THE IMPACT OF TAXATION AS A TOOL OF FISCAL POLICY IN NIGERIA
This research work was undertaken to examine the impact of taxation as a tool of fiscal policy. The study is aimed at putting together those factors that constitute those variables which the government uses to manipulate the economy. The source of data to this research work are both from gathered from Secondary data, which is from various text books, internet materials and primary data through the use of questionnaires that was filled by various respondent. The result of the research shows that in this country, a great proportion of government revenue, which should have been proportion of government revenue, which should have been generated from taxation, are lost through an ineffective system of tax administration. Hence, making it difficult for taxation to be used as a tool of fiscal policies. Effective tax administration should be put in place to ensure that everybody is brought to the tax net. They should be transparency in the part of the government in providing the social amenities to the populate to encourage people to pay their tax.
TABLE OF CONTENTS
TITLE PAGE I
TABLE OF CONTENTS VI-VII
CHAPTER ONE: INTRODUCTION
1.0 BACKGROUND TO THE STUDY 1
1.1 SIGNIFICANCE AND JUSTIFICATION FOR THE STUDY 4
1.1 STATEMENT OF THE PROBLEM 5
1.2 OBJECTIVES OF THE STUDY 5
1.3 SCOPE OF THE STUDY 5
1.4 LIMITATION OF THE STUDY 5
1.5 RESEARCH QUESTION 6
1.6 DEFINITION OF TERMS 6
CHAPTER TWO: LITERATURE REVIEW
2.1. HISTORY OF TAXATION 9
2.1.1 TAX SYSTEM IN NIGERIA 12
2.1.2 HISTORY OF TAXATION IN NIGERIA 12
2.2 MEANING OF TAXATION 14
2.2.1 IMPORTANCE OF TAXATION 16
2.2.2 PROBLEMS OF TAX SYSTEM DESIGN 20
2.2.3 CRITERIA FOR AND PRINCIPLE OF TAXATION CRITERIA
FOR TAXES 21
2.2.2 THE INCIDENCE OF TAXATION 29
2.3 FISCAL POLICY AND STABILITY 31
2.3.1 IMPACT OF TAXATION AS A FISCAL POLICY TOOL ON
PRODUCTION EMPLOYMENT AND PRICE LEVEL. 39
2.4 IMPACT OF TAXATION ON OUTPUT AND PRICE AT LESS
THAN FULL EMPLOYMENT 40
2.5 IMPACT OF TAXATION ON OUTPUT AND PRICE IN PERIOD OF
MORE THAN FULL EMPLOYMENT (OR EXCESSIVE DEMAND)42
2.6 IMPACT ON GROWTH 43
2.7 IMPACT OF THE 2008 FISCAL POLICIES IN NIGERIA ON
2009 FISCAL YEAR 44
CHAPTER THREE: RESEARCH METHODOLOGY
3.1.0 PRE-TEST SURVEY 53
3.1.1 METHOD OF DATA COLLECTION 53
3.1.1 QUESTIONNAIRE METHOD 53
3.1.2 LIBRARY 55
3.2.0 PROCEDURE 55
3.2.1 SAMPLING PROCEDURE 55
3.2.3 SAMPLING TECHNIQUES 55
3.2.3 RANDOM SAMPLING 55
3.2.4 PREFERENTIAL SAMPLING 55
3.3.1 DESIGNING / FRAMING OF QUESTIONS 55
3.3.2 COLLECTION AND RECORDING DATA 56
3.3.3 PROCESSING AND ANALYSIS OF DATA 56
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1.0 DATA PRESENTATION ACCORDING TO RESEARCH
4.1.1 BIODATA OF RESPONDENTS 57
4.1.2 CLASSIFICATION BY GENDER 57
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 SUMMARY 66
5.2 CONCLUSION 66
5.3 RECOMMENDATION 68
2.0 BACKGROUND TO THE STUDY
Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation's economy. It is the sister strategy to monetary policy with which a central bank influences a nation's money supply. These two policies are used in various combinations in an effort to direct a country's economic goals. Here we take a look at how fiscal policy works, how it must be monitored and how its implementation may affect different people in an economy.
Fiscal policy is based on the theories of British economist John Maynard Keynes. Also known as Keynesian economics, this theory basically states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn, curbs inflation (generally considered to be healthy when at a level between 2-3%), increases employment and maintains a healthy value of money. Ezejelue, (2008)
The idea, however, is to find a balance in exercising these influences. For example, stimulating a stagnant economy runs the risk of rising inflation. This is because an increase in the supply of money followed by an increase in consumer demand can result in a decrease in the value of money - meaning that it will take more money to buy something that has not changed in value.
Let's say that an economy has slowed down. Unemployment levels are up, consumer spending is down and businesses are not making any money. A government thus decides to fuel the economy's engine by decreasing taxation, giving consumers more spending money while increasing government spending in the form of buying services from the market (such as building roads or schools). By paying for such services, the government creates jobs and wages that are in turn pumped into the economy. Pumping money into the economy is also known as "pump priming". In the meantime, overall unemployment levels will fall. Orojo, (2009).
With more money in the economy and less taxes to pay, consumer demand for goods and services increases. This in turn rekindles businesses and turns the cycle around from stagnant to active.
If, however, there are no reins on this process, the increase in economic productivity can cross over a very fine line and lead to too much money in the market. This excess in supply decreases the value of money, while pushing up prices (because of the increase in demand for consumer products). Hence, inflation occurs. Stafford (2009).
For this reason, fine tuning the economy through fiscal policy alone can be a difficult, if not improbable, means to reach economic goals. If not closely monitored, the line between an economy that is productive and one that is infected by inflation can be easily blurred.
When inflation is too strong, the economy may need a slow down. In such a situation, a government can use fiscal policy to increase taxes in order to suck money out of the economy. Fiscal policy could also dictate a decrease in government spending and thereby decrease the money in circulation. Of course, the possible negative effects of such a policy in the long run could be a sluggish economy and high unemployment levels. Nonetheless, the process continues as the government uses its fiscal policy to fine tune spending and taxation levels, with the goal of evening out the business cycles.
Unfortunately, the effects of any fiscal policy are not the same on everyone. Depending on the political orientations and goals of the policymakers, a tax cut could affect only the middle class, which is typically the largest economic group. In times of economic decline and rising taxation, it is this same group that may have to pay more taxes than the wealthier upper class.
Similarly, when a government decides to adjust its spending, its policy may affect only a specific group of people. A decision to build a new bridge, for example, will give work and more income to hundreds of construction workers. A decision to spend money on building a new space shuttle, on the other hand, benefits only a small, specialized pool of experts, which would not do much to increase aggregate employment levels.
One of the biggest obstacles facing policymakers is deciding how much involvement the government should have in the economy. Indeed, there have been various degrees of interference by the government over the years. But for the most part, it is accepted that a degree of government involvement is necessary to sustain a vibrant economy, on which the economic well being of the population depends
Taxation in Nigeria has been in existence as long as there were constituted authorities as in any other national. Lord Luggard first introduced tax became operative in Nigeria.
The duties of the tax collection authorities during the period included the giving of information, supervision of the collection of taxes, accountability of tax collected and the payment of such taxes into the treasury by the district council. Tax was designed to generate fund for the government to enable her perform her socio-economic and political responsibilities to the citizens.
On the other hand, fiscal policies, simply defined, is the use of taxation, public borrowing and public expenditure by the government for the purpose of increasing per capital income, to bring about even distribution of income, reduction of unemployment and the promotion of local technology. The role of fiscal policy in developing countries is to accelerate the rate of capital formation for the enhancement of economic development.
Therefore, understanding the role of fiscal policies implies understanding the economic objectives of government and how the tool of fiscal policies is being used to achieve the stated objectives. This is against the background of a fairly well development financial system. Fiscal policies in Nigeria are one of the policies used in achieving some of the economic objectives set by the government.
Therefore, this research work seeks to know how taxation is being used as a tool of this very important policy and the impact such has made in Nigeria.
1.1 SIGNIFICANCE AND JUSTIFICATION FOR THE STUDY
The significance of this study stems from the fact that a healthy economy is beneficial not only to the government but to the entire citizenry as it affects her standard of living.
As fiscal policy concerns taxes and government expenditure. It involves manipulation of the revenue and expenditure of government with the objectives of influencing macro-economic variables e.g. the employment level, aggregate demand level to mention but a few.
Therefore, an examination of the impact of taxation as a tool of fiscal policy will help in revealing further procedures to bring about an improved economy, improved standard of living and maintenance of a healthy balance of payment. Also, the wrong notion of an average Nigerian as to the purpose of taxation would be corrected. This study could also serve as a basis for further research work on the subject being considered.
1.1 STATEMENT OF THE PROBLEM
Fiscal policies being one of the policies used by the government in order to enhance the economic development and which indeed has been of great help to the economy of Nigeria make use of taxation as one of its tools.
But then, how actually is taxation employed in achievement of these objectives and how effective is its use in carrying out these objectives.
1.7 OBJECTIVES OF THE STUDY
The basic objective of this project work is to highlight the impact of taxation as a tool of fiscal policies.
To examine the effect of taxation on Nigeria economy.
1.8 SCOPE OF THE STUDY
This project work focuses on the impact of taxation as a tool of fiscal policies in Nigeria.
The impact of this policy varies from one country to another due to the level of advancement and technological know-how on their institution that participates on the fiscal policy such institution like central Banks, Financial Houses and the Stock Exchange market. It was also impossible to cover all body that participate in fiscal policy in Nigeria, money market and capital market are the bodies that are involved, the findings obtained were then generalize to the Nigeria situation since all the bodies involved operates with the same legal frame work.
1.9 LIMITATION OF THE STUDY
In all fields of human endeavour, problems and constraints are inherent and a work of this nature cannot be excluded. As a result of this, the researcher found it difficult to visit many financial houses and to collect information within her locality. Among other constrains are the following:
- Time Frame: There is a limited time for this project works, hence the researcher cannot afford to visit various banks, and time did not permit me to actually have a comprehensive result.
- Finance: The problem of capital storage also had its effects on the researchers as a result of this I was not able to travel to other relevant places other than the place of case study.
1.10 RESEARCH QUESTION
The method of data collection was both primary and secondary. Primary data collection was done by setting questionnaires in which respondents were to answer several questions that were of specific interest to the study. While secondary data were collected from various writers and authorities in the field.
- How is government expenditure financed?
- How is government administering taxes?
- What are the limitation and problems of fiscal policy in relation to taxation?
1.11 DEFINITION OF TERMS
Fiscal Policy: This is the manipulation of the government budget in order to influence the level of activity in the economy.
Taxation: This is a process or machinery by which individuals or group of persons are make to contribute in an agreed quantum and method of development and administration of their communities or societies.
Tax: Tax may be defined as a compulsory level imposed by government on individuals or legal entities.
Direct Taxes: These are taxes that have direct bearing on the income of individuals and corporate entities e.g. pay as you earn (PAYE), Companies Income Tax (C.I.T), Capital Gains Tax (CGT) and Petroleum Profit Tax (PPT).
Indirect Taxes: These are taxes levied on the production and consumption of goods and services i.e. they do not have direct bearing on the income of the Tax Payers e.g Import Duties, Export Duties, Excise Duties and Value Added Tax.
Incidence of Tax: The incidence of tax means economic unit of person that bears the burden to a tax.
Personal Income Tax:
This is the tax that requires the tax liabilities of individuals, sole traders, partners in a partnership and benefit of a Trust or Estate or settlement.
Capital Gain Tax:
This is the tax relief or allowance granted by the Act in lieu of depreciation as an allowable deduction in arriving at the chargeable income of an individuals or companies, for the use of Qualifying Capital Expenditure in a basis period of a trade or business.
Capital Transfer Tax:
This is a tax that is levied or applied to assets transferred by one individual to another.
Petroleum Profit Tax:
This is payable by entities engaging in prospecting for or extraction of and transportation of petroleum, oil or natural gas.
Value Added Tax (VAT):
VAT is a consumption tax payable on the goods and services consumed by any person whether government agencies, business organization or individuals.
Discretionary fiscal policy: Discretionary fiscal policy is the deliberate alteration of the rate of taxation or government expenditure purposely to adjust the equilibrium level of Net National Product of full employment and stable price level.