Mar 14, 2019 | 04:54 pm | 4
1.1 Background to the Study
Government, all over the world needs tax to fund and control their economic activities and one of source of revenue is taxation. Taxation can be defined as a compulsory levy on income since the decision to pay tax is not that of the tax payers. According to Amaechina (1998), “taxation has been defined as a levy which a government imposes on the income of the citizens or corporation in a state for which the government gives no direct benefit to the taxpayer” or “a non-punitive but yet a compulsory levy by government on the properties and income of individual and corporation”. The government cannot build a school or a hospital personally for somebody because he has paid his taxes, but the money realized is used to finance general government expenditures.
According to the Oxford Advanced Learner’s Dictionary (2005), tax is money that has to be paid to the government. People pay tax according to their incomes and it is often paid on goods and services. Black’s Law Dictionary (2007) defines tax as “monetary charge imposed by the government on persons, entities or property, levied to yield public revenue”. In Ola (1985), taxation is defined as the demand made by the government of a country for a compulsory payment of money by the citizens of the country. Thomas (2006), sees taxes as “proportional contribution from persons and property, levied by the state, by virtue of its sovereignty, for the support of government and for all public needs”. Nightingale (1997) describes tax as a compulsory contribution imposed by the government and concludes that even though tax payers may receive nothing identifiable in return for their contributions, they nevertheless have the benefit of living in a relatively educated, healthy and safe society. According to Soyode&Kajola (2006), taxation is defined as “the process of levying and collection of tax from taxable persons”.
Taxes affect relative prices in the economy. And changes in tax rates lead to changes in relative prices. The way in which prices and quantities of factors, goods and services react to such changes in relative prices can be an important determinant of inflation in the short to medium term. But the story does not end there. Tax rates also have an important impact on the long-term dynamics of the economy. The structure of the tax system determines the incentive structure for economic activity. Decisions to invest in human or physical capital and to supply labour - decisions that help to determine the potential growth rate of the economy and the ability of the economy to adjust to shocks - also depend to a large extent on the level and structure of taxes.
The origin of taxation in Nigeria is linked with the era of the colonial master in the early 20th century. The introduction becomes necessary as a result of the enormous tasks facing the government. Tax is a compulsory extraction of money by a public authority for public purposes and taxation is a system of raising money for the purpose of governance by means of contributions from individuals or corporate bodies (Sayode&Kajola, 2006).
Under current Nigeria law, taxation is enforced by the tiers of government that is local, state and federal government. The tasks have to do with how government can control its economic activities, achieve the desired level of price stability and how to control supply of money. Nigeria’s fiscal policy measures have been largely driven by the need to promote such macroeconomic objectives as promoting rapid growth of the economy, generating employment, maintaining price levels and improving the balance-of-payment conditions of the country. Tax authorities usually require either the buyer or the seller to be legally responsible for payment of the tax. Tax incidence is the way in which the burden of a tax is shared among the market participants ("who bears the cost?")
When the government sets a tax, it must decide whether to levy the tax on the producers or the consumers. They also sets taxes on producers, such as the gas tax, which cuts into their profits. The legal incidence of the tax is actually irrelevant when determining who is impacted by the tax. When the government levies a gas tax, the producers will pass some of these costs on as an increased price. Likewise, a tax on consumers will ultimately decrease quantity demanded and reduce producer surplus. This is because the economic tax incidence is based on how the market responds to the price change – not on legal incidence.
The taxes increase prices, making the goods more expensive to purchase for the common individuals. In economic terms, the demand for products will be reduced and the welfare of those companies producing those goods or services will also be affected as their ability to collect revenue would be limited, Wikiversity (2018).
1.2 Statement of the Problem
Achieving price stability in Nigeria has remained one of the key objectives of monetary policy since the 1970s. In spite of this target by monetary authorities, a persistent increase in prices has constituted a major macroeconomic challenge. From a single digit level in 1960s, the inflation rate increased to 16% in 1971 only to jump to an all-high level of 33.9% in 1975.The 1975 high level of inflation has been attributed to the oil boom of the early 1970s and the increases in salaries and wages of both government and private workers (Maku and Adelowokan, 2013). The level of inflation in Nigeria continued to show a random trend. From 20.5% in 1981, it rose to 40.9% in 1984, and fell to 3.2% in 1985. From 1985 it rose again to 49% in 1989, falling to 7.9% in 1990. The upwardtrend continued in 1990, reaching 72.7% in 1995. Ever since 1995, it has continued to show a downward trend. From 29.3% in 1996, it fell to 6.9% in 2000 and slightly rose to 18.8% in 2001. It also slightly fell to 17.8% in 2005 and 5.4% in 2007. It has remained at an annual average of about 11.5% from 2008 to 2012. It fell to 8.5% in 2013 and is 8.05% in 2014, from 2014 to 2015 it rises to 9.01% and rose to 15.7% in 2015. From 2015, it rose again to 16.5% in 2017 and it fell to 12.4% in 2018. CBN (2018).
Rising prices, known as inflation, impact the cost of living, the cost of doing business, borrowing money, mortgages, corporate and government bond yields, and every other facet of the economy. This can lead to increased consumer spending across the economy. Inflation can drive spending in a consumer economy, but it also increases prices potentially reducing the value of that spending.
The resultant effect of a constant rise in the general price level can be seen in the standard of living of citizens, hence workers need more money to afford the same standard of living resulting to persistent demand by worker for wage compensation leading to high cost of production.
1.3 Research Questions
The following research questions will serve as a guide in carrying out this study:
Does custom and excise duties tax have any significant impact on price level in Nigeria?
Does petroleum profit tax have any significant impact on price level in Nigeria?
Does personal income tax have any significant impact on price level in Nigeria?
1.4 Objectives of the Study
The broad objective of this study is to empirically access government taxes on price level in Nigeria.Below are the specific objectives:
Examine the impact of custom and excise duties tax has on price level in Nigeria.
Examine the impact of petroleum profit tax on price level in Nigeria.
Examine the impact of personal income tax on price level in Nigeria.
1.5 Research Hypothesis
The following hypotheses shall be tested in the course of this study:
H01: Custom and excise duties has no significant impact on Consumer price index in Nigeria
H11: Custom and excise duties tax has a significant impact on Consumer price index in Nigeria.
H02: Petroleum profit tax has no significant impact on Consumer price index in Nigeria
H12: Petroleum profit tax has significant impact on Consumer price index in Nigeria.
H03: Personal income tax has no significant impact on Consumer price index in Nigeria
H13: Personal income tax has significant impact on Consumer price index in Nigeria.
1.6 Significance of the Study
The researcher seeks to examine the assessment of government taxes on price level in Nigeria. The study will be of immense importance to the following categories of persons;
Government (policy makers); the government will benefit from the study since it will provide the basis for making policy as well as formulating future policies. It will make the Central Bank of Nigeria to know the appropriate policy measures to take in order to enhance a suitable tax system as this has a multiplier effect on price level in Nigeria. The General Public; this study will be of immense significance to the general public because when the price level is curtailed, it will go a long way in improving the standard of living of the people by increasing their income. Students and researchers; this study is important to students and researchers since it will reveal more details and provide more information for those who are interested in carrying out further research on government taxes on price level in Nigeria. In general, this research work will be useful as its findings will add to the existing body of knowledge.
1.7 Scope and Limitations of the Study
This study seeks to assess government taxes on price level in Nigeria. In order to fully capture the effects in Nigeria, a thorough empirical investigation will be conducted with data covering a period of 30 years i.e. 1987-2017. During the course of its conduct, this study has been limited or hindered from early completion due to factors such as financial constraints, unwillingness of certain institution to provide needed information. Discrepancies between data from different sources. In spite of these limitations, the researcher has made conscious effort to ensure the realization of the research objectives.
1.8 Organization of the Study
This study is divided into five chapters. Chapter one contains the general introduction which provides the background to the study, statement of the problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study and organization of the study. Chapter two examines the works of other economists on the subject matter of taxation and price level and it consists of the definition of concepts, theoretical literature review, empirical literature review, theoretical framework and literature gaps. Chapter three provides the methodology employed. It also contains the specification and estimation of the model. Chapter four carries out the analysis and interpretation of the result as well as the policy implication of the findings. Chapter five contains the summary, conclusions and recommendations.