2.0 BACKGROUND TO THE STUDY
Fiscal policy is the means by which a
government adjusts its levels of spending in order to monitor and
influence a nation's economy. It is the sister strategy to monetary
policy with which a central bank influences a nation's money supply.
These two policies are used in various combinations in an effort to
direct a country's economic goals. Here we take a look at how fiscal
policy works, how it must be monitored and how its implementation may
affect different people in an economy.
Fiscal policy is based on the theories
of British economist John Maynard Keynes. Also known as Keynesian
economics, this theory basically states that governments can influence
macroeconomic productivity levels by increasing or decreasing tax levels
and public spending. This influence, in turn, curbs inflation
(generally considered to be healthy when at a level between 2-3%),
increases employment and maintains a healthy value of money. Ezejelue,
The idea, however, is to find a balance
in exercising these influences. For example, stimulating a stagnant
economy runs the risk of rising inflation. This is because an increase
in the supply of money followed by an increase in consumer demand can
result in a decrease in the value of money - meaning that it will take
more money to buy something that has not changed in value.
Let's say that an economy has slowed
down. Unemployment levels are up, consumer spending is down and
businesses are not making any money. A government thus decides to fuel
the economy's engine by decreasing taxation, giving consumers more
spending money while increasing government spending in the form of
buying services from the market (such as building roads or schools). By
paying for such services, the government creates jobs and wages that are
in turn pumped into the economy. Pumping money into the economy is also
known as "pump priming". In the meantime, overall unemployment levels
will fall. Orojo, (2009).
With more money in the economy and less
taxes to pay, consumer demand for goods and services increases. This in
turn rekindles businesses and turns the cycle around from stagnant to
If, however, there are no reins on this
process, the increase in economic productivity can cross over a very
fine line and lead to too much money in the market. This excess in
supply decreases the value of money, while pushing up prices (because of
the increase in demand for consumer products). Hence, inflation occurs.
For this reason, fine tuning the economy
through fiscal policy alone can be a difficult, if not improbable,
means to reach economic goals. If not closely monitored, the line
between an economy that is productive and one that is infected by
inflation can be easily blurred.
When inflation is too strong, the
economy may need a slow down. In such a situation, a government can use
fiscal policy to increase taxes in order to suck money out of the
economy. Fiscal policy could also dictate a decrease in government
spending and thereby decrease the money in circulation. Of course, the
possible negative effects of such a policy in the long run could be a
sluggish economy and high unemployment levels. Nonetheless, the process
continues as the government uses its fiscal policy to fine tune spending
and taxation levels, with the goal of evening out the business cycles.
Unfortunately, the effects of any fiscal
policy are not the same on everyone. Depending on the political
orientations and goals of the policymakers, a tax cut could affect only
the middle class, which is typically the largest economic group. In
times of economic decline and rising taxation, it is this same group
that may have to pay more taxes than the wealthier upper class.
Similarly, when a government decides to
adjust its spending, its policy may affect only a specific group of
people. A decision to build a new bridge, for example, will give work
and more income to hundreds of construction workers. A decision to spend
money on building a new space shuttle, on the other hand, benefits only
a small, specialized pool of experts, which would not do much to
increase aggregate employment levels.
One of the biggest obstacles facing
policymakers is deciding how much involvement the government should have
in the economy. Indeed, there have been various degrees of interference
by the government over the years. But for the most part, it is accepted
that a degree of government involvement is necessary to sustain a
vibrant economy, on which the economic well being of the population
Taxation in Nigeria has been in
existence as long as there were constituted authorities as in any other
national. Lord Luggard first introduced tax became operative in Nigeria.
The duties of the tax collection
authorities during the period included the giving of information,
supervision of the collection of taxes, accountability of tax collected
and the payment of such taxes into the treasury by the district
council. Tax was designed to generate fund for the government to enable
her perform her socio-economic and political responsibilities to the
On the other hand, fiscal policies,
simply defined, is the use of taxation, public borrowing and public
expenditure by the government for the purpose of increasing per capital
income, to bring about even distribution of income, reduction of
unemployment and the promotion of local technology. The role of fiscal
policy in developing countries is to accelerate the rate of capital
formation for the enhancement of economic development.
Therefore, understanding the role of
fiscal policies implies understanding the economic objectives of
government and how the tool of fiscal policies is being used to achieve
the stated objectives. This is against the background of a fairly well
development financial system. Fiscal policies in Nigeria are one of the
policies used in achieving some of the economic objectives set by the
Therefore, this research work seeks to
know how taxation is being used as a tool of this very important policy
and the impact such has made in Nigeria.
1.1 SIGNIFICANCE AND JUSTIFICATION FOR THE STUDY
The significance of this study stems
from the fact that a healthy economy is beneficial not only to the
government but to the entire citizenry as it affects her standard of
As fiscal policy concerns taxes and
government expenditure. It involves manipulation of the revenue and
expenditure of government with the objectives of influencing
macro-economic variables e.g. the employment level, aggregate demand
level to mention but a few.
Therefore, an examination of the impact
of taxation as a tool of fiscal policy will help in revealing further
procedures to bring about an improved economy, improved standard of
living and maintenance of a healthy balance of payment. Also, the wrong
notion of an average Nigerian as to the purpose of taxation would be
corrected. This study could also serve as a basis for further research
work on the subject being considered.
1.1 STATEMENT OF THE PROBLEM
Fiscal policies being one of the
policies used by the government in order to enhance the economic
development and which indeed has been of great help to the economy of
Nigeria make use of taxation as one of its tools.
But then, how actually is taxation
employed in achievement of these objectives and how effective is its use
in carrying out these objectives.
1.7 OBJECTIVES OF THE STUDY
The basic objective of this project work is to highlight the impact of taxation as a tool of fiscal policies.
To examine the effect of taxation on Nigeria economy.
1.8 SCOPE OF THE STUDY
This project work focuses on the impact of taxation as a tool of fiscal policies in Nigeria.
The impact of this policy varies from
one country to another due to the level of advancement and technological
know-how on their institution that participates on the fiscal policy
such institution like central Banks, Financial Houses and the Stock
Exchange market. It was also impossible to cover all body that
participate in fiscal policy in Nigeria, money market and capital market
are the bodies that are involved, the findings obtained were then
generalize to the Nigeria situation since all the bodies involved
operates with the same legal frame work.
1.9 LIMITATION OF THE STUDY
In all fields of human endeavour,
problems and constraints are inherent and a work of this nature cannot
be excluded. As a result of this, the researcher found it difficult to
visit many financial houses and to collect information within her
locality. Among other constrains are the following:
- Time Frame:
There is a limited time for this project works, hence the researcher
cannot afford to visit various banks, and time did not permit me to
actually have a comprehensive result.
The problem of capital storage also had its effects on the researchers
as a result of this I was not able to travel to other relevant places
other than the place of case study.
1.10 RESEARCH QUESTION
The method of data collection was both
primary and secondary. Primary data collection was done by setting
questionnaires in which respondents were to answer several questions
that were of specific interest to the study. While secondary data were
collected from various writers and authorities in the field.
- How is government expenditure financed?
- How is government administering taxes?
- What are the limitation and problems of fiscal policy in relation to taxation?
1.11 DEFINITION OF TERMS
Fiscal Policy: This is the manipulation of the government budget in order to influence the level of activity in the economy.
Taxation: This is a process or machinery
by which individuals or group of persons are make to contribute in an
agreed quantum and method of development and administration of their
communities or societies.
Tax: Tax may be defined as a compulsory level imposed by government on individuals or legal entities.
Direct Taxes: These are taxes that have
direct bearing on the income of individuals and corporate entities e.g.
pay as you earn (PAYE), Companies Income Tax (C.I.T), Capital Gains Tax
(CGT) and Petroleum Profit Tax (PPT).
Indirect Taxes: These are taxes levied
on the production and consumption of goods and services i.e. they do not
have direct bearing on the income of the Tax Payers e.g Import Duties,
Export Duties, Excise Duties and Value Added Tax.
Incidence of Tax: The incidence of tax means economic unit of person that bears the burden to a tax.
Personal Income Tax:
This is the tax that requires the tax
liabilities of individuals, sole traders, partners in a partnership and
benefit of a Trust or Estate or settlement.
Capital Gain Tax:
This is the tax relief or allowance
granted by the Act in lieu of depreciation as an allowable deduction in
arriving at the chargeable income of an individuals or companies, for
the use of Qualifying Capital Expenditure in a basis period of a trade
Capital Transfer Tax:
This is a tax that is levied or applied to assets transferred by one individual to another.
Petroleum Profit Tax:
This is payable by entities engaging in prospecting for or extraction of and transportation of petroleum, oil or natural gas.
Value Added Tax (VAT):
VAT is a consumption tax payable on the
goods and services consumed by any person whether government agencies,
business organization or individuals.
Discretionary fiscal policy:
Discretionary fiscal policy is the deliberate alteration of the rate of
taxation or government expenditure purposely to adjust the equilibrium
level of Net National Product of full employment and stable price level.