CHAPTER ONE
INTRODUCTION
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. According to Azubike (2009), tax is a major player in every society of the world. The tax system is an opportunity for government to collect additional revenue needed in discharging its pressing obligations. A tax system offers itself as one of the most effective means of mobilizing a nation’s internal resources and it lends itself to creating an environment conducive to the promotion of economic growth. Nzotta (2007) argues that taxes constitute key sources of revenue to the federation account shared by the federal, state and local governments. Odusola (2006) stated that in Nigeria, the government’s fiscal power is divided into three-tiered tax structure between the federal, state and local governments, each of which has different tax jurisdictions. The system is lopsided and dominated by oil revenue. He further argues that over the past two decades oil revenue has accounted for at least 70% of the revenue, thus indicating that traditional tax revenue has never assumed a strong role in the country’s management of fiscal policy. Instead of transforming the existing revenue base, fiscal management has merely transited from one primary product-based revenue to another, making the economy susceptible to fluctuations of the international market. It is on the account of this lopsided revenue structure that tax experts and scholars stated in clear terms that the Nigerian tax system need to be reformed to achieve long term economic growth and development. Tax is a compulsory levy imposed on a subject or upon his property by the government to provide security, social amenities and create conditions for the economic well-being of the society (Appah, 2004; Appah and Oyandonghan, 2011). 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 and curb inflation, reduce income inequalities etc. Tosun and Abizadeh (2005) say taxes are used as proxy for fiscal policy. They outlined five possible mechanisms by which taxes can affect economic growth. First, taxes can inhibit investment rate through such taxes as corporate and personal income, capital gain taxes. Second, taxes can slow down growth in labour supply by disposing labour leisure choice in favour of leisure. Third, tax policy can affect productivity growth through its discouraging effect on research and development expenditures. Fourth, 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 high tax burdens even though they have high social productivity. Engen and Skinner (1996) suggest that a number of recent theoretical studies have used endogenous growth models to stimulate the effects of a fundamental tax reform on economic growth. All these studies conclude that reducing the distorting effects of the current tax structure would permanently increase growth. Musgrave and Musgrave (2004) stated that the economic effects of tax include micro effects on the distribution of income and efficiency of resource use as well as macro effect on the level of capacity output, employment, prices, and growth. However, the use of tax as an instrument of fiscal policy cannot be achieved because of dwindling level of revenue generated as a result of ineffectiveness of government officials. Kiabel and Nwokah (2009) argue that the increasing cost of running government coupled with the dwindling revenue has left all tiers of government in Nigeria with formulating strategies to improve the revenue base. Tax is dynamic, so reforms are necessary to effect the required changes in the national economy (Ola, 2001). Azubike (2009) noted that tax reform is an ongoing process with tax policy makers and tax administrators cont;inually adopting the tax systems to reflect changing economic, social and political circumstances in the economy. Therefore, the objective of this study is to examine the impact of tax reforms on the economic growth of Nigeria (2005-2014).
1.2 Statement of the Problem
Taxation is a veritable source of government revenue. However, it is still debatable in the literature the optimal taxation to be imposed to enhance development without unjustly inflicting welfare cost. Over 100 attempts at tax reforms in developing countries have been recorded since 1945. Tax reform has turned from a desired or preferred task to being a necessary one. One of the victims of numerous economic crises that have plagued developing countries since the first oil shock in 1973 has been the tax system. Consequently, tax collections have been hit hard resulting in large fiscal deficits. Several studies on tax literature, both theoretical and empirical, have based their research works on tax revenue and economic growth (Avila and Strauch, 2008; Chin and Lai, 2009; Song, 2002; Chen, 2007; Folster and Henneksen, 2001; Weller, 2007 and Arnold, 2011). Nevertheless, only a limited number of studies explicitly recognize tax reforms or different changes in the nature and characteristics of tax systems of recipient countries and, hence, the ultimate effect of tax revenue on economic growth depends on how the public respond to changes in the tax systems. Over the years, revenue derived from taxes has been very low and no physical development actually took place, hence the impact on the poor is not being felt. (Weller, 2007) Inadequate tax personnel, fraudulent activities of tax collectors and lack of understanding of the importance to pay tax by tax payers are some of the problems of this study. The issues mentioned above will therefore constitute the problem to be addressed by this research work.