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THE IMPACT OF FEDERALLY COLLECTED TAXES ON ECONOMIC GROWTH

CHAPTER ONE

INTRODUCTION

1.1  Background of the Study

Economic growth can be achieved by four important determinants namely: human resources, national resources, capital formation and technological development (Dwivedi, 2004). Efficient use of these resources will help to speed up the political, economic and social activities in the country. The revenue needed is not always available, and so a potent and certain source of revenue from a well-structured tax system will obviously create the required revenue for realising the set objectives. The need for its payment was emphasized by Jesus in “Mathew 22 vs 17-21” when the Pharisees asked Him whether it was lawful to pay taxes or not. His reply “render therefore unto Caesar the things which are Caesar’s and to God the things that are to God’s” suggests that tax payments should be compulsory, non-negotiable, binding and obligatory on all citizens of a country regardless of religion and social status. What then is tax?

Tax is a compulsory charge imposed by a public authority on the income and properties of individuals and companies as stipulated by the government Decree, Acts or Laws irrespective of the exact amount of service of the payer in return (Omotoso, 2001). Tax payment is not for the direct exchange of good and/or services but a transfer of resources and income from the private sector to the public sector in order to achieve some of the nation‟s economic and social goals (Okpe, 2000). Such goals may be in for of high level of employment, stable prices, rapid growth of gross national product, favourable balance of payments position, promotion of a free market economy, satisfaction of collective demands, equitable income redistribution, promotion of infant industries, the encouragement of priority sector, encouragement of balance population development and promotion of labour and capital development (Onoh, 2013).

The level of tax to be paid by the citizens and the items to be taxed is determined by the government. Such decision according to Ngerebo and Masa (2012) is based on the cost of the projects or programmes government intends to execute, which is the principal determinant of the budget -size. Government also judges the basis, rates, the category of citizens, and the time period to pay the tax, on the direction of the economy desired and government’s perception of the standard of living of the citizens. Taxes therefore affect the expenditure size of government, the productivity and level of activities of businesses, the consumption pattern of individuals, the propensity to save and invest and the growth path of the economy. The extent to which the impact of taxation is felt is dependent on the level of compliance with tax payments which is further dependent on the level of tax literacy.

In Nigeria the incidence of tax evasion and avoidance by tax payers is high, leading to low level of government revenue which further reduces the level of government expenditure, culminating into a reduction in the income savings and expenditure of households and firms, leading to low level of economic activities and economic growth. This study is therefore intended to examine the impact of taxation on the growth of the Nigerian economy amidst high level of evasion and avoidance.

Taxation is known globally as a very strong and powerful weapon of fiscal policy and as such government of nations put structures in place to maximize revenue accruable from its various tax components. The structure of tax should be such that it is broader enough to generate revenue to finance government expenditure and various other programmes of government. The growth and development of any nation is predicated upon the availability of funds as well as other human and material resources. Tax revenue mobilization as a source of financing developmental activities in Nigeria economies has been a difficult issue primarily because of various forms of resistance, such as evasion, avoidance corrupt practices attending to it. These activities are considered as sabotaging the economy and are readily presented as reasons for the underdevelopment of the country (Afuberoh and Okoye, 2014).  Government  collects  taxes  in  order  to  provide  an efficient  and  steadily  expanding  non-revenue  yielding services,   such   as   infrastructure,   education,   health, communications  system,  employment  opportunities  and essential public services (such as the maintenance of laws and  order)  irrespective  of  the  prevailing  ideology or  the political system of a particular nation (Worlu and Emeka, 2012).

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