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AN EMPIRICAL ASSESSMENT OF THE IMPACT OF CORPORATE TAX ON PRIVATE SECTOR INVESTMENT (1970-2008)

ECONOMICS PROJECT TOPICS AND MATERIALS

CHAPTER ONE

INTRODUCTION

 1.1 Background of Study

The effect of fiscal policy instruments on growth and development with taxation playing a central role is perhaps the oldest, most studied, and most controversial topic in economics. The effect of corporate taxes on private sector investment is one of the central questions in both public finance and development. This is premised on economists concern as regards how changes in tax policy and feedback behavior affect economic activity. As a result, a pool of divergent theories, opinions and empirical studies on taxation, constitute a significant portion of economic literature.

The need for government in the affairs of man is the basis for taxation. Tax simply is a demand made by the government of a country for a compulsory payment of money by the citizens of the country. It is an instrument used to withdraw resources from the populace. Taxes are known to play various roles ranging from revenue generation which finances public expenditures to trade/individual protection, consumption management, behavior modification and income redistribution.

Private sector investment on the other hand has to do with spending on goods that is undertaken by companies and organizations that are not owned or controlled by the government (Encarta World English Dictionary). It is the process of investing in a product that is not traded publicly. It includes all profit and non-profit enterprises/activities not initiated by the government. Private sector investment also includes buying goods directly from the source and keeping them until they are sold for profit. Investments in healthcare, schools, research organizations, medical care units and other community projects which do not involve profit but for improving the standard of living of a certain region, qualifies for private investment. It is one of the major components of Gross Domestic Product.

Adebayo (2008) notes that many governments have find it more convenient to generate income from tax than other sources. The relative importance of tax has sometimes pushed some government into overstressing its role, to the point where its use becomes counter-productive. A more general philosophy is that a tax regime should not discourage the creation of wealth but should act as a precursor for investment and economic growth. Economic theory suggests that replacing taxes that tend to have high rates and narrow bases with a tax that has a broad base and a low rate would reduce the economic dislocation caused by the tax system and make the entire tax structure simpler, more neutral and more productive (PAI 2007, see Aleksandra and Akisz, 2008).

Adebayo (2005) asserts that tax accounts for a considerable portion of revenue for public spending at all levels of government in Nigeria. At the Federal Government level especially, between the period of 1994 and 2003, Adebayo (2005) observes that it was never lower than 34.3% of the federally collected revenue recording as high as 86.0% in 2002. This alone Adebayo (2005) maintains is a good indicator of the prominence of tax in funding government programmes in Nigeria. This position is further strengthened when it is realized that federal government independent revenue as a percentage of total tax revenue was very low.

It is worthwhile to say at this juncture, that, from the days of the early economists down to the present day economists, the role taxation plays as one of the major fiscal policy instruments, in economic growth and development cannot be overemphasized. It’s role (in the case of boosting investments, regulating the economy, encouraging savings capacity, checking/regulating inflation etc), has always been a topic of intense debate. This is why an empirical Appraisal of the impact of Tax variables on private sector investment in relation to Nigeria’s economic growth is being reviewed and researched on, in this work.

1.2       Statement of Problem

Tax revenue depends solely on the level of output in an economy. The level of economic activity including private investment determines the tax base for income and payroll taxes, as well as, the level of private spending. These in turn determine the tax base for expenditure/consumption taxes, such as Value Added Tax, Sales Tax and Import duties. In recognition of this fact, Nigerian economy has witnessed a range of policy changes in tax administration. Following inconsistencies and apparent confusion in the operation of various tax systems in the then Northern, Western and Eastern regions of the country, Raisman Fiscal Commission of 1958 then recommended that there be a uniform basic principle for taxing incomes throughout the country. It is this recommendation that was embodied in the Nigeria Constitution Order in Council 1960, which resulted eventually in the enactment of the Income Tax Management Act 1961 (ITMA, 1961). ITMA 1961 was the precursor to Companies Income Tax Acts 1961, 1979 and 1990 as well as the Personal Income Tax Act 1993 as amended. It is important to note that there had been amendments to the various tax laws to reflect the intention of the government. Adebayo (2005) states that federal government expenditures are functionally classified into recurrent and capital expenditures. The latter is of greater interest as it touches the nerve-centre of welfare enhancement. The percentage of expenditure on social and community services, to the total capital expenditure, has been too low. The highest figure of 23% was in 2003. It is not unlikely that the actual figure will eventually be low. The highest actual figure is 12.2% of the total capital expenditure. This figure itself may amount to nothing especially if high inflation rate of the period is considered (Adebayo 2005). Aluko (2006) perhaps in agreement states that Nigeria tax laws needs to be restructured to conform with the present day realities; noting that tax collection in Nigeria has been mainly from organized private sector while the self-employed pay lesser tax.

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