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INVESTMENT AND TAXATION IN PERIOD OF ECONOMIC CRISIS

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

Investment spending makes direct contribution to economic activity because investment is the most volatile component of GDP. Investment plays vital role in the long run and short run growth. It links the present with the future. Investment is the part of overall financial planning. If we have some savings, we will try to invest to maximise return. Steven Haggblade (2007) says investment in agriculture is necessary for rapid growth and poverty reduction. However, major keys are necessary for agricultural growth like technological research etc. In Africa 75% of the labor force is in agriculture sector.

Economic growth and development depends essentially on a country’s ability to invest and make efficient and productive use of its resources. In fact, there cannot be growth without investment of sufficient amount and quality. Hence, Bayraktar (2003) noted that investment is the result and cause of economic growth. The role of the private sector is important in both contribution to quantity of gross domestic investment and its ability to allocate and employ resources efficiently. Private sector investment has been the engine of employment and income creation, provision of infrastructure as well as social services. The international organisations have equally acknowledged the role of the private sector in enhancing economic growth of developing countries. Notably, European Commission (EU) (2014) said that the private sector has the potential for generating inclusive and sustainable growth in developing countries. International Finance Corporations (IFC) (2011) equally asserted that the private sector is a critical component in addressing the development challenges of the developing countries through its contributions in many areas, including growth, employment, poverty reduction, service delivery, food security, climate change mitigation, environmental sustainability, and contributions to taxes. This means that the presence of the private sector can at least spur economic growth and poverty reduction.

In Nigeria, the oil boom of the1970s among other factors gave impetus to a public sector-led government strategy. Public sector dominance was also prevalent in order to give government an increasing measure of control over its own resources, the dwindling revenue of government as a result of the economic crisis of the 1980s coupled with the dissatisfaction with the performance of the public compelled Nigeria. However, the structural adjustment programme (SAP) was put in place in 1986, with the objective among others of facilitating the development of the private sector, whose role could determine the level of economic growth of the Nigerian economy. The SAP and other policies engendered the much needed private investments.

Between 1986 - 2014, private investment in Nigeria has experienced an upward trend. This is a reflection of the role played by the market forces. Continued efforts aimed at reforming and privatizing the public sector, removing price distortions, liberalizing foreign trade and payments, opening the market up to foreign direct and portfolio investments, and strengthening the capacity of the financial system to mobilize domestic savings and allocate financial resources have all contributed to the share of private investment in developing countries (Bayraktar, 2003). However, Nigeria as one of the developing countries still has room to improve her investment performance. This would be better done when the effect of investment on economic growth of the country is understood.

The term, investment, according to Ibenta (2005), may be defined as accumulation and commitment of fund in financial and real assets with the objective of obtaining income over time. He further posits that it is a commitment of resources made in the hope of realizing benefits that are expected to occur over a reasonable long period of time in the future. Investment can also be referred to as the production of capital goods (Heim, 2008).Investment thus includes new plant and equipment, construction of public works like roads, dams, buildings, etc. Investment can be defined as the outlay of money for future use (Agu, 2015)

On the bases of the above definitions, investment involves an outlay of fund with the expectation of future income. Investment can be divided into autonomous and induced investment. Autonomous investment is service based and not induced by demand as it is not influenced by immediate returns while induced investment is largely profit motivated. Autonomous investment is in the purview of the public sector and therefore propelled by the government. Thus investment is made by the public sector and the private sector. All government capital expenditures form public investment. Private sector investment include all investment made by the private sector, these include domestic investment, and foreign private investment.

Economic growth is viewed as an increase in the net national product in a given period of time (Dewett, 2005). Todaro and Smith (2006) defined economic growth as a steady process by which the productive capacity of the economy is increased over time to bring about rising levels of national output and income. Jhingan (2006) viewed economic growth as an increase in output. He explained further that it is related to a quantitative sustained increase in the country’s per capita income or output accompanied by expansion in its labour force, consumption, capital and volume of trade.

Azubike (2009) is of the view that 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 if lends itself to creating an environment conducive to the promotion of economic growth. Nzontta (2007) on the other hand, argues that taxes constitute key sources of revenue to the federation account shared by the federal, state and local governments.

Appah, et al (2004). 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 also Anyanwu (1996) and Anyanfo (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.

On the other hand, Tosuu and Abizadeh (2005) acknowledge that 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 research and development expenditure. 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.

Tax is a major sources of government revenue all over the world. Government use tax proceeds to render their traditional functions, such as provisions of public goods, maintenance of law and order, defense against external aggression, regulation of trade and business to ensure social and economic maintenance.

1.2       Statement of the Problem

The fluctuations in private sector investment in Nigeria have been a serious concern. In spite of the measures adopted by the Nigerian government, private sector investment, over the years remained low which tend to impede economic growth in the country. It has however been found that a major problem is that the government is so much concerned about policies to boost private investment without much knowledge on the factors that could influenced the effect of the private investment on economic growth in Nigeria. Private investors will flourish only in a supportive environment of cost reductions, with reasonable level of economic stability. Among other things, Ibenta (2005) noted that foreign investors are exposed to currency risk and it is this risk that is making many foreign investors to divest from Nigeria economic scene since the introduction of the foreign exchange market.

According to the classical economist the only objective of taxation was to raise government revenue. But with the change in circumstances and ideologies, the aim of taxes has also been changed. These days apart from the objective of raising the public revenue, taxes level affect consumption, production and distribution with a view to ensuring the social welfare through the economic development of a country, tax can be used as an important tool in the following manner: optimum allocation of available resources, raising government revenue, encouraging savings and investment, acceleration of economic growth, price stability, control mechanism etc.

1.3       Objectives of the Study

This study sought to know the impact of investment and taxation in the period of economic crisis in Nigeria. Specifically, the study sought to;

i.   investigate the contributions of tax to real gross domestic product (RGDP) in Nigeria.

ii.   identify the roles of investment and taxation in the period of economic crisis in Nigeria.

iii.   examine the relationship between investment, taxation and economic growth in Nigeria.

1.4       Research Questions

i.   What are the contributions of taxation to real gross domestic product (RGDP) in Nigeria?

ii.   What are the roles of investment and taxation in the period of economic crisis in Nigeria?

iii.   What is the relationship between investment, taxation and economic growth in Nigeria?

1.5       Research Hypotheses

Ho1: Taxation does not contribute to real gross domestic product (RGDP) in Nigeria.

Ho2: There is no relationship between investment, taxation and economic growth in Nigeria.

1.6       Significance of the Study

This study will be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.

1.7       Scope/Limitations of the Study

This study is on investment and taxation in the period of economic crises in Nigeria.

Limitations of study

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8       Definition of Terms

Investment: An investment is an asset or item acquired with the goal of generating income or appreciation.

Taxation: Taxation is a term for when a taxing authority, usually a government, levies or imposes a tax.

Economic Crisis: A situation in which the economy of a country experiences a sudden downturn brought on by a financial crisis.

References

Agu, O. C. (2015). Determinants of private investment in Nigeria an econometric analysis. International Journal of Economics, Commerce and Management, III (4).

Anyanwu, J. Anyango O. (1996). Personal Income tax and economic growth. Joeanee publishers. Onitsha.

Bayraktar, B. (2003). The role of private sector investment in the economic performance of IOC member countries. Journal of Economic Cooperation, 24(1), 63 -110. 

Dewett, K. K. (2005). Modern economic theory. New Delhi: ShyamLal Charitable Trust.

European Commission (2014). A stronger role of the private sector in achieving inclusive and sustainable growth in developing countries.Communication from the commission to the European Parliament, the council, the European economic and social committee and the committee of the region. Brussels, 13.5.2014 COM (2014) 263 final. 

Heim, J. J. (2008). The Investment function: determinants of demand for investment.Working Papers in Economics.

Ibenta, S. O. N. (2005). Investment analysis and financial management strategy. Enugu: Institute for Development Studies.

International Finance Corporations (2011). Chapter 1: Role of the private sector in development. International Finance Institutions and Development through the Private Sector. A joint report of 31 multilateral and bilateral development finance institutions. 

Nzontta, O. (2007). Individual tax payers attitude and companies behavior in Nigeria Novel publishers: Onitsha.

Todaro, M. P. & Smith, S. C. (2006). Economic development. 9th Edition, England: Pearson Education Ltd.

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