It is not only relatively paramount but also compulsory and does not guarantee a direct relationship between the amount contributed by a citizen and the extent of government services provided to him/her. A tax is an involuntary fee paid by individuals or business to the government for the sole purpose of answering resources to society and economically beneficial use, to stabilize the economy and to redistribute wealth between the rich and the poor (Mwima-Swaya, 1995).
Moreover, the relationship between taxation and economic growth has of recent times become one of the most important economic issues. This is particularly due to the poor fiscal performance in a number of developing countries such as Nigeria. The relationship to a large extent empirical and forces one to employ methods of scientific investigation that do not yield aprioristic conclusions and external truths, but only statements of validity limited by the character of the model used or by significance of evidence provided (Dalibor, 2005).
While it could be clear that taxation might affect the level of GDP, Early growth models presumed that the langram growth depends on exogenons technical change such that it may be hard to access the effect of fiscal policy on the rate of capital accumulation or more generally, Economic activity (Myles, 2000). Some prior studies established a positive linkage between taxation and economic growth; others have however submitted mixed findings.
It is against this backdrop, this study is under taken to evaluate the impact of taxation on the Economic growth of Nigeria with specific attention on direct taxation such as PPT, CIT and Tax

The achievement of Macro Economic objective of full employment, stability of price level, high and sustainable Economic growth from time immemorial has been a policy priority of every economy such as Nigeria given the susceptibility variables to fluctuations in the economy. The achievement of this very goal is influenced by the employment of fiscal policy instrument such as taxation.  A lot of revenues derived by the Nigerian government through taxation has not yielded economic growth and full employment stability (Chigbu, Akujuobi and Ebunohowei, 2002).
In the light of the above existing gaps, the following specific research questions are raised:
Does petroleum profit tax enhance the economic growth of Nigeria?
What is the relationship between economic growth and the company income tax in Nigeria?
Is there a relationship between value added tax and the growth of the Nigeria economy?
What is the relationship between personal income tax and economic growth?

The general objective is to examine the impact of taxation on the growth of the Nigerian economy.  But the specific objectives are as follows:
To examine how petroleum profit tax contribute to the economic growth of Nigeria.
To find out the relationship between company income tax and the Nigerian economic growth.
To ascertain if there is a significant linear relationship between value added tax and the economic growth of Nigeria.
To ascertain the relationship between company income tax and economic growth.

The research hypotheses to establish the relationship between taxation and the economic growth of Nigeria are put in an alternative form as follows:
Ho:  No significant relationship between petroleum profit tax and economic growth.
Ho:  No significant relationship between company income tax and economic growth.
Ho:  No significant relationship between value added tax and economic growth.
Ho:  No significant relationship between personal income tax and economic growth.

This study examined the impact of taxation on the economic growth of Nigeria.  This study covers the time between 1995-2011. In terms of the samples size, such taxes as petroleum profit tax, company income tax, value added tax and personal income tax are critically examined under this study within the Nigeria economy with a geographical bias or restriction.

Researchers on the impact of revenue from taxation collected by the Nigerian government in the economy have been on going. In this regard, it is necessary to state the usefulness of this study in light of the present day Nigerian economy.
Firstly, the Federal Government of Nigeria will find this study useful in terms of policy formulation especially fiscally policy to help achieve stability of the economy. It will further guide them to know the extents with which these varying forms of tax revenue have contributed to the economic growth of Nigeria and how to sustain it.

There are still scanty literature reviews on the impact of taxation over the Nigerian economy. Most of the study done thus far on taxation and economic growth has mainly been peculiar to advanced countries of the world.
Data serve as another limitation of the study. Most times, the accuracy and reliability of the data extracted from the secondary source are unreliable, such that the outcome of this study might be very valid and the problem of generalizing the outcome of the study.

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