IMPACT OF TAXATION ON THE ECONOMIC GROWTH IN

NIGERIA
TABLE OF CONTENTS
CERTIFICATION
DECLARATION
DEDICATION
ACKNOWLEDGEMENT
ABSTRACT
TABLE OF CONTENTS
LIST OF TABLES
CHAPTER ONE: INTRODUCTION
1.1 Background to the study
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Research Question
1.5 Research Hypotheses
1.6 Significance of the Study
1.7 Scope of the Study
1.8 Definition of Terms
CHAPTER TWO: LITERATURE REVIEW AND THEORETICAL
FRAMEWORK

2.1 Theoretical Framework

2.1.1 The Ability to Pay Theory of Taxation

2.1.2 Benefit Theory

2.1.3 The Socio-Political Theory

2.1.4 The Proportionate Principle

2.2 Conceptual Review

2.2.1 Historical Background of Taxation in Nigeria

2.2.2 Tax Structure in Nigeria

2.2.3 Direct Tax and Economic Growth in Nigeria

2.2.4 Indirect Taxation and Economic Growth in Nigeria

2.2.5 The Role of Taxation in Wealth Creation and Employment

2.2.6 Economic Effects of Taxation

2.2.7 Custom and Excise Duties (CED)

2.2.8 Company Income Tax (CIT)

2.2.9 Petroleum Profit Tax (PPT)

2.2.10Personal Income Tax (PIT)

2.3 Empirical review

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research Design

3.2 Sources of Data

3.3 Method of Data Collection

3.4. Limitation of the Study

3.5 Model Specification

3.6 Techniques of Data Analysis

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND
DISCUSSION OF FINDINGS

4.1 Data Presentation

4.2 Data Estimation Procedure

4.3 Hypothesis Testing

4.4 Analysis of Result

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND

RECOMMENDATIONS

5.1 Summary of the study

5.2 Conclusion

5.3 Recommendation

REFERENCES
 CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Taxation is an essential part of a country’s investment and growth plan. 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 wellbeing of the
society (Appah 2004; Appah and Oyandonghan 2011). Taxation is one of the
oldest means by which the cost of providing essential services for the generality of
persons living in a given geographical area is funded. Globally, governments are
saddled with the responsibilities of providing some basic infrastructures for their
citizens. Taxation is the means by which the government of nations generate
revenue to finance their expenditure through the imposition of compulsory charges
on citizens and artificial persons(corporate entities in Nigeria, all persons in
employment, individuals in business non-residents who operate in Nigeria as well
as companies that operate in Nigeria are liable to pay tax.

A tax policy represents key resource allocator between the public and private
sectors in a county. Anyanfo (1996) and Anyanwu (1997) stated that tax is
imposed to regulate the production of certain goods and services, protection of
infant industries, control business and curb inflation, reduce income inequalities
etc. Economic growth is usually brought about by technological innovations and
positive external forces.it is the yardstick for raising the standard of living of the
people. Taxation plays a crucial role in promoting economic activity and growth; it
has been seen to be a major source of revenue for most economies including
Nigeria. The primary aim of taxation is usually to generate revenue capable of
financing government expenditure at all levels of government. Chigbu et al (2012)
explained that taxes are levied on individuals, groups, business or corporate bodies
by constituted authorities for funds used by state in the maintenance of peace,
security, economic growth and development and social engineering for the benefit
of the citizenry.

Taxation as a fiscal policy instruments affects the macro economic variables

of the economy, as it affects the level of aggregate demand in the economy. It
affects income distribution thereby reduces the gap between the rich and the poor
in the country. Taxation reduces the purchasing power of individuals thereby
serving as an inflationary measure. Anyafo (1996) also affirms that a good tax
system should be able to stimulate employment, control inflation and enhance
economic growth. Tax is also used as a measure to discourage the consumption of
those goods and services considered to bar full or non-essential commodities. The
economic growth is a gradual and steady change in the long run which comes
about by a general increase in the rate of savings and population (Jhinghan 2005).

1.2 STATEMENT OF THE PROBLEM

The revenue accruing to the federal Government of Nigeria form taxation

over the years has remained grossly insufficient to meet the expanding social and
public spending required in fostering economic growth and development in the
country. The problems associated with the major tax reforms in Nigeria can be
attributed to its inability to achieve its set objectives towards which it was focused.
Ogbonna and Ebimobowei (2012) identified some of the problems to include the
increasing cost of tax administration by the Federal Government of Nigeria in
relation to the tax revenue collections as evidenced by scholars, which is a major
indication of high level of inefficiency in the tax operators of the country contrary
to the canons of taxation enunciated by Adam Smith. Therefore this research work
was designed to unravel the problem of low tax yield to Nigeria’s economy and
proper immediate solutions.

1.3 OBJECTIVE OF THE STUDY

The main objective of this work is to examine the impact of taxation on the
economic growth of Nigeria.

The specific objectives are:

1. To assess the impact of Companies Income Tax on economic growth of

Nigeria.

2. To ascertain the influence of Petroleum Profit Tax on economic growth of

Nigeria.

3. To examine the impact of Custom and Excise Duties on economic growth of

Nigeria.

4. To determine the impact of Value Added Tax on the economic growth of

Nigeria.

1.4 RESEARCH QUESTIONS

This study will provide solutions and answers to the following questions:

1. What is the impact of Companies Income Tax on economic growth?

2. What is the influence of Petroleum Profit Tax on economic growth of

Nigeria?

3. In what ways has Custom and Excise Duties impacted the economic growth
of Nigeria?
 4. To what extent does Value Added Tax Impact the economic growth of
Nigeria?

1.5 RESEARCH HYPOTHESIS

According to Euborkhai (2003) cited in Ebiringa (2012) Hypothesis are

declarative statement of assumption or calculated guesses held by the researcher
which serves as a tentative answer to the problem under investigation. In this work,
hypothesis is stated as follows:

Ho1: Companies Income Tax has no significant impact on the economic

growth of Nigeria.

Ho2: Petroleum Profit Tax has no significant impact on the economic

growth of Nigeria.

Ho3: Custom and Excise duties have no significant impact on the economic
growth of Nigeria.

Ho4: Value Added Tax has no significant impact on the economic growth of
Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

Nigeria as a nation stands to gain from an improved tax system which

enhances economic growth and development, equitable distribution of Income
greater employment. This study is expected to highlight and analyse both Direct
and Indirect effect on the development of the Nigerian Economy.
1.7 SCOPE OF THE STUDY

This study focuses on the impact of taxation on the economic growth of

Nigeria; the scope of this study is defined from three (3) dimensions namely:
Geographical area of coverage, time period and the data. The geographical scope
of this study is Nigeria which represents both the study's population and sample
size. The time period is Twenty Seven Years (27) (1991-2017). This study is
restricted to Secondary Data.

1.8 DEFINITION OF TERMS

The following are terms defined to suit the context in which there is used in
the study. This is to enable the reader a better understanding of ideas expressed in
the work.

 Nigeria Tax Authorities: This refers to the revenue collection agencies of

the Federal Inland Revenue Service (FIRS), State Federal Revenue Service
(SFRS) and the Local Government Revenue Committee.

 Joint Tax Board (JTB): This is the supervisory and regulatory body that
defines the scope of operation and administration system between the
various tiers of authorities.

 Tax: Obligatory transfer of financial resources from the private organist ion
to the public sector for common pool.

 TAX JUSTICE: This refers to the tax administration transparency issues in

Nigeria.
 Tax Reform Policies: These are policies established by the Federal
Government in Nigeria on tax administration and implementation.

 Tax Consultants: These are firms employed by the Federal Government of

Nigeria charged with the duties of tax administration and collection.

 Tax Evasion: This refers to the deliberate failure to pay taxes usually by
making false reports.it is an illegal means to avoid paying taxes.

 Gross Domestic Product: The total value of the aggregate level of output of
goods and services by resident producing unit of a nation irrespective of
whether the factors of production are owned by indigenes of foreigners.

 Company Income Tax (CIT): This is also known as company profit tax or
corporations tax.it is a tax on the profit made by companies.

 Petroleum Profit Tax (PPT): This is tax levied on the profit of oil
companies. Petroleum profit tax is singled out because of the significance of
oil in the Nigerian public revenue performance.

 Personal Income Tax (PIT): Personal income tax is a tax paid on one’s
personal income as distinct from the tax paid on the firm’s earnings. It is
also a tax collected from individuals and is imposed on different sources of
income like Labour, Pensions, Interest and dividends.

 Custom And Excise Duties Tax (CED): This is the oldest form of indirect
tax which dated back to the19th century. Excise duties are commodity taxes
levied on goods manufactured within the country. Custom duty is a tax
levied on Imports (and sometimes on exports) by the customs authorities of
a country to raise revenue for the state.
 CHAPTER TWO

LITERATURE REVIEW

2.1 THEORITICAL REVIEW

Theories are propounded to explain the reasoning behind people's actions

and reactions to tax compliance and tax rules which invariably Impact the pool of
revenue available to the government for the execution of policies and programmes.
Various theories exist to explain reasons for tax structures which are:

2.1.1 The Ability to Pay Theory of Taxation

This theory is synonymous with the principle of equity or justice in taxation,

people with higher incomes should pay more taxes than people with lower
incomes.it appears more reasonable and just that taxes should be dual. The major
drawback inherent in this theory is the definition of one's ability to pay.

2.1.2 Benefit Theory

According to this theory, the state should levy taxes on individuals

according to the benefit conferred on them. The more benefits a person drives from
the activities of the state, the more he should pay to the government; this principle
has been subjected to service criticism on the following grounds:

Firstly, if the state maintains a certain connection between the benefits

conferred and the benefits derived.it will be against the basic principle of tax.
 Secondly, most of the expensive dither incurred by the state is for the
general benefit of its citizens, it is not possible to estimate the benefit enjoyed by a
particular individual every year.

Thirdly, if we apply this principle in practice, then the poor will have to pay
the heaviest taxes, beds use they benefit more from the services of the state. If we
get more from the poor by way of taxes, it is against the principle of taxes.

2.1.3 The Socio-Political Theory

This theory was presented by Wagner (1883) states that social and political
objectives should be the major factors in selecting taxes. The theory advocated that
a tax system should not be designed only to serve individuals, but should be used
to cure the ills of the society as a whole.

2.1.4 The Proportionate Principle

In order to justify the idea of justice in taxation. J.S Mill and some other
economists have suggested the ‘principle of proportionate in taxation’. These
economists were of the opinion that if taxes are levied in proportion to the incomes
of the individuals.it will extract equal sacrifice.

2.2 CONCEPTUAL REVIEW

2.2.1 Historical Background of Taxation in Nigeria

Taxation is as old as humanity and it predates the colonial era in Nigeria. It

cuts across social, political and religious divides as it has been shown that people
pay taxes in one form on the other to support the common goal. In the biblical
times even before the birth of Jesus Christ, taxes has been ordained as part of the
human existence and it was found out that the two major religions supports the
payment of taxes. Before the advent of colonial rule the native chips and kings
extract taxes/tributes from their subjects either for the common good or as a form
of right. Steinmo (1993), noted that every government need a lot of money. How to
get this money and who to take it from are the two most difficult political
economy. Taxes are one of the major ways governments get money to run its
activities and provide for general good.

Taxes are burdens that must be borne by everyone to sustain and maintain a
decent and orderly society. The collection of taxes from people is not as simple as
it seems, as people also have their own opinions about such payments. Tax
administrators therefore face a Herculean task of collecting all the taxes from all
the people who largely are unwillingly to part with their money for various
reasons.

2.2.2 Tax Structure in Nigeria

A good tax structure plays a multiple role in the process of economic

development of any nation including Nigeria Appah (2010). Nigeria tax system has
undergone significant changes in recent times. However the tax system is basically
structured in such a way as to contribute to economic growth through income
generation. On the basis of incidence, taxes can be structured into direct and
indirect. There are different components of direct taxation. These include the
personal Income tax (PPT), petroleum profit tax (PPT), companies’ income tax
(CIT), educational tax (ET). The different prominent components of indirect
taxation in Nigeria includes, Value Added Tax (VAT) and custom and Excise Duty
(CED).

VAT is regulated by the value Added Tax Act (VATA) of 2007. The
Nigerian VAT system is destination based, which means the tax is levied on goods
and services consumed within the tax jurisdiction. The implication of this is that
VAT imposition is designed to stimulate export growth (Desai & Hines, 2002). In
Nigeria, tax rate chargeable is 5 per cent on goods and services purchased but the
tax payer can claim credit of input tax when such goods are sold. The CED is
regulated by the custom and Excise management Act of 1990. The duty is
chargeable is 5 percent on goods and services purchased but the tax payer can
claim credit of input tax when such goods are sold. The CED is regulated by the
customs and Excise management Act of 1990. The duty is chargeable on all goods
and services imported into Nigeria. The tax is administered by the Nigeria custom
services and is also refers to as import duties. Currently the duties ranged between
2.5 per cent to 100 per cent depending on the product. Taxes maybe direct or
indirect and maybe imposed on Individuals basis, on entities, on assets and on
transactional basis. In Nigeria, taxes are imposed on the following basis:

i. On individuals

i. Personal Income Tax: Imposed on the income of all Nigeria’s citizens

or residents who derive income in Nigeria and outside Nigeria?

ii. Development Levy: A flat charge imposed on every taxable person

typically within a state.

ii. On Companies (Corporate Entities)

i. Companies Income Tax: Imposed on the profits of all corporate

entities who are registered in Nigeria or derive income from Nigeria,
other than those engaged in petroleum operations.
 ii. Petroleum Profit Tax: Imposed on the profits of all corporate entities
registered in Nigeria or who derive income from oil and gas
operations in Nigeria.

iii. Education Tax Imposed: Imposed on all corporate entities registered

in Nigeria.

iv. Technology Levy: Imposed on selected corporate entities (internet

services providers, pension managers, banks, insurance companies
and other financial institutions within a specified turnover range) in
Nigeria to support nationwide development of technology
infrastructure and capacity.

iii. On Transactions

i. Value Added Tax: Imposed on the net sales value of non-exempt,

qualifying goods and services in Nigeria.

ii. Excise Duty: Imposed on the manufacturing of goods within the

government territory collected by the Nigeria customs service.

iii. Import Duty: Imposed on the import of goods into the Government
territory collected by the Nigeria customs service.

iv. EXPORT DUTY: Imposed on the export of goods outside the

Government territory collected by the Nigeria customs service.

iv. On Assets

This includes taxes such as property tax and other such taxes imposed on
land or landed property.
2.2.3 Direct Tax and Economic Growth in Nigeria

Direct taxes in Nigeria include the personal income taxes, company income
tax, the petroleum profit tax and education Tax. Eugene and skinner (1996) believe
that taxation can affect economic growth in major ways:

First, higher taxes can discourage the investment rate through high statutory
taxes rates on corporate and individual income, high effective capital gains taxes
and low depreciation allowances. Secondly, taxes discourage Labour force
participation or distortion occupational choices and also affect the choice for
acquisitions of skills, education and training. Third, tax policy has the potential to
discourage productive growth by attempting to tax research and development and
the development of ventures capital. Fourth, heavy taxation on Labour supply can
distort the efficient use of human capital by discouraging worker from employment
in sectors with high social productivity but a heavy tax burden.

2.2.4 Indirect Taxation and Economic Growth in Nigeria

Indirect taxes are also called taxes on consumption expenditure, it is usually

on that rate or regressive as the same tax paid by everybody. Indirect taxes in
Nigeria includes: The value Added Tax (VAT), Custom Duty etc. it is easier to
collect and less prone to evasion. The Nigeria taxes system has since shifted more
towards indirect taxation as the alternative to direct taxation which is more difficult
and more costly to collect, prone to high rate of tax and tax avoidance.

Hence, from the point of view of economic efficiency, a tax system with a
relatively low level of direct taxation and a larger share of indirect taxes may have
certain advantages. Arigo (1999) contend that distortionary taxation (taxes) on
income reduces the rate of economic growth and that non-discretionary taxation
(indirect taxes) does not.

2.2.5 The Role of Taxation in Wealth Creation and Employment

According to Nzotta (2007), four key issues must be understood for taxation
to play its functions in the society.

i. Tax is a compulsory contribution made by the citizens to the government

and this contribution is for general common use.

ii. Tax imposes a general obligation on the tax payer.

iii. There is a presumption that the tax payer may not be equivalent to the
benefits received.

iv. Tax is not imposed on a citizen by the government because it has rendered
specific services to him or his family.

Taxation can play a vital and pivotal role in the creation of wealth and
employment in the Nigerian economy, in the following ways:

i. Stimulating growth in the economy, by increased trade and economic

activities. In this regard, tax revenue should be used to provide basic
infrastructure such as power, roads, transportation and other economic
activities.

ii. Stimulating domestic and foreign investment, where the tax system creates a
competitive edge for investments in the economy, local investments would
be retained in the country, while also attracting foreign investments,
 increased investment would generate employment and provide wealth in the
hands of individuals.

iii. Revenue generated from taxes can also be applied directly to identify sectors
of the Nigerian economy to stimulate such sectors. In this regard, the sectors
must be those which have potential for creating employment, developing the
economy and creating wealth for the greater benefit of citizens and
government of the this country.

iv. Revenue earned from taxes can be used to develop effective regulatory
systems, strengthen financial and economic structures and address market
imperfections and other distortions in the economic sector. Taxes realized
from specific sectors of the economy can be channelled back to those sectors
to encourage their continued growth and development.

v. Redistribution of income, whereby tax revenue from high income earners is

used to provide public infrastructure and utilities to the lowest income
earners. Taxes may also be used to create a social security not for short and
long terms relief to indigent members of society and other classes of persons
who require such intervention by the government. (National Tax Policy).

2.2.6 Economic Effects of Taxation

The effects of taxation on economic growth mean what happens to the Gross
Domestic product of the country when tax is imposed. Anyanwu (1997)
maintained that tax affects the pattern of production, consumption, investment and
employment. These effects are either positive or negative. Taxation affects both
production and economic growth by distorting capacity and will lead to work, safe
and invest. Taxation has the objective of equalizing income and wealth inequalities
which conflicts with increasing production and economic growth Anyanwu (1997).
This inequality can be reduced with the use of progressive tax, wealth tax,
expenditure tax, gifts tax etc. as this will achieve redistribution in the long run.

Angahar and Sami (2012) confirmed that taxation is a fiscal policy tool used
in controlling inflation that taxation is a fiscal policy tool used in controlling
inflation. In inflationary times, government should increase direct taxes thereby
straining away excess purchasing power. They should be selective in the choice of
indirect taxes to be employed in controlling inflation, putting into consideration the
elasticity of demand and supply of the commodities. Commodities with low
demand elasticity and high supply elasticity will not increase inflation when
taxation is increased. Commodities that are of necessities should be taxed lower,
while luxuries should be highly taxed as this will reduce the inflationary pressure
on the economy. Worlu and Nkoro (2012) maintained that economic growth is an
increase in the amount of the goods and services produced over a specified period
of time in a country. Economic growth is a sub category of economic development.

2.2.7 Custom and Excise Duties (CED)

These are the oldest form of indirect tax which dated back to the 19th
century. Custom duties are commodity taxes imports and exports. According to
Ayodele (2006), custom duties are the highest yielding indirect tax. The tax is
administered by the Nigerian custom services (NCS). It is believed that duties on
imports are against the principle of comparative cost thereby restricts the full
development of international trade, import duties are also used to protect infant
industries in the country. The burden of export duties are passed on to the foreign
country in the form of increased prices. The burden of import duties fall on the
consumers of the goods and services that it is levied on.
 Excise duties are commodity taxes levied on goods manufactured within the
country. This indirect tax does not only serve the purpose of raising revenue for the
country but also to discourage the consumption of certain goods (Fasoranti, 2013).
Who bears the burden of excise duties depend on the type of commodity taxes.
Excise duty on luxuries is borne by the rich, while excise duty on necessities is
borne by the poorer people. (Anyafo 1996).

2.2.8 Company Income Tax (CIT)

This is also known as company profit tax or corporation tax. Company

income tax is a tax on the profit made by companies; it was introduced in Nigeria
in 1961 and administered by the Federal Internal Revenue Services. Since
enactment, the law on CIT varies according to operation and size of turnover per
annum. According to Onaolopo et al. (2013) companies condemn this company
taxes on profit as it is seen as a penalty for success without compensation for
failure. Company taxes are designed to collect revenue from firm’s economic
profit. The tax is on the net accounting profit, gross profit less administrative,
operating and interest expenses. The revenue form company income tax has been
low due to tax concessions, rebates and tax holidays allowed to newly established
companies. Tax evasion and tax avoidance are also responsible for this low yield
(Ebringa and Emoh, 2012).

2.2.9 Petroleum Profit Tax (PPT)

This is a tax levied on the profit of oil companies. According to Akintoye

and Tashie (2013).petroleum profit tax is singled out because of the significance of
oil in the Nigerian public revenue performance. The petroleum profit tax Act 1959
no.15 imposed with effect from January 1st 1959, a tax on profits from the mining
of petroleum in Nigeria. This is to take care of economic rent on the land used for
mining. The PPT is applicable to upstream operation in the oil sector i.e.
production of crude oil and gas and sale of these as primary products to
downstream operations (Ayodele, 2006). It is the most important tax in Nigeria in
terms of its share of 95% of government revenue and 79% of total foreign
exchange earnings. The major problem of the source of revenue is the fluctuation
resulting from price fluctuation of crude oil process in the world market. The
operation of the petroleum profits tax was external to the companies engaged in
liquefied natural gas operations under PPT amendment no.3 Decree 1979 no.95.

2.2.10 Personal Income Tax (PIT)

According to Akinloye and Tashie (2013), personal income tax is a tax paid
on one’s personal income as distinct from the tax paid on the firm’s earnings. In an
incorporated firm, the owners (shareholders) pay taxes on both their income (salary
or dividend from the firm) firm’s income (profits). In partnership and sole-
ownerships, the tax is paid only once in the firm’s profits personal income tax Rate
in Nigeria is reported by the Federal Inland Revenue Service, Nigeria. The
personal income tax is a tax collected from indie duals and is imposed on different
sources of income like Labour, pensions, interesting dividends. Revenues from the
personal income tax are an important source of income for the government of
Nigeria (Anyafo, 1996).

2.3 EMPIRICAL REVIEW

King and Rebelo (1990) used a number of different measures of marginal

tax rates to explain growth, except for one measure; they find no significant
correlation between tax rates and economic growth and concluded that the link is
fragile. Asea (1997) find that tax variables become insignificant once they control
the initial level of GDP. More recently, Folster and Henrekson (2001) looked at the
relationship between growth and the size of government and find a negative
relationship between total public expenditure as a share of GDP and growth. Agell
et al (2006) dispute the methodology behind these findings and only an unstable
and insignificant relationship between the expenditure ratio and growth.

Arnold (2008), Johansson et al (2008) and Arnold et al (2011) have

investigated the effect of the tax structure on long run GDP using a panel error
correlation model for 21 OECD countries over the years 1971-2004. Based on the
results of those estimations, the authors suggests a growth - friendliness ranking for
tax instruments, which is led by property taxes, in particular by recurrent taxes on
immovable property followed by consumption taxes (and other property taxes).

Kneller, Bleaney and Gemmel (1999) emphasize that the estimated effects of
different types of taxes may be biased if other elements in the budget such as
expenditures are omitted. As suggested by Arnold et al (2011), one possible
solution is to focus on the growth effects of revenue neutral changes in tax
structure, which avoids the complication that changes in total tax revenue, are
reacted in changes in public speaking. Anyanwu (1997), he investigated the effects
of taxes on Nigeria’s GDP/Economic Growth (1981-1996) and findings revealed
that companies income tax positively and significantly affects GDP just as customs
and excise duties does. However, petroleum Profit Tax positively and
insignificantly affects Nigeria’s GDP. The same is true of other direct taxes
(capital gain and stamp duties). However all direct taxes positively and
significantly affect Nigeria's GDP.

Anichebe in 2013 studied of the impact of tax on economic growth in

Nigeria between 1986 to 2011, his study finds out a significant relationship
between tax composition and economic growth. Tosun and Abizadeh (2005) in
their study of economic growth of tax changes in OECD countries from 1980 to
1999 reveal that economic growth measured by GDP per capita has a significant
effect on the tax mix of GDP per capita. Arnold (2011) in their study found that
short term recovery requires increase in demand while long run growth requires
increase in supply. As short term concessions can be hard to reverse, this implies
that policies to alleviate this crisis could compromise long run growth.

According to the study of Umoru and Anyiwe (2013), Myles (2000)

empirically ascertained that direct tax policy is a stimulant to economic growth and
also Barry and Jules (2008) found that direct taxes impacted negatively on
economic growth. Margolloth (2003) reported that direct taxation is harmful to
growth in endogenous growth models. Tosun and Abizadeh (2005) reported that
the share of personal income tax responded positively to economic growth. They
also reported that corporate income taxes are the most harmful to growth as well as
personal income taxes. Djankor et al (2009) found strong negative effect of
personal income tax on output growth.

Chelliah (1989) observed that an increase in indirect taxation compared to

direct taxation reduces economic growth more than direct taxation does. Aamir et
al (2011) found that increasing revenue from indirect taxes is more conducive for
economic growth in the long run. Ajakiaye (1999) found that VAT has a negative
effect on economic growth in Nigeria. In a more broad study, Romer (200)
resolved that progressive taxation affords policy makers the opportunity to pursue
counter-cyclical fiscal policies which drives economic growth specifically, they are
of the view that VAT can only increase growth when enforcement and
implementation procedures are effective. This position was strengthened by
McCarten (2005).
 Iferueze and Odesa (2013) found evidence that greater reliance on indirect
taxation as opposed to direct taxation has significant positive effects on economic
growth. Along similar lines, Kneller,Bleaney and Gemmell (1999) suggested that
in OECD countries, while income taxes reduce growth, consumption taxes do not.
Wildman (2001) find similar evidence for personal income taxation, especially
with higher progressivity, measured in terms of the long-run income elasticity of
tax revenues. Wildman suggests that personal income tax progressively affects
growth not so much through accumulation of physical capital as through
accumulation of human capital.

Adereti et al (2011), in their own value added tax and economic growth in
Nigeria, using the regression model revealed that a strong positive relationship
exists between values added tax and economic growth in Nigeria within the period
under review (1994-2008). Onaolopo et al (2013) investigated the effect of
petroleum profit tax on Nigerian economy, the study covered the period between
1970 and 2010. Their study revealed that income from a nation’s natural resource
has a positive influence on economic growth and development. They
recommended that government should transparently and judiciously account for
the revenue it generates through PPT by investing in the provision of infrastructure
and public goods and services. Chigbu et al (2012) in the empirical study on
economic growth and taxation using the Granger casualty approach concluded that
taxation is a very important instrument of fiscal policy that contributes to economic
growth of any country.

Ergete and Dulby (2012) in their study “The impact of Tax Cuts on
Economic Growth”. Evidence from the Canadian provinces revealed that a
negative relationship exists between taxation and economic growth in Canada. The
findings concluded that reducing corporate income tax by one percentage point
raises annual growth by 0.1 to 0.2 points. Arnold et al (2011) based their research
on 21 centuries and their findings reveal that corporate taxes most harmful to
economic growth followed by taxes on personal income, consumption and
property. Corporate taxes, both in terms of the statutory rate and depreciation
allowances reduce investment and productivity growth.

CHAPTER THREE

RESEARCH METHODOLOGY

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