EFFECT OF TAX REFORMS ON ECONOMIC DEVELOPMENT OF NIGERIA

ABSTRACT

The study was designed to evaluate the effect of tax reforms on economic development of Nigeria (1994-2014). The research design adopted in this study was the ex-post facto research design. To achieve the objectives of this study, twelve specific objectives and twelve research questions were raised while six research hypotheses were formulated. The independent variable was measured by petroleum profits tax (PPT), Companies income tax (CIT) and Value added tax (VAT) while economic development was proxy by gross domestic product (GDP) and infrastructural development (ID). The study made use of secondary data which were collected from the Central Bank of Nigeria (CBN) and Federal Inland Revenue Service (FIRS). Data obtained were analysed using Chow test statistical tool with the aid of E-view version 7.0. Findings showed that tax reforms actually impacted positively on the economic development. The findings also showed that tax reforms impacted the economy in both the pre reform periods and post reform periods. Based on the findings, the study recommended that the practice of reforming the Nigerian tax system should be upheld in order to continue to increase the total revenue of Nigeria. The study concluded therefore, that the practice of reforming the Nigerian tax system is inevitable and should be carried out every four years in order to continue to increase the total revenue of Nigeria especially at this period of global drop in the price of oil.

CHAPTER ONE

INTRODUCTION

1. Background to the Study.

Over the years, it has been observed that Nigeria’s fiscal policies are dynamic and her expenditure increases in response to the needs of the society while her revenue does not increase in the same proportion as a result of poor tax administration, (Phillips, 1977).

Tax is a compulsory payment made by the citizens for which there is no immediate commensurate return. It is a burden which every citizen must bear to sustain his government (Nwezeaku, 2005). According to Soyode and Kojola, (2006), “a tax is compulsory exaction of money by a public authority for public purposes”.

Appah (2004) and Oyandonghan (2011) stated that tax is imposed to regulate the production of certain goods and services, protection of infant industries, control of inflation, stimulation of growth and development, income retribulation, and so on. Tosun and Abizadeh (2005), stated that “taxes are used as proxy for fiscal policy. They enumerated five possible mechanisms by which taxes affect economic growth. First, taxes can inhibit investment rate through such taxes like company income tax and personal income tax, 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 expenditure. Fourth, taxes can lead to a flow of resources to other sectors that may have low 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.

A system of taxation will vary from one country to the other because it is a socio/political and economic model representing society’s social, political and economic needs and aspiration at any given time, (Soyode & Kajola, 2006). As a result of this, Nigerian tax system is dynamic and is continually changing to meet the needs of the constituents of the society, hence the need for tax reform in Nigeria. Tax is dynamic, so reforms are necessary to effect the required changes in the national economy, (Ola, 2001). Azubuike (2009) observed that tax reform is an ongoing process with tax policy makers and tax administrators continually adopting the tax systems to reflect changing economic, social and political circumstances in the economy.

Economic development is a qualitative process and refers to structural change of economic and social infrastructure in an economy, which allows an increase in the standard of living in a nation’s population. It is also referred to as the quantitative and qualitative changes in the economy. Such actions can involve multiple areas including development of human capital, critical infrastructure, regional competitiveness, environmental sustainability, social   inclusion,   health,   safety,   literacy   and   other   initiatives.   Economic

development is a normative concept, that is, it applies in the context of people’s sense of morality (right and wrong, good and bad). The definition of economic development given by Michael Todaro is an increase in living standards, improvement in self-esteem made and freedom from oppression as well as a greater choice. The main purpose of economic development is to raise the standard of living and the general well-being of the people in the economy.

Tax reform is operationalized in this study to mean changes put in the Nigerian tax system in order to increase total revenue base of the nation. They are reviews necessary to effect the desired changes in the nation’s economy. The dependence on oil revenue by all tiers of government in Nigeria has made the federal government to reform the existing tax laws. The need to address the problem of over dependence on oil led to several tax policy reforms. The tax policy reviews of 1991 to 1993, 2002 – 2004, 2007, 2011 as well as the yearly amendments given in the annual budgets were geared towards addressing this issue.

The study was designed to investigate the effect of tax reforms on Nigeria’s economic development from (1994 – 2014).

1.2              Statement of Problem

Governments of developing nations according to Falae & Olabiyi (2005); Gbateman (2009) have made several attempts either fiscal or monetary targeted at growing the economy. There are hitherto reforms across sectors basically with the objective of economic growth and overall development but, Ndadaye (2007) through his empirical work showed that the various macroeconomic parameters such as Gross Domestic Product, unemployment level, and so on that best describe the state of the economy are uninterestingly fluctuating and at best declining.

The importance of macroeconomic indicators such as Gross Domestic Product (GDP), infrastructural development, education, health sector development, youth and social development, transportation sector development and so on to a developing nation like ours cannot be over emphasized, as their deficit are some of the binding constraints to growth in the economy.

It is an established fact from Central Bank of Nigerian (CBN) Statistical Bulletins and Federal Inland Revenue Service records that tax revenue increases annually which may be due to various tax reforms and may not have reflected remarkably in the economy. After the broadening of the Nigerian tax system and the total revenue base of the nation, the economy did not reflect significantly the increase in total tax revenue as a result of various tax reforms. Omesi (2007) observed that “the role of taxation in promoting economic activities and development in Nigeria is not felt primarily because of poor administration as a result, the economy has

remained in deep slumber”. Ogbonna (2009) notes that the administration of petroleum profits tax in Nigeria has mainly been focused on revenue generation to the detriment of stimulating economic growth and development. Osuala & Jones (2014) submit that, there have been wastages, some spending has been politicized and there has been high level of misappropriation, mismanagement and corruption. Hence one is poised to ascertain whether the increase in the total revenue base of the nation has really effected the economic development of Nigeria. Tax has been mentioned in the works of Olukoshi (2005) and Olabiyi (2005) but the ability of tax to stimulate economic growth results from the deliberately designed regimes that encourage compliance by all who should pay.

However, many studies have been carried out on taxation and tax reforms but most of them were carried out overseas such as Bonu & Motau (2009), Roshazia (2011), lee &Gordon (2005), Ferede &Dahly (2012) and Wang (2013) and their results may not apply generally to other countries especially Nigeria due to several peculiarities of our local environment. Most the tax reform studies that relate to Nigeria have to do with economic growth, revenue generation and investment as evident in the studies of Ogbonna & Appah (2012), Oriakhi &Ahuru (2014) and Nwokoye & Rolle (2015), undermining economic development. A situation where results of cross country researches in developed economies are generalized to developing countries often induce knowledge gap. Therefore, this study seeks to close this gap in Nigeria by empirically investigating the effect of tax reforms on the economic development of Nigeria.

To the best of our knowledge, the latest of these previous studies on tax reforms and economic growth is Ogbonna & Appah (2012) who used time series annual data for their analysis which covered the period from 1994-2009, which in our thinking is not a recent study. Furthermore, most of these studies on taxation and tax reforms that relate to Nigeria used only gross domestic product (GDP) to proxy economic growth, but in this study we used gross domestic product (GDP) and infrastructural development to proxy economic development.

1.3              Objectives of the Study

The broad objective of this study was to investigate the effect of tax reforms on Nigeria’s economic development. The specific objectives include to:

1. Investigate whether there is any significant relationship between petroleum profits tax and Gross Domestic product (GDP) in the pre-reform period.
   1. Investigate whether there is any significant relationship between petroleum profits tax and Gross Domestic product in the post- reform period.
   1. Investigate whether there is any significant relationship between petroleum profits tax and infrastructural development in the pre-reform period.
   1. Investigate whether there is any significant relationship between petroleum profits tax and infrastructural development in the post- reform period.

• Determine the impact of companies income tax on Gross Domestic product in the pre-reform period.
  • Determine the impact of companies income tax on Gross Domestic product in the post-reform period.
  • Determine the impact of companies income tax on infrastructural development in the pre-reform period.
  • Determine the impact of companies income tax on infrastructural development in the post-reform period.
  • Examine the effect of value added tax on Gross domestic product in the pre- reform period.
  • Examine the effect of value added tax on Gross Domestic product in the post- reform period.
  • Examine the effect of value added tax on infrastructural development in the pre-reform period.
  • Examine the effect of value added tax on infrastructural development in the post-reform period.

1.4              Research Questions

In view of the objectives of this study and statement of problem, an attempt was made to address the following research questions:

1. What is the relationship between petroleum profits tax and Gross Domestic product in the pre-reform period?

• What is the relationship between petroleum profits tax and Gross Domestic Product in the post-reform period?
  • What is the relationship between petroleum profits tax and infrastructural development in the pre-reform period?
  • What is the relationship between petroleum profits tax and infrastructural development in the post-reform period?
  • What is the relationship between companies income tax and Gross Domestic Product in the pre-reform period?
  • What is the relationship between companies’ income tax and Gross Domestic Product in the post-reform period?
  • What is the relationship between companies’ income tax and infrastructural development in the pre-reform period?
  • What is the relationship between companies’ income tax and infrastructural development in the post-reform period?
  • What is relationship between value added tax and Gross Domestic Product in the pre-reform period?
  • What is the relationship between value added tax and Gross Domestic Product in the post-reform period?
  • What is the relationship between value added tax and infrastructural development in the pre-reform period?
  • What is the relationship between value added tax and infrastructural

development in the post-reform period?

1.5              Research Hypotheses

The following hypotheses were formulated for the study.

1. There is no significant relationship between petroleum profits tax and Gross Domestic Product in both the pre-reform and post reform periods.
   1. There is no significant relationship between petroleum profits tax and infrastructural development in both the pre reform and post- reform periods.
   1. There is no significant relationship between companies income tax and Gross Domestic Product in both the pre-reform and post-reform periods.
   1. There is no significant relationship between companies tax and infrastructural development in both the pre-reform and post-reform periods.
   1. There is no significant relationship between value added tax and Gross Domestic Product in both the pre-reform and post-reform periods.
   1. There    is    no    significant    relationship   between    value    added    tax    and infrastructural development in both the pre-reform and post-reform periods.

1.6              Significance of the Study

One basic importance of this study is that if filled the gap in literature by providing empirical evidence on the effect of tax reforms on the economic development of Nigeria. This study is intended to inform and educate adequately the beneficiaries of this study. These beneficiaries include researchers and, students of business and economics, the government and the general public.

The study will benefit students and researchers because it will serve as a reference point to them. It will also be useful to those who will want to carry out further study on the subject matter. More so, researchers and the students contemplating tax planning reforms will find this study valuable as it will provide basic background for proper understanding.

This study will also benefit the government (policy makers) in the area of tax planning or formulation. This is because the revelations from this study will help them in making conscious efforts in determining the amount of tax revenue that will be payable by taxpayers at a future date.

Finally on the part of the general public, this study will help individual and corporate tax payers to arrange their financial affairs in such a way as to avoid as far as possible the payment of tax without breaching the tax laws of this nation.

1.7              Scope of the Study

This study was restricted to Tax reforms and economic development in Nigeria from 1994-2014. In order to achieve the objective of the study, the researcher used petroleum profits tax, companies’ income tax and value added tax to measure tax reforms while gross domestic product and the infrastructural development were used to proxy economic development.

1.8              Limitations of the Study

The major limitation of this study was the general limitation associated with research in Nigeria. It was very difficult to get the required secondary data from Central Bank of Nigeria (CBN), and Federal Inland Revenue Service (FIRS). But we were able to overcome by spending some amount of money to get the required information electronically.

1.9              Operational Definition of Terms

1. Tax Reforms: Tax reform means changes that are put in the Nigeria tax system in order to increase total revenue base of the nation. They are reviews necessary to effect the desired changes in the economy.
2. Economic Development: This means economic growth as well as the changes that take place in an economy which raise the standard of living and the general well-being of the people.
3. Gross Domestic Product (GDP): This is the market value of all final goods and services produced within a country in a given period without regard to the producers. Gross Domestic product (GDP) is one of the primary indicators to measure the economy of a country.
4. Infrastructural Development: These are basic structures, services and facilities needed for an economy to function well. They include technical structures that support a nation, such as roads, bridges, water management, solid waste management, and telecommunications. Others are energy, transportation,

governance and other public utilities.

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