GOVERNMENT TAXES AND ECONOMIC GROWTH

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Tax is described as a compulsory fee or levy imposed on the goods, services and incomes o find individuals and organizations. Taxes levied on incomes are widely regarded as direct taxes while those taxes imposed on goods are services are known as indirect taxes. Some of the reasons for the introduction and imposition of taxes is to generate revenue by the government for the purpose of financing certain projects which will ensure reliable and functional economic growth and development. Through the imposition of taxes, there will be redistribution of incomes and provision of essential services to the citizens there by promoting standard of living. A country‘s tax system is a major determinant of other macroeconomic indices, specifically, for both developed and developing economies. There exists a relationship between tax structure and the level of economic growth and development. Tax policy objectives vary with the stages of development. Similarly, the economic criteria by which a tax structure is to be judged and the relative importance of each tax source vary over time Vincent, (2001). For example, during the colonial era and immediately after the Nigeria‘s political independence in 1960, the sole objective of tax revenue was to raise revenue. Later on, emphasis shifted to the infant industries protection and income redistribution objectives .Tax revenue is a powerful tool of economic reform and a major player in every economy of the world. It is never static but dynamic and should reflect current realities prevailing in the economy. The tax system is an opportunity for government to collect additional revenue besides other sources of income, which is needed in discharging its pressing obligations. A good system of tax offers itself as one of the most effective means of mobilizing a nation's internal resources and it lends itself to creating enabling and conducive environment to the promotion of economic growth and development Ogbonna, (2010).Furthermore, the rudimentary nature of the economy precludes retail form of taxes. At this stage also, taxes are difficult to collect because of the lack of skills and facilities for tax administration Kiabel, (2009). Given this, a complicated tax structure is not feasible and the amount of revenue from income tax will depend on taxpayers’ compliance and the efficiency of the tax collectors. The Nigerian Tax System has undergone significant changes in recent times. The Tax Laws are being reviewed with the aim of repelling obsolete provisions and simplifying the main ones. Under current Nigerian law, tax revenue is enforced by the 3 tiers of Government, which are Federal, State, and Local Governments with each having its sphere clearly spelt out in the Taxes and Levies Act, 1998. The whole essence of tax revenue is to generate revenue to advance the welfare of the people of a nation with focus on promoting economic growth and development of a country through the provision of basic amenities for improved public services via proper administrative system, and structures. Tax revenue plays a crucial role in promoting economic activities, growth and development. Through tax revenue, government ensures that resources are channeled towards important projects in the society, while giving succor to the weak. The role of tax revenue in promoting economic activity and growth may not be felt if poorly administered. This calls for a need for proper examination of the relationship between revenue generated from taxes and the economy, to enable proper policy formulation and strategy towards its efficiency. According to Olashore, (1999), the Nigerian economy has remained in a deep slumber with macroeconomic indicators reflecting an economy in serious need of rejuvenation, revival and indeed radical reform. Also in the view of Oni, (1998), tax administration needs to be revamped and refunds of taxes as well as duty drawbacks administration are inefficient. In his discussion of the relationship between tax structure and economic development, Vincent, (2001) divided the period of economic development into two, the early period when an economy is relatively underdeveloped and the later period when the economy is developed. During the early period, there is limited scope for the use of direct taxes because the majority of the populace resides in the rural areas and is engaged in subsistence agriculture. Because their incomes are difficult to estimate, tax assessment at this stage is based on presumptions prone to wide margins of error. A critical challenge before tax administration in the 21st century Nigeria is to advance the frontiers of professionalism, accountability and awareness of the general public on the imperatives and benefits of tax revenue in our personal and business lives which include: promoting economic activity; facilitating savings and investment; and generating strategic competitive advantage. If tax administration does not for any reason meet the above challenges, then there is a desperate need for reform in the area of the tax regime, and in the administration of taxes. Tax revenue mobilization as a source for financing development activities in Nigeria has been a difficult issue primarily because of various forms of resistance, such as evasion, avoidance and corrupt practices attending to it.