NATIONAL TAX POLICY AND GOVERNMENT SERVICES: EVIDENCE FROM

NIGERIA TAX SYSTEM.

Yerima Gimba Alhassan

Department of Economics and Development Studies,

Federal University, Kashere, Gombe State

[email protected] 08036329326

ABSTRACT The policy of taxation in Nigeria has not been effective in the provision of government services in terms of infrastructural facilities, job creation and poverty reduction. Thus, the impact of paying tax is not felt by payees in Nigeria. At the macroeconomic level, taxes are used to redistribute income and therefore contribute to the economic growth of the country. This paper examines the relationship between tax policy and government services drawing evidence from Nigeria. The study adopts Granger causality test to examine the relationship between per capita Gross Domestic Products and the variables used in our model. The secondary data used were sourced from Central Bank of Nigeria (CBN) and Federal Inland Revenue Service (FIRS), and the data covered the periods 1985-2011. The findings from the study revealed that company income tax and custom and excise duties Granger cause per capita income in a uni directional relationship while Value Added tax do not. In view of this, we recommend that a corrupt free and well trained tax system will foster a great generation of tax revenue for economic development and above all, accountability and transparency on the part of government officials in the management of tax revenues for the benefit of the citizens.

KEY WORDS: Government services, Granger, Tax policy, Nigeria JEL Classification: O09

1.0 Introduction

The impact of tax payment is not felt by payees in Nigeria. This has cast doubt over the provision of government services in terms of infrastructural facilities, job creation and poverty reduction. Tax is one of the most important sources of government revenue. Tax is a compulsory contribution imposed by a public authority; irrespective of the exact amount of services rendered to the taxpayer in return (Dalton, 1954). In modern times, the reason for the imposition of tax ceases to be for the generation of revenue for the state. It has also become the avenue for the redistribution of wealth and re-adjustment of the economy (Ojo, 2008). The central objective of the Nigerian tax system is to contribute to the well being of all Nigerians directly through improved policy formulation and indirectly through appropriate utilization of tax revenue generated for

1 | P a g e the benefit of the people. The National tax policy provides a set of rules, modus operandi and guidance to which all stakeholders in the tax system must subscribe. Unfortunately, most policy changes in Nigeria are without adequate consideration of the taxpayers. Policies are most times made just to meet the changing need of the economy without adequate consideration of the tax payers who bear the burden of taxation. Thus, the tax policy is unable to meet up with efficiency and equity criteria against which it is being judged. However, tax policy is continually subjected to pressure and changes which most time does not guarantee outcome that are in line with the overall goal (James and Nobes 2008). In generating revenue to achieve the set goal, the tax system is expected to minimise distortion in the economy. Other expectations of the Nigerian tax system include: Encourage economic growth and development, generate stable revenue or resources needed by government to accomplish laudable projects and or investment for the benefit of the people, provide economic stabilization, to pursue fairness and distributive equity, and correction of market failure and imperfection. Citing Bird and Oldman (1990), James and Nobes (2008) stated as follows: “the best approach to reforming taxes is one that takes into account taxation theory, empirical evidence and political and administrative realities and blend them with good dose of local knowledge and a sound appraisal of the current macroeconomics and international situation to produce a feasible set of proposals sufficiently attractive to be implemented and sufficiently robust to withstand changing times, with reason and still produce beneficial results”. The main forms of tax collected are direct and indirect taxes. For the direct taxes, it is levied on individuals, and factors of productions. However, indirect taxes are levied on goods and services. The choice between direct and indirect tax has elicited serious debate in terms of economic benefits and limitations that characterized each. In the light of the foregoing, this paper will attempt to examine the relationship between the National Tax Policy and Government services drawing evidence from Nigeria. To achieve this objective, the paper is divided into five sections. Literature review is next after this introduction. This will be followed by methodology while results and discussion is in section IV. Summary and recommendations conclude this paper. II. Theoretical and Empirical Literature Review Solow (1956) was the first to examine how taxation affects growth. The neoclassical growth model of Solow implies that steady state growth is not affected by tax policy. However, Barro and Sala-i-Martin (1992) show that the growth rate is decreasing in the rate of distortionary taxes and increasing in government productive expenditure, but is unaffected by non distortionary taxes or unproductive expenditure. Okauru (2011) stated that Nigeria operates what is generally known as a federal tax system. In this respect, the present structure of taxation as stipulated by the Constitution of the Federal Republic of Nigeria reflects the three-tier system of Government at the Federal, State and Local Government levels. Under the Constitution, each tier of Government has been granted powers and responsibility in respect of the imposition and collection of taxes. Section 100 of the personal income tax Decree, 1993 and amended by Decree No 18-Finance (Miscellaneous Taxation Provisions) Decree 1998, Kiabel and Nwokah (2009) noted “Tax authority “to mean Federal Board of Inland Revenue, the State board of internal revenue and the local government revenue committee. Together with the Joint tax board (JTB) and Joint state revenue committee or Local Revenue Committee, Nigerian tax authority administers taxes in Nigeria. Thus, the benefit theory is a modified form of cost of service theory. According to the theory, the burden of taxation should fall on the people according to the benefit received by them from the state (Jhingan, 2012). Bird (2005) defined value added tax (VAT) as a multi stage tax imposed on the value added to goods and services as they proceed through various stages of production and distribution and to services as they are rendered which is eventually borne by the final consumer but collected at each stage of production and contribution chain. Empirically, Onaolapo, et al (2013) used stepwise regression analysis in assessment of VAT and its effect on revenue generation in Nigeria. The result showed that VAT has statistically significant effect on revenue growth in Nigeria. Ekeocha (2010) analyses the economics effects of tax policy reform in Nigeria using the computable general equilibrium analysis. From the analysis, it is clear that the policy strategy of increasing the rate of Value Added Tax from 5% to 15% will improve government revenue and nominal GDP but at the expense of real GDP and worsening level of unemployment. In their study, Abiola, and Asiwah (2012) use descriptive statistics to examine the impact of tax administration on government in a developing economy. The study found that increasing tax revenue is a function of effective enforcement strategy which is the pure responsibility of tax administration. Similarly, Abata (2014) use descriptive survey design method to examine the impact of tax revenue on Nigerian economy. The findings show that tax revenue significantly impact on federal government budget implementation in Nigeria. Ogbonna and Appah (2012) employed econometric models to examine the impact of tax reforms on economic growth of Nigeria from 1994-2009. The result shows that reforms is positively and significantly related to economic growth and tax reforms granger cause economic growth. Osundina and Olanrewaju (2013) use the ordinary least square to measure the possible effect of taxation on the Nigerian economy. The result revealed that taxation has a significant welfare on the Nigerian economy. According to Avi-Yonah and Margalioth (2006), direct taxation accounts for about two third of the total tax revenue generated in developed countries. But proponents of the conventional wisdom hypothesis are advocating for the use of indirect taxation. To them, developing countries should focus on indirect taxation [Lee and Gordon, 2005; Li and Sartre, 2004; Wildman, 2001] all reported a positive relationship between indirect tax and economic growth. Others such as Emran and Stigliz (2005), Baunsgaard and Keen (2005), disputed the above finding and instead reported the relative importance of direct taxation as the driver of economic growth. According to Bird (2003), the most effective tax for developing countries is one that produces the largest amount revenue in the least costly and disproportionate manner. He identified broad based Value Added Tax (VAT) as an ideal tax that suits the situation. Tosun and Abizadeh (2005) reported that corporate income taxes are the most harmful to growth as well as personal income taxes. Thus, most studies have reached substantially different conclusions on the relative impact of direct and indirect taxes on economic growth with multiplicity of problems ranging from inconclusive findings, generalization of results and findings in developed countries to developing countries. However, of all the literature reviewed, none paid attention to the relationship between national tax policy and government services, particularly in Nigeria. Therefore, a research of this nature becomes paramount in order to contribute to the body of literature that explores the changing facets of taxation in Nigeria.

3 | P a g e III. Methodology. This study adopted Georgios and Furceri (2009) research on nineteen European countries in 2009, on the effects of changes in taxes on economic growth using a dynamic approach that relates growth to taxes: Growthi,t =Wi + Vt + Σbjdtaxi,t-j + Ui,t ………………….. (1) where growth is the growth rate of real GDP per capita, i is indexing over countries and t over time, w and v represent country- and time-specific effects respectively, the b’s are parameters to be estimated, dtax is the change in the tax rate (dtaxi,t=taxi,t– taxi,t–1), J is the number of lags, and u is the error term. Georgios and Furceri (2009) concluded that an increase in taxes has a negative and persistent effect on real GDP per capita. The size of the effect depends on how the “tax shock” is measured, but their estimates suggest that an increase in the total tax rate by 1% of GDP will have a long-run effect on real GDP per capita of –0.5% to –1.2%. However, Georgios and Furceri (2009) failed to establish the relationship between the national tax policy and government services. Investigating the relationship between national tax policy and government services is necessary in view of the importance of taxation in the provision of services to the people. This is the major strength of this paper. In this study, data on selected forms of taxes will be used to examine the relationship between tax policy and government services for 1985-2011 periods. Also, Granger test will be employed in order to ascertain the relationship. Therefore, this study hypothesizes that government services will depend on value added tax (VAT), company income tax (CIT), custom and excise duties (CED). Following, Georgios and Furceri (2009) , we specified our model as follow:

PCGDP t = f (VAT t, CEDt, CITt,, μt)...... (2) Where; PCGDP = Per capita GDP as proxy for standard of living VAT = Value Added Tax, CED = Custom and Excise Duties, CIT = Company Income Tax, and U= is the error term.

Equation (2) is transformed in functional relationship. Thus,

PCGDP = β0 + β1 VAT+ β2 CED + β3CIT +U...... (3) The model is formulated based on reviewed empirical and theoretical studies.

Granger Causality Test The following equations are used to determine causality: ...... (4) ...... (5) where Yt and Xt are observed over time periods; n represents the number of lags, are parameters to be estimated; represents the serially uncorrelated error terms. The test is based on the following hypothesis: For all i’s For all i’s If the value of is statistically significant but those of are not then x causes y. If the values of both coefficients are statistically significant, then there exist a bi directional causality between X and Y and if both coefficients are not statistically significant, then we have a case of independence or no causality between X and Y. Granger-Causality test helps determine the pattern of relation between the explanatory variables in the model. This relation can occur in one way or two ways.

IV. Results and Discussion. The Granger causality test show that there exist a uni directional relationship between PCGDP and CIT as well as between PCGDP and CED, both without a feed back at 5% probability level while VAT do not Granger cause PCGDP despite the fact that in 2011, for instance, income tax (corporate income and personal income) accounted for 12.78 percent of total tax revenues, while VAT alone accounted for 12.68 percent of total tax revenue but by 2013, income tax accounted for a lower percentage of 19.09 % as compared to VAT with a total of 20.05%. Similarly, the ratio of income tax (PIT and CIT) to VAT which is taken as an approximate measure of the progressivity of the tax system fell from 1.01% and 1.22% in 2011 and 2012 respectively to 0.82 % and 0.95% in 2012 and 2013 respectively (see appendix 1). The lower share of the income tax yield and the higher share of VAT in total tax revenues in 2012 and 2013 indicate that the tax system is now getting regressive in Nigeria, government services do not commensurate with tax payment, particularly the VAT which is collected on virtually all goods consumed in Nigeria. However, for an efficient and effective system of tax administration, there must always be a consideration of the challenges which militate against the creation and maintenance of such a system. In Nigeria most of the issues faced cut across the three tiers of Government. The major challenges faced in tax administration in Nigeria include: a. Insufficient Government impact on citizens. b. Inadequate overall understanding of the role of taxation in national development. c. Insufficient political support for the tax administration. d. Issues within the tax administration set up, which include.  Capacity issues: quality and quantity of human resource  Technology issues: manual system of tax operations, poor records, absence of automated systems.  Low level of taxpayer education and enlightenment  Large informal sector outside the tax net The above issues are not exhaustive. 5.0 Summary, Recommendation and Conclusion. In our study, we examine the relationship between National tax policy and government services drawing evidence from Nigeria. The study covered the periods 1985-2014 and data were sourced from the Central Bank of Nigeria and Federal Inland Revenue Service. The Granger causality test was employed. Thus, there exist a uni directional relationship between PCGDP and CIT as well as between PCGDP and CED without a feed back at 5% probability

5 | P a g e levels while the VAT do not. Therefore, we recommend that desired revenue and economic development cannot be generated from the tax system in Nigeria except government review obsolete laws. Also, a corrupt free and well trained tax system will foster a great generation of tax revenue for economic development and above all, accountability and transparency on the part of government officials in the management of tax revenues for the benefit of the citizens. In order to encourage voluntary tax compliance, government needs to be more responsible to the needs of the citizens. There is the need to institutionalize tax culture at all levels of government and amongst citizens. Likewise, without support from the highest levels of Government, tax authorities would be unable to effectively operate and discharge their duties. It is therefore, necessary for Government, especially the Executive and Legislature to provide support to tax authorities in all areas. At the Federal level the FIRS has received significant support in several areas, which greatly assisted in achieving the milestones, which the FIRS has been able to achieve.

References Abata, M. A. (2014). The Impact of Tax Revenue on Nigerian Economy ( Case of Federal Board of Inland Revenue). Journal of Policy and Development Studies. Vol. 9, No.1 Abiola, J. and Asiwah, M. (2012). Impact of Tax Administration on Government in a Developing Economy. A case study of Nigeria. International Journal of Business and Social Science. Vol. 3, No.8 Avi-yonah, R. and Y. Margalioth (2006), Taxation in Developing Countries: Some Recent Support and Challenges to the Conventional View, OECD Conference paper Michigan law school,November Barro, R.J. (1997). Determinants of Economics growth: A Cross - Country Empirical Study. Cambridge and London. MIT Press

Baunsgaard, T. and M. Keen (2005), Tax Revenue and Trade Liberalization, IMF Working paper No 05/112. Bird, R. (2003), Taxation in Latin America: Reflections on Sustainability and the Balance between Equity and Efficiency. Joseph L. Rotman School of Management, University of Toronto ITP paper 036 Bird R. M. (2005) Value Added Taxes in Developing and Transitional Countries: Georgia State University Working Paper No 05-05. Dalton, H. (1954), Principles of Public Finance, 4th Ed, p.23 Ekeocha, D. (2010). The Economic Effects of Tax Policy Reform in Nigeria. W.iiste.org/ Journals/index.php/JEDS/articule. Emran S and J. Stiglitz (2005), On Selective Indirect Tax Reform in Developing Countries. Journal of Public Economics 18: 599 –620 Georgios Karras and Davide Furceri (2009). Taxes and Growth in Europe. South-Eastern Europe Journal of Economics 2 (2009) 181-204

James, S. and Nobes, C. (2008) The Economics of Taxation, 8th ed, Birmingham. Fiscal Publications Jhingan M. L. (2012). Principles of Economics. Vrinda Publications (P) LTD, 4th Ed. Kiabel, B.D. and N.G. Nwokah, 2009. Boosting revenue generation by state governments in Nigeria: The tax Consultants option revisited. Eur. J. Soc. Sci., 8(4) Lee Y. and Gordon H. (2005) Structure and Economic Growth. Journal of Public

7 | P a g e Economics 89:1027-1043. Ogbonna, G.N. and Appah, E. (2012) Impact of Tax Reforms and Economic Growth in Nigeria: A Time Series Analysis. Current Res. J.Soc. Sci. 4(1):62-68. Ojo, S. (2008) Fundamental Principles of Nigerian Tax, Lagos, Sagribra Tax Publications. Okauru, I.O (2011). Effective and Efficient Tax collection and Administration in Nigerian in the Three Tiers of Government. Retrieved From http://www.rmafc.gov.ng/2011 on 23/01/2014 Onoalapo, A. A et al (2013). Assessment of Value Added Tax and its effects on revenue Generation in Nigeria. International Journal of Business and Social Sciences. Vol.4, No.1 Osundina, C. K and Olanrewaju, G.O. (2013).Welfare Effects of Taxation on the Nigerian Economy. International Journal of Humanities and Social science Invention. Vol.2 No. 8 Solow, R. (1956), A Contribution to the Theory of Economic Growth, Quart. Journal of Economics 70:65-94. Tosun M.S. and S. Abizadeh (2005), Economic Growth and Tax Components: An Analysis of Tax Changes in OECD. Applied Economics,37; 2251-2263 Widmalm F. (2001), Tax Structure and Growth: Are Some Taxes Better than Others? Public Choice 107:199 – 219

Appendix 1

Tax Revenue Collection by Tax Types after recent Tax Reforms (2011- 2014)

Tax Types Percentage Contribution to Total Tax Collection (%)

2011 2012 2013 2014

Petroleum Profits Tax 68.98 63.93 54.82 57.96

Company Income Tax (CIT) 11.91 16.39 16.67 17.62

Gas Income 1.16 0.19 0.22 0.13

Capital Gains Tax 0.01 0.18 0.26 0.01

Stamp Duty 0.15 0.15 0.21 0.38

VAT (NCS-import) 3.30 3.29 4.84 4.55

VAT (non-import) 9.38 10.90 17.29 15.50

Education Tax 4.20 3.76 4.26 2.36 Personal Income Tax (PIT) 0.87 1.02 1.40 1.47

NITDEF 0.05 0.18 0.03 0.02

TOTAL 100 100 100 100

Ratio of income tax (CIT and PIT) 1.01 1.22 0.82 0.95 to VAT

Comment. Mildly Mildly Regressive Regressive Progressive Progressive

Source: Federal Inland Revenue Service (FIRS)

Appendix 2.

Pairwise Granger Causality Tests Date: 03/22/16 Time: 15:51 Sample: 1985 2011 Lags: 5

Null Hypothesis: Obs F-Statistic Prob.

CIT does not Granger Cause CED 22 3.95448 0.0268 CED does not Granger Cause CIT 4.08950 0.0241

PCGDP does not Granger Cause CED 22 3.47149 0.0397 CED does not Granger Cause PCGDP 2.56054 0.0900

VAT does not Granger Cause CED 22 0.29652 0.9049 CED does not Granger Cause VAT 0.08886 0.9924

PCGDP does not Granger Cause CIT 22 17.1481 7.E-05 CIT does not Granger Cause PCGDP 4.34245 0.0199

VAT does not Granger Cause CIT 22 0.40380 0.8364 CIT does not Granger Cause VAT 0.28956 0.9090

VAT does not Granger Cause PCGDP 22 0.80121 0.5715 PCGDP does not Granger Cause VAT 0.01233 0.9999

Source: Author’s computation using Eviews 7.

Appendix 3. Percentage Contributions of CIT, CED and VAT to Per capita Gross Domestic Product

(PCGDP), 1985-2011.

YEAR CIT CED VAT PCGDP

1985 1.32 41.2 0 899.5 1986 1.28 51.4 0 887.6

1987 1.24 36.92 0 1307.1

9 | P a g e 1988 1.2 29.46 0 1671.1 1989 1.18 43.91 0 2553.6

1990 1.15 35.71 0 3085.9 1991 1.13 30.78 0 3527

1992 1.1 36.46 0 5852.9 1993 1.06 42.93 0 7267.5

1994 1.03 50.83 128.08 9299.9 1995 1.01 52 93.59 19429.3

1996 0.98 48.03 85.21 26414.4 1997 0.95 42.27 78.33 26632.2

1998 0.92 43.39 67.84 25034 1999 0.89 32.5 60.66 28571.6

2000 0.87 39.18 67.98 39768.5

2001 0.84 23.3 43.32 39773.5

2002 0.82 31.19 52.1 56584.7 2003 0.8 34.51 49.53 67561.1

2004 0.71 37.21 50.79 81013.7 2005 0.76 46.61 62.24 110840.8

2006 0.74 77.68 62.29 138036.9

2007 0.73 62.2 51.85 150147.7 2008 0.7 60.22 41.88 169405.8

2009 0.67 70.94 54.26 165633.4 2010 0.64 73.7 55.76 185759

2011 0.73 74.6 54.85 190678

SOURCE: Author’s computation using data from CBN, 2012.