An Appraisal of The Effect of Tax Revenue on Economic Growth and Development in Nigeria

ABSTRACT:

 This study examines the effect of tax revenue on economic growth in Nigeria, utilizing time series data for the period spanning from 1970 to 2011. The study adopts the Ordinary Least Square (OLS) regression technique and established that tax revenue has positive effect on economic growth in Nigeria.  The result shows that domestic investment, labour force and foreign direct investment have positive and significant effect on economic growth in Nigeria.  It is recommended that efficient tax policy be implemented. Also, policy to  improve  labour  productivity  should  be  sustained,  while  policies  to  attract  foreign  investment  should  be implemented.

 KEYWORDS: Taxation, Tax Revenue, Foreign investment, Ordinary Least Square, Regression.

  I.  INTRODUCTION

 1.1   Background to the Study

 For development and growth of any society, the provision of basic infrastructure is quite necessary. This perhaps explains why the government shows great concern for a medium through which funds can be made available to achieve their set goals for the society (Fagbemi et al, 2010). Government needs money to be able to execute its social obligations to the public and these social obligations include but not limited to the provision of infrastructure and social services. According to Murkur (2001), meeting the needs of the society calls for huge funds which an individual or society cannot contribute alone and one medium through which fund is derived is through taxation. Tax is a major source of government revenue all over the world. Government use tax proceeds to  render  their  traditional  functions,  such  as the  provision  of  public  goods,  maintenance  of  law  and  order, defence against external aggression, regulation of trade and business to ensure social and economic maintenance (Azubike, 2009; Edame, 2008:14). In Nigeria, tax revenue has accounted for a small proportion of total government revenue over the years. This is because the bulk of revenue needed for development purposes is derived  from oil. Crude oil export has continued to account for over 80% of the total federal government revenue, while the remaining 20% is contributed by non-oil sector in which taxation is a part. For instance, Oil sector share in total revenue was 54.4% in 1972 against 45.6% share from non oil sector the same year. By 1974 oil share of total revenue had reached 82.1% while only 17.9% accrued from non oil sector. Following the glut in the world oil prices in the later part of the 1970s, the oil share in total revenue fell to 61.8% in 1978 while non oil sector‟s share rose to 38.2%. And since 1984, the oil sector share in total revenue has continued to rise, though with occasional falls in between periods. By 2006, oil share of total revenue had reached 88.6% against non oil share of 11.4%. As at 2009, oil sector share in total revenue stood at 78.8% while non-oil sector accounted for just 21.3% of the total revenue (CBN, 2010). From the above picture, it is evidenced that revenue from the non-oil sector (in which taxation is a part) has not contributed  significantly to  total  output. Thus,  the study  is  an attempt  to  examine the  effect  of tax revenue on economic growth in Nigeria. 

1.2  Statement of the Problem

Tax revenue has been seen as major source of government revenue all over the world. Government use tax proceeds to render their traditional functions, such as the provision of public goods, maintenance of law and order,  defence  against  external  aggression,  regulation  of  trade  and  business  to  ensure  social  and  economic maintenance.  However, it is evidenced that the role of taxation in promoting economic growth in Nigeria is not felt, primarily because of its poor administration. The major challenges facing tax administration in Nigeria include frontiers of professionalism, poor accountability, lack of awareness of the general public on the imperatives and