CHAPTER ONE

INTRODUCTION
1.1 Background to the Study
For Nigerian government to effectively carry out its primary function and other
subsidiary functions, governments need adequate funding. Government’s
responsibilities has continue to increase over time especially in developing
countries like Nigeria resulting from growing population of citizens, and
infrastructural decay. But quit unfortunate the revenue of the government has not
been growing above her expenditure to enable capital formation. In Nigerian, the
government has depended so much on oil revenue for execution of its primary
functions and economic goals neglecting tax revenue which is the primary sources
of government revenue (Uzonwanne, 2015).
Tax revenue is seen as an essential part of a country’s investment and growth
pattern. 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
economic wellbeing of the society (Appah, 2004; Appah and Oyandonghan, 2011).
The funds provided by tax are used by the states to support certain state obligations
such as education systems, health care systems, and pensions for the elderly,
unemployment benefits, and public transportation.
Tax is a major player in every society of the world (Azubike, 2009). The tax
system is an avenue for government to use in collecting additional revenue needed
in discharging its pressing obligations. A tax system is one of the most effective
means of mobilizing a nation’s internal resources and it lends itself to creating an
enabling environment to promote economic growth. Towing this line of argument,
Nzotta (2007), also argued that taxes constitute key sources of revenue to the

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federation account shared by the federal, state and local governments. Hence, a tax
policy represents key resource allocator between the public and private sectors in a
country.
Anyanfo (1996) and Anyanwu (1997), stated that taxes are imposed to regulate the
production of certain goods and services, protection of infant industries, control
business and curb inflation, reduce income inequalities etc. Similarly, Tosun and
Abizadeh (2005), submitted that taxes are used as proxy for fiscal policy
(negatively or positively). They outlined five possible mechanisms by which taxes
can affect economic growth. First, taxes can inhibit investment rate through such
taxes as corporate and personal income, capital gain taxes. Second, taxes can slow
down growth in labour supply by disposing labour leisure choice in favour of
leisure. Third, tax policy can affect productivity growth through its discouraging
effect on research and development expenditures. Fourth, taxes can lead to a flow
of resources to other sectors that may have lower productivity. Finally, high taxes
on labour supply can distort the efficient use of human capital high tax burdens
even though they have high social productivity.
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 (Jhingan, 2005). It
has also been described as a positive change in the level of production of goods
and services by a country over a certain period of time. However, economic growth
is measured by the increase in the amount of goods and services produced in a
country. An economy is said to be growing when it increases its productive
capacity which later yield more in production of more goods and services (Jhingan,
2003). Economic growth is usually brought about by technological innovation and
positive external forces. It is the yardstick for raising the standard of living of the
people. It also implies reduction of inequalities of income distribution.

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Tax revenue therefore, plays a crucial role in promoting economic activity and
growth. Through tax revenue, government ensures that resources are channeled
towards important projects in the society, while giving succour to the weak. The
role of tax revenue in promoting economic activity and growth is not felt primarily
because of its poor administration (Festus and Samuel, 2007).
Okpe (1998) asserted that the existence of government is a necessity that cannot
continue without financial means to pay for its expenses as there are certain
services which the government must provide to its citizens because of their
essential nature.
Government does this to ensure that the supply of such goods and services are
evenly distributed in any given society so that the rich and poor may benefit.
Towards this end, One is prone to ask, how did government get such huge amount
of money to finance and provide such essential goods and services to her citizenry.
Is it true that government uses her minted money to provide for the essential goods
and services or there are other important economic means available that should be
considered as sources of revenue to the government so that excessive money is not
in circulation in any economic situation. Thus, Olashore (1999) noted that for an
economic and social balance to be maintained in an economy, government has
found ways of financing her activities and one of such finance apart from loans and
grants is tax revenue.
Tax revenue plays a crucial role in promoting economic and social activities and
growth. Through tax revenue, government ensures that resources are channeled
towards important projects in the society while giving support to the weak. In
support of Olashore, Orjih (2001), stated that taxation is useful in raising revenue,
controlling the consumption of certain commodities, controlling monopoly,
reducing income inequalities, improving the balance of payments as well as
protecting infant industries.
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Abomaye-Nimenibo(2017) is of the view that tax is a compulsory contributions
made by animate and inanimate beings to government being a higher authority
either directly or indirectly to fund its various activities and any refusal is meted
with appropriate punishment. He went on to say that Tax is an involuntary
payment made by a resident of a state in obeisance to levy imposed by a
constituted authority of a sovereign state at a particular period of time.
Hence, this study looks at econometric consequences of tax revenue for both GDP
per capita levels and their transitional growth rates, with a large part of the
empirical analysis devoted to assessing the effects of direct and indirect tax
revenues on productivity and growth of the Nigerian economy. Therefore, the aim
of this research work is to evaluate empirically the impact of tax revenue on
economic growth in Nigeria from 1988 to 2018.

1.2 Statement of the Problem

There is at general lack of consensus among scholars on the contribution of tax
revenue to the economic growth of nations. For instance, whereas Ariyo (1997) in
his study on productivity of the Nigerian tax system documented a satisfactory
level of productivity of the tax system before the oil boom, Festus and Samuel
(2007) established that the role of tax revenue in promoting economic activities
and growth is not felt in Nigeria. The two studies reflect that the oil boom has not
improved the economic state of the country since before the boom, the growth of
economic activities deteriorated. The emergence of oil as a major tax revenue is
one of the means a country’s government devices in solving the economic
problems of the country and to enhance government expenditure which is expected
to be beneficial to the citizens of such country through the provision of social and
economic infrastructures (Adereti et al, 2011). In Nigeria, this has not been the
case because despite the tax revenue and expenditure reported year in year out by

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the government, the physical state of the nation in terms of infrastructure and
social amenities is backward. This is evident in the lack of electricity supply,
portable drinking water, basic health delivery, bad roads, just to mention but a few.
The gap in terms of the period covered is also a contributory factor in the disparity
in the outcomes of relationship between tax revenue and an economy. The advent
of the oil boom encouraged some laxity in the management of the non-oil revenue
sources like the company income tax and custom and excise duties. This calls for
an urgent need in the improvement of the tax system to enhance the evaluation of
the performance and facilitate adequate macroeconomic planning and
implementation (Adereti et al, 2011).
Bonu and Pedro (2009) investigated the impact of income tax rates (ITR) on the
economic development of Botswana which shows that the impact of income tax
revenue over the nation’s GDP is not impressive in developing nations. This calls
for the need to further investigate the current tax revenue vis-à-vis the Nigerian
economy.

1.3 Objectives of the Study

The broad objective of this study is to examine empirically the impact of tax
revenue on economic growth in Nigeria from 1988 to 2018. The specific objectives
of the study are to:
i. Examine the trend of tax revenue in Nigeria;
ii. Examine the relationship between tax revenue and economic growth in
Nigeria

1.4 Research Questions

The following research questions are derived from the research objectives:
I. What has been the growth trend of Tax Revenue in Nigeria?

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 II. What is the relationship between tax revenue and economic growth in
Nigeria?
III. What is the relationship between oil revenue and economic growth in
Nigeria?
IV. What is the relationship between federal government independent revenue
and economic growth in Nigeria?

1.5 Research Hypotheses

The research work is guided by the following null and alternative hypotheses;
i. H0: There is no significant relationship between tax revenue and economic
growth in Nigeria.
H1: There is a significant relationship between tax revenue and economic
growth in Nigeria.
ii. H0: There is no significant relationship between oil revenue and economic
growth in Nigeria.
H1: There is a significant relationship between oil revenue and economic
growth in Nigeria.
iii. H0: There is no significant relationship between federal government
independent revenue and economic growth in Nigeria.
H1: There is a significant relationship between federal government
independent revenue and economic growth in Nigeria.

1.6 Significance of the Study

The study will be of benefit to Government and hence will help public fund
managers in making adequate financial planning, forecast as well as mending the
needed areas in public expenditure to balance with revenue base. Also it will

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encourage government in finding lasting solution to the problem of income
inequality and rising poverty across the country.
All stakeholders in the public sector will find the work valuable as it redirect and
re-orientate the thinking of managers of public and private enterprise on the
importance tax revenue to nation growth and development.
Individuals and groups will also benefit from this study as it will provide the
avenue for better public participation in budget and budgetary implementation and
tracking.

1.7     Scope of the Study:

The scope of this study covers critical examinations on the impact of tax revenue
on economic growth of Nigeria as such, the scope of this study is defined from
three 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 thirty-five years (1988-2018). This
period is considered reasonable to establish the consistency and effectiveness of
tax revenue generated on the economic growth of Nigeria. This study is restricted
to secondary data which were obtained from the statistical bulletin from Central
Bank of Nigeria (CBN) and reports of Federal Inland Revenue Service (FIRS).
This provided data that was used to measure the tax revenue (independent variable)
and economic growth (dependent variable) of Nigeria. The tax revenue was
measured by Direct Tax and Indirect Tax and Gross Domestic Product (GDP) was
used as a proxy for economic growth over the period of study. Using data from
these sources enhanced the reliability and validity of data used in this study.
Ordinary Least Square was the statistical tool used in this research.

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1.8 Data and Methodology
This study will employ secondary data relating to the dependent and independent variables

which will be obtained from the Central Bank of Nigeria Statistical Bulletin.

Gross Domestic Product 1980-2018

Tax Revenue 1987-2018

Oil Revenue 1987-2018

Federal Government Independent Revenue 1987-2018

The method of Data Analysis will be econometric method of Ordinary Least Square (OLS), Co-

Integration and Granger Causality test. It is important to note that time series data are prone to

error due to fluctuations in business activities from which most of our data are derived. Hence,

the following analysis will be tested accordingly:

Test for the co-efficient of determination (R2) will be used to test and know the power-strength

of the explanatory variables in the models to see the goodness of fit of the variables. In other

words, it measures the percentage variation in the dependent variable that is explained by the

independent variables.

Test of significance (T-test) of each of the parameter estimates will be carried out. In other

words, it is a statistical test that is used to verify whether each of the parameters at 5 percent

confidence level is significant or not.

F-Test: This test will be carried out to see the overall significance of the explanatory variables in

the model.

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Durbin Watson test for autocorrelation: The Durbin-Watson (DW) statistical test will be used to

carry out the test for autocorrelation. ‘‘Autocorrelation or serial dependence of the error term is

considered when the successive values of the error term are serially correlated or dependent.

That is, the value, which U assumes in any one period, depends on the value, which it assumed in

the previous period’’.

1.8 Organization of Study

To facilitate this task, the study will be divided into five chapters.

Chapter one gives introduction to the current study. It gave the study background
and identified problems of the study. The objectives of the study are clearly stated
in this chapter with the study questions and hypothesis clearly spelt out. It further
stated the significance, scope, data and methodology and organization of the study
and ends with the definition of terms.

The next chapter presents conceptual, literature and empirical literature review.
The chapter concludes by identifying some literature gap and how relevant the
review is to the current study

The chapter three is the methodology. This chapter presents the model
specification, the method of data analysis and the source of our data.

Chapter four is the presentation of results. This chapter presents the results of our
analysis, interpretation and concludes with the policy implication.

The last chapter concludes, summarizes and gives recommendation based on the
study. It ends by giving recommendations for further studies.