CHAPTER ONE
Background of the study
Responsible governments all over the world, be it at the Federal,
State or Local government level, are concerned with the provision of
social goods and services for their citizens.
They are responsible for the maintenance of laws and orders within
their nations and also for the protection of their territorial integrity
against any external aggression.
In carrying out these social responsibilities, a huge amount of money
is needed. One of the major sources of fund available to government to
execute its numerous programs is imposition of taxes.
Governments at various levels enact laws to impose taxes and to
enforce their payment so that enough revenue can be generated to defray
their expenditure.
However, despite many stringent penalties and fines in the tax laws,
it appears that a lot of individuals and corporate entities still do not
see the reason why they should pay correct taxes or pay taxes at all.
Hence, they try in some cases to avoid payment of taxes and in
other extreme cases, evade taxes (Bukar, 2004; Omoigui, 2004).
One of the remarkable trends in contemporary history has been the
importance in the growth of economic life. Any serious discussion of
government is bound to raise the question about revenue and expenditure.
Through appropriate tax, expenditure and regulatory policies,
government seek to attain certain objectives. The achievement of
macroeconomic goals namely, full employment, stability of price level,
high and sustainable economic growth and external balance, from time
immemorial, has been a policy priority of every economy whether
developed or developing, given the susceptibility of macroeconomic
variables to fluctuations in the economy. The realization of these goals
is not automatic but requires policy guidance. The policy guidance
represents the objectives of economic policy (Olawunmi & Ayinla
2007). One of the regulatory policies used by government in achieving
its objectives to bring about economic growth is fiscal policy. Fiscal
policy is an outgrowth of Keynesian economics; its logical analysis
suggests that it offers a sure-fire means of stabilizing the economy.
The goal of modern fiscal policy is to achieve economic efficiency and
stability. In a modern economy, no sphere of economic life is untouched
by the government. Two major instruments or tools are used by government
to influence private economic activity; taxes and expenditure. The
effect of taxation covers all the changes in the economy resulting from
the imposition of a tax system. One may say that without taxation, a
market economy would not attain certain production, consumption,
investment, employment and other similar patterns. The presence of
taxation modifies these patterns for good or for bad and such
modifications may collectively be called the effect of taxation.
Expenditure on the other hand, was meant to directly add to the
effective demand in the market and generate a high-value multiplier by
distributing income to those sections of the population which had a high
marginal propensity to consume. Government has the responsibility of
preventing calamitous business depression by the proper use of fiscal
and monetary policy, as well as close regulation of the financial
system. In addition, government tries to smooth out the ups and downs of
the business cycles, in order to avoid either large scale unemployment
at the bottom of the cycle or raging price inflation at the top of the
cycle. More recently, government has become concerned with financing
economic policies which boost long-term economic growth. Because of the
increasing importance of government conduct in a nations development
process, fiscal policy handles the issues of resource allocation and is
preoccupied with the problems of economic growth, economic stability,
employment, prices, income distribution and social welfare. Fiscal
policy has developed an array of instruments to handle different facets
of the economics of public sector. But by the very existence of
multiplicity of goals, it is often bedevilled by inherent conflict of
objectives; between long-term growth and short-term stability, between
social welfare and economic growth, and between income redistribution
and production incentives (Samuelson & Nordhaus 2005). One of the
most important objectives of macroeconomic policy in recent years has
been the rapid economic growth of an economy. Economic growth is defined
as “the process whereby the real per capita income of a country
increases over a long period of time”. Economic growth is measured by
the increase in the amount of goods and services produced in a country. A
growing economy produces more goods and services in each successive
time period. Thus growth occurs when an economy?s productive capacity
increases which, in turn, is used to produce more goods and services. In
its wider aspect, economic growth implies raising the standard of
living of the people and reducing inequality of income distribution
(Jhingan, 2003). The relationship between government expenditure and
economic growth has continued to generate series of debate among
scholars. Some scholars argued that increase in government
socio-economic and physical infrastructure encourages economic growth.
For example, government expenditure on health and education raises the
productivity of labour and increase growth of national output. Similarly
expenditure on infrastructure such as roads, communications, power,
etc., reduces production costs, increases private sector investment and
profitability of firms, thus, fostering economic growth. Some scholars
supporting this view concluded that expansion of government expenditure
contributes positively to economic growth. The intent of fiscal policy
is essentially to stimulate economic and social development by pursuing a
policy stance that ensures a sense of balance between taxation,
expenditure and borrowing that is consistent with
1.2 STATEMENT OF PROBLEM
Tax is a major source of government fund, and this fund is the bed
rock of our economic development if effectively managed. This therefor
makes tax collection and administration a top priority to government.
There is high incidence of tax evasion and avoidance by tax payers. This
may affect the amount of revenue collectible by the government for the
running of administration.
Furthermore, it is hoped that people were wrongly assessed and the assessment sometimes result to regressive taxation
1.3 OBJECTIVE OF THE STUDY
The main objective of this studies is to ascertain the impact of
taxation as a stimulus for economic growth, however the study
specifically seek to:
i) To evaluate the benefit of taxation in the economy
ii) To ascertain how taxation stimulate economic growth and development
iii) To evaluate the tax administration system
iv) To explore avenues of ensuring effective tax compliance.
1.4 RESEARCH QUESTION
In other to achieve the objective of the study and proffering
solution to problem of study, the following research question were
formulated:
i) What are the challenges of taxation?
ii) What are the method which can be adopted to ensure tax compliance?
iii) How has taxation help in stimulating economic growth?
iv) What measures can we adopt to make sure that all tax payers are entrapped in the tax net?
1.5 SIGNIFICANCE OF THE STUDIES
It is conceived that at the completion of the study its findings would be beneficial to:
i) The tax authority who has the responsibility of tax collection
ii) The government who is responsible for utilization of the fund
iii) The tax payers who bear the tax burden
iv) The researchers, academia and the general public.
1.6 SCOPE OF THE STUDY
The studies covers the impact of tax as a stimulus for growth and
development in in Nigeria. However, the study has some limitation, which
are:
a) AVAILABILITY OF RESEARCH MATERIAL: The research material
available to the researcher is insufficient, thereby limiting the
study
b) TIME: The time frame allocated to the study does not enhance
wider coverage as the researcher have to combine other academic
activities and examinations with the study.
c) Organizational privacy: Limited Access to the selected
auditing firm makes it difficult to get all the necessary and required
information concerning the activities.
1.7 DEFINATION OF TERMS
Tax
A tax (from the Latin taxo) is a financial charge or other levy imposed upon a taxpayer (an individual or legal entity) by a stateor
the functional equivalent of a state to fund various public
expenditures. A failure to pay, or evasion of or resistance to taxation,
is usually punishable by law. Taxes consist of direct or indirect taxes and
may be paid in money or as its labour equivalent. Some countries impose
almost no taxation at all, or a very low tax rate for a certain area of
taxation.
ECONOMIC GROWTH
Economic Growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP, usually in per capita terms.[1]
Growth is usually calculated in real terms i.e., inflation-adjusted terms to eliminate the distorting effect of inflation on the price of goods produced. Measurement of economic growth uses national income accounting.[2] Since
economic growth is measured as the annual percent change of gross
domestic product (GDP), it has all the advantages and drawbacks of that
measure.
The "rate of economic growth" refers to the geometric annual rate of
growth in GDP between the first and the last year over a period of time.
Implicitly, this growth rate is the trend in the average level of GDP
over the period, which implicitly ignores the fluctuations in the GDP
around this trend.
An increase in economic growth caused by more efficient use of inputs (such as labor productivity, physical capital,
energy or materials) is referred to as intensive growth. GDP growth
caused only by increases in the amount of inputs available for use
(increased population, new territory) is called extensive growth.
FISCAL POLICY
Fiscal policy refers to that part of government policy concerning the
raising of revenue through taxation and other sources and deciding on
the level and pattern of expenditure for the purpose of influencing
economic activities. It is a policy under which the government uses its
expenditure and revenue programs to produce desirable effects and avoid
undesirable effects on national income, production and employment. The
policy can also be seen as a deliberate spending and taxation actions
undertaken by government in order to achieve price stability, to dampen
the swings of business cycles, and to bring about nation?s output and
employment to desired levels (Jhingan, 2003).