Academic journal article IUP Journal of Applied Finance

Tax Policy Reforms and Economic Growth in Nigeria

Academic journal article IUP Journal of Applied Finance

Tax Policy Reforms and Economic Growth in Nigeria

Article excerpt

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Introduction

Tax policy remains a major fiscal policy instrument of the government for generating income and revenue to meet the recurrent expenditures and creating capital formation towards the growth and development of the economy (Adeoye, 2004). Literatures from developed countries suggest that by reducing marginal tax rates, or by replacing the federal income tax with a consumption tax, the work effort, saving, and investment can be improved resulting in faster economic growth. Taxation can also influence what choices are made and, ultimately, the rate of growth, through its effect on the return to investment or the expected profitability of Research and Development (R&D) (Kerr and Monsingh, 2001).

In Nigeria, recent data have shown that tax revenue has risen steadily over the past few decades. This significant increase in taxation raises a question of what effects they have had on economic growth. Since about the last four decades, the revenues from this country had largely been derived from primary products. Revenue from agricultural products dominated the economy between 1960 and the early 1970s, while revenue from other sources was considered as residual. This country started experiencing oil boom from 1973/74 to date. Since then oil has dominated Nigeria's revenue structure, and its share in federally collected revenue rose from 26.3% in 1970 to 81.8, 72.6 and 76.3 in 1979, 1989 and 1999, respectively (Odusola, 2006). As a matter of fact, in more than the past two decades, oil has accounted for at least 70% of the revenuee. Lee and Gordon (2004), Collier and Hoeffler (2005) and Collier (2006) stress that countries deriving large revenues from natural resource endowments typically raise less revenue from domestic taxation, and that this creates governance problems because the lower domestic tax effort reduces the incentive for the public scrutiny of government. Tax system in Nigeria has undergone several changes reflecting the policy orientation and objectives of government. For example, in the 1960s, emphasis was directed towards achieving economic growth and development, and the major aim of tax policy was to generate maximum revenue in order to finance public sector programs. Similarly, the emphasis was later channelled by the policy makers to import substitution to drive the industrial development (Ekuerhare, 1980). Attention was also shifted towards increasing the existing tax rates, most especially import duties, in the form of high protective tariffs, and as a consequence, import duties provided the larger percentage of federal government revenue in the early 1960s (Phillips, 1997). The excise duties were also introduced on several goods in order to broaden the revenue base. This made the foreign trade sector the major source of revenue in the 1960s. Some changes were recorded in the Nigerian revenue profile in the early 1970s whereby indirect taxes gave way to direct taxes with the emergence of the oil boom (Egwakhide, 1988). The reduction in non- oil tax revenue due to the neglect of the agricultural sources was matched by an increase in import duties until 1973. The Nigerian tax reforms comprise the various tax policy measures carried out by the government from 1960 up to the current ongoing tax reforms. Sanni (2005) classified tax policy reforms into four attempts made by government to reform tax system in Nigeria. The first one was the Task Force on Tax Administration of 1978. The second one was the 1991 Study Group on the Nigerian Tax System and Administration and the third was on 1992 Study Group on Indirect Taxation. The fourth one was the 2002 and 2003 Study Groups on the Nigerian Tax System.

The turning point in the tax system in Nigeria was as a result of the emergence of different study groups. Both the Study Group on Tax System and Administration and Study Groups on Indirect Taxation in 1991 and 1992, respectively, recommended the establishment of Federal Inland Revenue Services (FIRS) as the operational arm of Federal Board Inland Revenue (FBIR), setting up of revenue services at the other tiers of government (State and Local Governments) and a policy shift from direct to indirect/consumption taxation which led to the introduction of Value Added Tax (VAT) in 1994 in Nigeria. …

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