1.1 Background to 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.
Hence, Ifurueze and Ekezie (2014) termed tax to be a compulsory levy imposed on a subject or upon his property by the government to generate the needed revenue for the provision of basic amenities and create enabling condition or the economic wellbeing of the society. To them, the enabling environment created by government encourages the establishment of new business, survival of existing business and infrastructures provided is a key determinant of political, economic and social well-structured tax system which provides government the needed fund for capital and current expenditure.
The main reason for taxation is to finance government expenditure and to redistribute wealth which translates to financing development of the country (Ola, 2001; Jhingan, 2004; Musgrave & Musgrave, 2004; Bhartia, 2009). Government collects taxes in order to provide an efficient and steadily expanding non-revenue yielding services, such as infrastructure-education, health, communications system, employment opportunities and essential public services like maintenance of laws and order, irrespective of the prevailing ideology or the political system of a particular nation. Furthermore, Anyanfo (1996) and Anyanwu (1997) stated that tax are imposed to regulate the production of certain goods and services, protection of infant industries, control business, curb inflation, reduce income inequalities etc.
Tosun and Abizadeh (2005) said taxes are used as proxy for fiscal policy. They outlined five possible mechanisms by which taxes can affect economic growth. To begin with, taxes can inhibit investment rate through such taxes as corporate and personal income, capital gain taxes. Also, taxes can slow down growth in labour supply by disposing labour-leisure choice in favour of leisure. More so, tax policy can affect productivity growth through its discouraging effect on research and development expenditures. Furthermore, taxes can lead to a flow of resources to other sectors that may have lower productivity. Finally, high taxes on labour supply can distort the efficient use of human capital even though they have high social productivity.
Taxes are of different kinds or types all over the world. This means that different countries have their own way of categorizing taxes to be collected. For the purpose of this research, the types of taxes will be considered from Nigeria perspective. According to Federal Inland Revenue Service, in Nigeria there are nine types of taxes which can be enumerated as follows; Company income tax (CIT), petroleum profit tax (PPT). The former is tax payable by any company resident in Nigeria based on their worldwide income. For companies that are non-resident in Nigeria, the CIT has to be paid on all incomes from Nigerian sources. Whereas the latter is paid in place of the CIT by companies operating in the petroleum sector and are involved in the extraction and transportation of petroleum products.
More so, there is value added tax which is a tax payable on goods and services consumed by any person, business organizations or individuals. And tertiary education trust fund tax which is a 2% tax separate from the CIT that is deducted from the profits of every resident company which is geared towards improving the quality of education. Non-resident companies are exempt from this task.
Furthermore, capital gains tax and personal income tax are also types of taxes in Nigeria. Capital gains tax is the tax deducted from the profits accrued from the sale of assets and securities by Nigerians. While personal income tax is the tax deducted from the income of Nigerian residents through the pay as you earn mechanism. In addition, there is national information technology development fund (NITDF) levy. This tax is applicable to companies in the Information and Communications Technology (ICT) industry. And withholding tax (WHT) which has no distinction of its own. This tax is only a mechanism to collect other taxes. Various persons may be subject to WHT deduction to balance their tax liabilities for different types of tax. WHT deductions are regarded as advance payment of the relevant tax liability that will arise from the tax returns of the period concerned.
Finally, there is Stamp duties tax which is a written documents relating things between individuals or group and companies. Stamp duties may include instruments such as financial transaction, article of association between companies, statements, deals, and bonds.
Jarkir (2011) outlined that to stimulate economic growth of a country, tax can be used as an important tool in the following manner; Optimum allocation of available resources in the sense that the imposition of tax leads to diversion of resources from the taxed to the non-taxed sector. The revenue is allocated on various productive sectors in the country with a view to increasing the overall growth of the country. Tax revenues may be used to encourage development activities in the less developed areas of the country where normal investors are not willing to invest.
In addition, tax stimulates economic activities through reduction of inequalities in income and wealth. The reduction of inequality in incomes and wealth is possible through the adoption of progressive tax system by the government of a country. It means taking income from those with higher income and providing income to those with lower income. Through reducing inequalities in income and wealth by using an efficient tax system, it can encourage people to save and invest in productive sectors.
Furthermore, variation in taxation profoundly affects national income, employment, output and prices. On one hand, reduction in taxes has the effect of raising disposable income thereby increasing consumption and investment expenditure of the people. On the other hand, an increase in taxes tends to reduce disposable income and thereby reduces consumption and investment expenditures. Thus government can control deflationary and inflationary pressures in the economy by a judicious combination of expenditure and taxation programmes.
The role of Government expenditures in the operation of economies cannot be overemphasized. Government expenditures refers to expenses incurred by the government for the maintenance of itself and provision of public goods, services and works needed to foster or promote economic growth and improve the welfare of people in the society. Government or public expenditures are generally categorized into expenditures on administration, defense, internal securities, health, education, foreign affairs, etc. and have both capital and recurrent components.
Capital expenditure refers to the amount spent in the acquisition of fixed or productive assets whose useful life extends beyond the accounting or fiscal year, as well as expenditure incurred in the upgrade of existing fixed assets such as lands, building, roads, machines, equipment, etc. Capital expenditure is usually seen as expenditure creating future benefits as there could be some lags between when it is incurred and when it takes effect on the economy. The effectiveness of government expenditure in expanding the economy and fostering rapid economic growth depends on whether it is productive or unproductive. Other things being equal, productive government expenditure would have positive effect on the economy, while unproductive expenditure would have the reverse effect. Todaro and Smith (2006) describe economic growth as “the steady process by which the productive capacity of the economy is increased over time to bring about rising levels of national output and income.” The growth rate is affected by macro-economic policies, such as taxation, consumption, and investment.
In both developed and developing economies, the government has to play an active role in achieving economic growth (Edame and Okoi, 2014). In this sense, fiscal policy is an essential vital instrument of government in promoting economic growth. An important part of the fiscal policy is taxation. Many economists believe that tax revenue is one of the most significant factors that contribute to a country’s growth (Myles, 2000). It has provided developing countries with a stable and predictable fiscal environment to promote growth and to finance their social and physical infrastructural needs.
1.2 Statement of Research Problem
Taxation should not mainly focus on revenue generation to the detriment of stimulating economic development, provision of infrastructure and basic social amenities. This is evident in the lack of electricity supply, portable drinking water, basic healthcare delivery, bad roads Just to mention but a few. Some states, local government and dubious government officials introduce all sorts of taxes, levies, charges etc. where certain tenement rates or fees have been paid by the tax payer in the past, some government official craftily introduce new certificate or license which makes double payment mandatory otherwise you lose your property. People in government see themselves as privileged ones who must be obeyed as long as they go by the name government officials.
Based on the proposed 2017 budget, non-oil revenues (largely comprising Companies Income Tax, Value Added Tax, Customs and Excise Duties and Federation Account levies) are estimated to contribute N1.373 trillion (28%) to the projected aggregate revenue of N4.94 trillion. Despite the huge amount that can be generated from tax as a source of revenue, its role in promoting economic and social activities and growth is not felt because of its poor administration, corruption and the attitude of Nigerians toward tax payment.
In this direction, Olashore (1999) submitted that the economy has remained in deep slumber or shamble as all macroeconomic indicators show that the economy is in urgent need of changes, balancing and indeed radical reform. Therefore, identifying the impact of taxation on economic growth in Nigeria is a research carried out at the right time as there is an urgent need to examine more deeply and to look into the short run relationship between government capital expenditure and petroleum profit tax, company income tax, custom & excise duties and its long run effect on economic growth in Nigeria to bring about the changes and radical reform.
1.3 Research Question
In the light of the above, the research seeks to ask the following questions;
what is the short-run relationship between tax revenue and government capital expenditure?
is there any long-run relationship between government capital expenditure and economic growth in Nigeria?
1.4 Objective of the Study
Given the foregoing, the primary objective of this study is to investigate impact of tax on government capital expenditure and economic growth in Nigeria. The specific objectives of this study include to:
Establish short-run relationship that exists between tax revenue and government capital expenditure.
Examine if there is a long-run relationship between government capital expenditure and economic growth in Nigeria.
1.5 Significance of the Study
This study will assist the government in policy formulation as it relates to tax and government expenditure which are two instruments for fiscal policy. It will help to strengthen the operation of the relevant government agencies such as federal board of Inland Revenue, central bank of Nigeria, joint tax board. More so, it will assist in estimating a sustainable revenue profile thereby facilitating effective management of Nigeria’s fiscal policy, among others.
1.6 Scope and Limitation of the Study
In view of its primary objective, this study focuses mainly on impact of tax on government capital expenditure and economic growth in Nigeria. This research was limited by certain constraints which include difficulty in sourcing data from certain relevant organization, non-availability of data on certain variables, restrictions in accessing certain materials on the internet and insufficient financial resources for the study. Lastly, this study was also constrained by insufficient time on the part of the researcher, since attention had to be given to other course work.
1.7 Organization of the Study
This study is organized into five chapters:
Chapter one: The introductory aspect gives an insight into the background of the study, statement of the problem, research question, significance of the study, scope of the study and organization of the work.
Chapter two: covers the review of literature which is logically structured to include the conceptual literature, theoretical literature and empirical literature, theoretical framework, gaps in literature.
Chapter three: provides information on the source of data, model specification and method of data analysis.
Chapter four will contain data presentation, the estimation of the data and interpretation of result for model. Chapter five being the concluding chapter will attempt to highlight the summary of findings, conclusion, policy recommendation and suggestion for further research.