CHAPTER ONE

INTRODUCTION
1.1 Background of the study

Taxis one of the delicate areas of government policy. Not only are taxes necessary

to fund government expenditure, they can also be an effective lever to achieve a

fairer distribution of income and more inclusive growth. At the same time, taxes

may distort economic behaviour and risk damaging economic growth. This is why

public policy makers are interested in raising revenue in ways that will minimize

disruption to economic activity. Economists have long understood that the larger

the behavioral response to a tax change, the larger the resulting efficiency cost or

deadweight loss. Although the deadweight loss may not be of utmost relevance to

policy makers or voters per se, they are usually keenly interested in the impact of

taxes on productivity growth and employment. In this direction, OECD (2010) has

noted that a growth-oriented tax systems pursue not only ‘to minimize the

distortions of market signals by the tax system, but also to create as few obstacles

as possible to investment, innovation, entrepreneurship and other drivers of

economic growth.’ Spry (2014) further explained that ‘a tax system with low tax

rates and a broad tax base minimizes economic distortions’ and noted that with

such minimal distortions, economic decisions allocate resources to their most

productive use. This means that tax structures should best be designed to

specifically encourage savings, investments, innovations, entrepreneurship and

1
generally support GDP per capita growth. Also, Stiglitz (2014) advised that such

tax reforms geared towards promoting equity and growth should be carefully done

if they are not to have large distributional consequences and impose large

transition costs.

In the country we are today, different irregularities leading to public outcry and

perpetual increasing fraud in government sector activities resulting from an

inappropriate public finance planning and implementation mostly in some of the

developing countries. Banks and businesses organizations were collapsing thereby

leading to crisis of confidence in internal and external activities in the country due

to poor governance. The reason behind this is corruption, indiscipline, lack of

accountability which is the hall marks of our society in developing countries

resulting into decrease in growth and development.

Economic growth represents the expansion of a country’s potential GDP or output

Olopade & Olopade, 2010). Growth models that incorporate public services, the

optimal tax policy lingers on the characteristic of services. Economic growth has

provided insight into why state growth at different rates over time; and this

influence government in her choice of tax rates and expenditure levels that will

influence the growth rates (Nazifi, 2014 & Nwaeze 2010).

The narrow goal of development (economic growth) induced nations to focus their

energies narrowly on the rapid growth of national incomes (Todaro & Smith 2013).

2
“To maximize income growth, environmental considerations were left to languish

on the sidelines; the standard of living was often allowed to slide; large inequalities

between classes, regions, and genders were ignored; and poverty was tolerated

more than it should have been in the rush to generate maximum growth”

(Basu2015). It was then scholars and policy-makers in most developing countries

who realized that income growth was only one dimension of development; a new

economic view of development has arrived. The state spends on the defense,

education other social services. It also spends on servicing national debts, capital

investment such as Airport, etc. Government also spends on its own maintenance

as well as on other countries and governments. Public or government expenditure

therefore is the expenses of the government for its own maintenance and on the

society and the economy as a whole. The state is getting increasingly involved in

economic activities and in transfer payments to other countries. As a result, public

expenditure has maintained an upward trend over time in virtually all the countries

of the world (Maku, 2010). The major items of public expenditure in Nigeria

include: administration, economic service, infrastructure and social amenities,

national security and defence, grants and aids and interest on loans.)

Public expenditure could be broadly classified into recurrent expenditure ad capital

expenditure. The expenditure of government which occurs regularly throughout the

year is referred to as recurrent expenditure. Capital expenditure on the other hand

3
are the expenditures of government on the acquisition of things of permanent

nature (Nwaeze 2010). They include all expenditure on capital projects such as

buildings, construction of roads, bridges and all permanent structures and assets.

A tax is a fee charged or levied by the government on a product, income, or

activity. If it is levied directly on personal or cooperate income, it is called a direct

tax. If it is levied on the price of a good or services, then it is called an indirect tax.

The main reason tor taxation is to finance government expenditure and to

redistribute wealth which translate to financing development of the country (Ola,

2014; Jhingan, 2014; Musgrave and Musgave; 2014 and B hartia, 2010). Whether

the taxes collected are enough to finance the development of the country will

depend on the needs of the country and country can seek alternative sources of

revenue to finance the development of the country will depend on the needs of the

country and countries can seek alternative sources of revenue to finance

sustainable development (Unegbu & Irefin, 2011). Government collects taxes in

order to provide an efficient and steadily expanding non-revenue yielding services,

such as infrastructure- education, health, communications system etc, employment

opportunities and essential public services (such as the maintenance of laws and

order) irrespective of the prevailing ideology or the political system of a particular

nation.

This study therefore attempts to address the issues on the influence of tax revenue

4
on government capital expenditure and economic growth in Nigeria with the view

for remedying the country’s revenue potentials for enhanced wealth creation and

development.

1.2 Statement of Problem

The attitude of Nigerians towards taxation is worrisome as many prefer not to pay

tax if given the opportunity the economy continues to lose huge amount of revenue

through the unwholesome practice of tax avoidance and tax evasion, these loss of

revenue can change the fortune of many economy particularly, developing

countries like Nigeria. This problem has been lingering for so long which urgent

attention and solution is overdue. The cost of collecting tax in Nigeria both social

and economic cost is too high to the extent that if left unchecked the cost may soon

out weight the benefit or value, derived from such operation and that will not be

appropriate for the system. The government spends more to realize a miserable

pittance. The rate of corruption on the part of tax officials is alarming as most of

them connive and collude with supposed tax payer to evade and avoid tax.

Sometimes, the tax officials art; not properly trained on the modern ways of tax

administration. The inadequate social infrastructures in Nigeria call for attention as

to how tax revenue generated is to be expanded and accounted Tor especially

where those in authority continue to spend these hand earned resources with

reckless abandon.

5
This study therefore attempts to address the issues on the impact of tax on

government capital expenditure and economic growth with the view for remedying

the country's revenue potentials for enhanced wealth creation and development.

1.3 Objectives of the study

Given the foregoing, the primary objectives of this study is to establish empirically
whether tax have any impact on government capital expenditure on the growth of
Nigerian economy.
The specific objectives of this study include to:

 Examine the impact of tax on government capital expenditure and economic

growth in Nigeria.

 Establish the relationship that exists between tax revenue and government

capital expenditure.

 Examine if government capital expenditure has any impact on the economic

growth in Nigeria?

1.4 Research Hypothesis

In the light of the above, the following hypotheses are formulated. It’s important

that hypotheses are logical speculations based on available information’s. We

hypothesize in the null and alternative hypotheses format Ho and H1 respectively.

H0: Tax has significant impact on government capital expenditure and economic

growth in Nigeria.

6
H1: Tax has no significant impact on government capital expenditure and

economic growth in Nigeria.

H0: There is a significant relationship between tax revenue and government capital

expenditure.

H1: There is no a significant relationship between tax revenue and government

capital expenditure.

1.5 Significance of the study

The study will assist the government in policy formulation as it relates to the

impact of taxation on government capital expenditure, it will help to strength the

operation of the relevant government agencies such as federal board of inland

revenue, central bank of Nigeria, joint tax board and others. This study will bring

government attention to other sources of revenue apart from the over dependence

on revenue from petroleum.

1.6 Scope of the study

The view its primary objectives, this study focus mainly on the impact of tax on

government capital expenditure and economic growth in Nigeria.

7
 CHAPTER TWO
LITERATURE REVIEW
2.1 Conceptual Framework

Concept of Taxation

Taxation is not a new word in Nigeria or the world as a whole. In Nigeria, taxation

has been in existence even before the coming of the colonial men or the British.

Taxation can be defined as the system of imposing a compulsory levy on all

income, goods, services and properties of individuals, partnership, trustees,

executorships and companies by the government (Samuel & Simon, 2011; Yunusa,

2013). A1-Qudair (2015) defined taxation as a compulsory payment made to

individuals and organization to relevant Inland Revenue authorities at the federal,

state pr local government level. Hye and Jalil (2010) sees taxation as a levy

imposed by the government against the income, profit or wealth of the individual,

partnership, corporate organization. Ola (2017) defined taxation as compulsory

levy imposed on a subject or upon his property by the government to provide

security, social amenities and create conditions for the economic well-being of the

society. A precise definition of taxation by Zinaz and Samina, (2010) is that

taxation is one of the sources of income for government, such income as used to

finance or run public utilities and perform other social responsibilities. According

to Adams (2014) taxation is the most important source of revenue for modern

governments, typically accounting for ninety percent or more of their income.

8
Tax is also the nexus between state and its citizens, and tax revues are the lifeblood

of the social contract. The very act of taxation has profoundly beneficial effects in

fostering better and more accountable government (Tax Justice Network (TJNS)

revenue 2012. Musgrave and Musgrave (2014) also stated that the economic

effects of tax include micro effects on the distribution of income and efficiency of

resources use as well as macro effect on the level of capacity output, employment,

prices, and growth. However, the use of tax is an instrument of fiscal policy to

achieve economic growth in most less develops countries cannot be reliable

because of dwindling level of revenue generation. A critical examples of

governments that have influenced their economic development through revenue

from tax are; Canada. United States, Netherland. United Kingdom, they derive

substantial revenue from Company Income tax. Value Added tax. Import Duties

and have used same to create prosperity (Oluba,2018).

According to Adegbie and Fakile (2011), the more citizens lack knowledge or

education about taxation in the country, the greater the desire and the opportunities

for tax evasion, avoidance and non-compliance with relevant lax laws. In this

respect, the country will be more adversely affected because of absence of tax

conscience on the part of individuals and the companies and the (allure of tax)

administration to recognize the importance of communication and dialogue

between the government and the citizens in matters relating to taxation.

9
The attitude of Nigerian towards taxation is worrisome as many prefer not to pay

tax if given the opportunity the economy continues to lose huge amount of revenue

though the unwholesome practice of tax avoidance and tax evasion, these loss of

revenue can change the fortune of many economy particularly, developing

countries like Nigeria. This problem has been lingering for so long which urgent

attention and solution is overdue. The cost of collecting tax in Nigeria both social

and economic cost is too high to the extent that if left unchecked the cost many

soon out weight the benefit or value, derived from such operation and that will not

be appropriate for the system. The government spends more to realize a miserable

pittance. The rate of corruption on the art of tax officials is alarming as most of

them connive and collude with supposed tax payers to evade and avoid tax.

Sometimes, the tax officials’ art, not properly rained on the modern ways of tax

administration. The inadequate social infrastructures in Nigeria call for attention as

to how tax revenue generated is to be expanded and accounted of especially where

those in authority continue to spend these hand earned resources with reckless

abandon.

Taxes are classified into direct and indirect. Yunusa (2013) and Aguolu (2014)

defined direct taxes as taxes levied on the income of individual, group of

individuals, and business firms and are paid directly by the person or persons on

which it is legally imposed by the tax authority. Direct taxes can be classified into

10
Personal Income tax, Company Income tax, Capital Gain tax, Petroleum Profit

tax, and Capital Transfer tax. Indirect taxes are taxes levied on expenditure that is,

goods and services. These taxes are paid as part of payment for goods and services

purchased by the ultimate users or consumer. The incidences of this type of taxes

are usually borne by the third party. Indirect taxes can be classified into the

following: Import duties, Export duties and Value added tax (Yunusa,2013).

Concept of Economic Growth

Economic growth represents the expansion of a country’s potential GDP or output.

For instance, if the social rate of return on investment exceeds the private return,

then policies that encourage can raise the growth rate and levels of utility. Growth

models that incorporate public services, the optimal tax policy lingers on the

characteristic of services (Adeniyi, 2013). It has provided insight into why state

growth at different rates over time; and this influence government in her choice of

tax rates and expenditure levels that will influence the growth rates.

Economic growth is an essential ingredient for sustainable development. Economic

growth brings about a better standard of living of the people and this is brought

about by improvement in infrastructures, health, housing, education and

improvement in agricultural productivity. Economic growth as a concept is viewed

differently by different scholars. This is attributed to the condition prevailing at the

time of these scholars. Majority accept it as an increase in the level of national

11
income and output of a country. According to Dewett (2015), it implies an increase

in the net national product in a given period of time. Todara and Smith (2016)

defined economic growth as a steady process by which the productive capacity of

the economy is increased over time to bring about rising levels of national output

and income. Jhingan (2016) viewed economic growth as an increase in output. He

explained further that it is related to a quantitative sustained increase in a country’s

per capita income or output accompanied by expansion in its labour force,

consumption, capital and volume of trade. The main characteristics of economic

growth are high rate of structural transformation, international flows of labour,

goods and capital (Ochejele, 2007).

The motive to improve the quality of lives of citizens through the numerous

expenses of government has motivated the study of the impact of government

expenditure on the economic growth of Nigeria. Globally, government spending

has been on the increase without a corresponding increase in the economic

development of these nations especially in developing nations. This situation has

also stimulated research in the area of government spending and economic growth

and development.

Government Expenditure

This is the acquisition by governments of goods and services for current

consumption to directly satisfy the individual or collective needs of the society,

12
referred to as government consumption expenditure, while government acquisition

of goods and service intended to create future benefits in referred to as government

investment expenditure (government gross capital formation). All governments’

acquisitions (government consumption expenditure plus government investment

expenditure) are classified total government expenditure. Government expenditure

can be financed by borrowing, printing of new money, taxes or revenues from

government direct investments even though some the government investment are

supposed to be subsidized. This presupposes that while it is not in doubt that

governments spending stimulates economic growth, economic growth on the other

hand stimulates government spending as changes in economic growth rate

determines change in revenues accruable to the government upon which spending

in based (Aguolu,2014).

Economic Growth and Government Expenditure

No doubt, the bulk of government revenues come from proceeds from government

direct, investments in Nigeria, while printing of new money and taxes have remain

major components of government revenues in Nigeria, revenues from governments

direct investments have dominated governments revenue streams in Nigeria. This

phenomenon explains fluctuations in government expenditure over the years in

Nigeria. Since rise in public expenditure greatly depends on revenue collection,

and revenue collection depends on the level of economic activities it therefore

13
follows that government expenditure depends on the level of economic activities

(Osmond, Nnamocha & Emmanuel 2015).

The Importance of Taxation in an Economy Raising of Revenue to Finance

Government Expenditure Programmes.

Tax plays an important role in the Nigerian society. It is a strong force for

economic development in the country from the pre-colonial, colonial and post-

colonial eras.

It is by far the most significant source of revenue for modern government; hence

there is recent call for increase in taxation.

Revenue generated by the government can be used to carry out its expenditure

programmes which include: defence, social and infrastructural services, general

administration etc. for government to effectively carry out these obligations, a lot

of revenue will be required. Revenue generated from oil and non-oil sources

cannot be enough to execute these enormous tasks, hence tax revenue which is

believed to be the most significant source of revenue to the government. Rabiu

(2014) agree with this in his statement “A great majority of Federal and state

government” taxes are imposed primarily for the purpose of raising revenue to

finance government expenditure. This reproves why government in its annual

budget limits the level of expenditure to commensurate with the projected revenue

which tax plays a significant role. In essence, what taxes meant to the government

14
to exactly what capital and gains are to individuals and business organizations.

Tax Laws and Economic Development

Musa (2010) opined that economic and social development laws and policies

provide the basis for effective state action that lifts society from

underdevelopment, improves the standard of living and facilities for the realization

of the millennium development goals. Nigeria is in dire need of solution to its

development challenges. Good laws that are well implemented would contribute to

the resolution of these challenges. The first thing to do in this scenario is an

attempt to review the implementation of the identified laws like the company

income tax, petroleum income Act and tax reform Act. The second thing is to get

relevant legislative committees and ministers, departments and agencies involved

give account of their respective stewardship roles in implementation of the law.

Oluba (2018) in his study on productivity of the Nigerian tax system and reports a

satisfactory level of productivity of the tax system before the oil boom. The advent

of the oil boom encouraged some laxity in the management of non-oil revenue

sources like the company income tax, which was rectified to a reasonable extent

with the commencement of the structural adjustment programme. The report

underscores the urgent need for the improvement of the tax information system to

enhance the evaluation of the performance of the Nigerian tax system and facilitate

adequate macroeconomic planning and implementation. In our own opinion, we

15
think the Nigeria tax system needed urgent overhauling in order for it to be

effective in catering for the expenditure of the government.

The objectives of the tax system are multi-dimension in nature which includes

revenue generation, resources allocation, fiscal tool for stimulating economic

growth and development, social function, like redressing the rural-urban

population drift as well as making everybody to be a responsible citizen in the

society. The government needs to enlighten the citizen on tax as well as been

effective in their use of the generated revenue.

The joint Tax Board was created in tax law by section 27 of Income Tax

Management Act of 1961 to harmonize the tax administration of the country. It

needs to be appreciated that the tax system offers itself as one of the most effective

source of revenue and that it tends to create an environment conducive to the

promotion of economic growth. However, the potency of the tax system will

depend greatly on the tax measures and policies adopted. Sani (2015) opined at

prompting ambition, rewarding success, encouraging private savings and

investments needed to create new jobs and kindling in the people that spirit of

enterprise. The regulation of Nigerian economy should also be the basic function

of the tax system. Taxes should further be used selectively to induce and encourage

nationally desirable economic activities, and may be offered to promote the

development of backward areas of Nigeria. Sani concluded that tax concessions

16
must be given and framed so as to ensure the companies actually carry out the

underlying intention of increased economic development if the tax authority is to

avoid the criticism that tax concessions only offer tax loopholes through which the

agile tax payer can maneuver.

United Nations (2015), expert group stated that tax revenue contributes

substantially to development and therefore, there is the need to streamline a nation

tax system so as to ensure the realization of optimal tax revenue through equitable

and fair distribution of the tax burden. The stark reality in most developing

countries is that whilst there is severe budgetary pressure as a result of ever

increasing demand for government expenditure, there is limited scope for raising

extra tax revenues. Non-compliance problems with corporate persons result from

technicalities and tax avoidance, poor record keeping and cash transactions.

2.2 Theoretical Framework

The study examined four relevant theories which were:

Expectancy theory of taxation

The theory stated that every tax proposal passes the test of practicality and must be

the sole consideration before tax authorities in hid for tax proposal. It strongly

emphasis that the economic and social objective of the state is considered

irrelevant since it is meaningless to have tax that cannot be levied and effectively

collected;

17
Ability to pay theory

The theory focused on the income of the tax payer to meet up the tax payable and

that entity or individual with higher tax base should be subjected to higher tax

payment than an entity or individual with lower tax base The economists are not

unanimous as to what should be the exact measure of a person's ability or faculty to

pay (Naiyeju, 2016 as cited by Osho, Omotayo & Ayorinde, 2019).

Peacock and Wiseman Theory of Public Expenditure

Allan Peacock and Jack Wisemen theory, otherwise known as PWT, was based on

the political theory of public expenditure determination which states that

government likes to spend more money, that citizens do not like to pay more taxes,

and that government needs to pay some attention to the aspiration and wishes of

their people. PWT attempted to explain the circular trend or time pattern of change

in government expenditure in response to development in the political economy

while the taxable capacity of the electorate acts as a constraint. Their theory is

known as Displacement Hypothesis and is based on the experience of Great

Britain. The Displacement hypothesis states that government expenditure grows in

step wise fashion (Zinaz & Samina, 2010).

The acceptance of the existence of a tolerable level of taxation which acts as a

constraint on government behavior is consistent with Clark’s “Catastrophe School”

of taxation. PW make a destination in government expenditure growth between

18
normal or peak time and war, crisis or social upheaval period. According to PW,

during peak, public expenditures would tend to experience an upward trend, even

though there may be some discrepancy between a desirable level of government

expenditure and a desirable level of taxation (Fola, 2007 & Keho, 2010). During

war, famine or social upheaval this normal and steady growth in government

expenditures, would be disturbed. This was as a result of the displacement

hypothesis as unproductive government spending during social upheavals

displaced productive government expenditure leading to rapid increase in public

expenditure. Government imposes higher taxes which are regarded as acceptable

during period of crisis. During this period, public expenditure is displaced upward

(i.e. displacement effect). War-related expenditure displaces private and other

government expenditure. However after the war or crisis, aggregate public

expenditures does not fall back to its original level since a war is not fully paid for

from taxation alone (Yunusa, 2013). Inspection effect may also occur as

government attempts to increase expenditures to improve social conditions which

have deteriorated during the period of the crisis. Government finances the high

expenditures from the increase and tolerable level of taxation that does not return

to its former level. There are two possible scenarios which may occur after the war

or social upheaval. First, total private expenditures may return to its original

growth path and second, government expenditures experienced during the war may

19
continue in the post-war period along with an increase in civilian government

expenditures until the desired growth is reached (Zinaz & Samina, 2010).

Benefit theory

Benefit theory, which is the underpinning theory stated that the more benefits a

person derives from the activities of the state, the more he should pay to the

government; economic growth and development theory which disclosed that the

real purpose of taxation is to take purchasing power from the taxpayers so that

taxpayer relinquishes control over economic resources and make them available to

the state. It is fiscal policy instrument which the government manipulate to achieve

macroeconomic objective. According to Nwankwo, (1992) as cited by Osho,

Omotayo and Ayorinde (2019), this theory states that the more benefits a person

derives from the activities of the state, the more he should pay to the government.

2.3 Empirical review

The review of the relationship between fiscal policy and economic growth in three

North African countries of Egypt, Morocco and Tunisia by Mansouri (2018) shows

positive correlation between the two variables, and also that 1 percent rise in public

expenditure increases the real GDP by 1.26 percent in Morocco, 1.15 percent in

Tunisia and 0.56 percent in Egypt. The results also affirmed existence of long-run

relationships for all the three countries.

20
In Nigeria, there is controversy as to the role government expenditure on economic

growth for instance, Omitogun and Ayinla (2007) attempt to establish whether

there is a link between fiscal policy and economic growth in Nigeria using the

Solow growth model estimated with the use of ordinary least square (OLS)

method. It was found that fiscal policy has not been effective in the area of

promoting sustainable economic growth in Nigeria. Nurudeen and Usman (2010)

analyzed the impact of government expenditure on economic growth in Nigeria

and found that government total capital expenditure has negative effect on

economic growth. Also, comparing the relative effectiveness of fiscal versus

monetary policies on economic growth in Nigeria, Adefeso and Mobolaji (2010)

suggest that the effect of monetary policy is more prominent than fiscal policy on

economic growth in Nigeria.

Moreover, Ighodaro and Okiakhi (2010) disaggregated government expenditure

into general administration, and community and social services in examining the

effect of government expenditure on economic growth in Nigeria using time series

data and found that both components of government expenditure have negative

impact on economic growth.

However, Ekpo (1995), found that capital expenditure on transport,

communication, agriculture, health and education positively influence private

investment in Nigeria, which invariably enhanced the growth of the overall

21
economy. In the same vein Ogbole, Sonny and Isaac (2011) focused on the

comparative analysis of the impact of fiscal policy on economic activities in

Nigeria during regulation and deregulation, using the econometric methods of co-

integration and error correction model. The study indicates that there is a

difference in the effectiveness of fiscal policy in stimulating economic growth

during and after regulation period. They recommend that government fiscal policy

should refocus and redirect government expenditure towards production of goods

and services so as to enhance GDP growth.

Arnold (2018) examined the relationship between tax structures and economic

growth by entering adopting panel growth regressions for 21 OECD countries. The

results of his analysis revealed that income taxes are mainly related with lower

economic growth than taxes on consumption and property. More specifically his

findings allow the formation of a ranking of tax instruments with respect to their

association to economic growth. However, an evidence of a negative relationship

between the progressivity of personal income taxes and growth was established. In

a separate analysis of the effects of effects of income tax changes on economic

growth, Gale &Sam wick (2014) convincingly explained that the structure and

financing of a tax change are fundamental to achieving economic growth, and also

that ‘base-broadening measures can eliminate the effect of tax rate cuts on budget

deficits, but at the same time they also reduce the impact on labor supply, saving,

22
and investment and thus reduce the direct impact on growth’. More technically

they explained that not all tax changes will have the equal influence on growth, and

that reforms that enhance incentives, reduce existing subsidies, eschew windfall

gains, and avoid deficit financing will have more promising effects on the long-

term size of the economy, but may also bring about trade-offs between equity and

efficiency.

Angelopoulos, Malley & Philip popoulos (2012) studied the quantitative

implications of changes in the composition of taxes for long-run growth and

welfare in the UK economy, and they revealed from their findings that the goal of

tax policy is to promote long-run growth by altering relative tax rates in a budget

neutral manner by reducing labour taxes and increasing capital and/or consumption

taxes. On the contrary, they noted that if the goal of the tax policy is to promote

welfare, substantial gains can be obtained from tax reforms that decrease the

capital tax rate relative to the labour and consumption tax rates or that reduce

labour relative to consumption taxes. Generally, their findings give the highpoint

of the significance of the choice of tax structure in policy design and specifically

analyzing the mediums through which the changes in the tax structure mainly

affect growth and welfare.

Moreover, Yamarik (2017) in an earlier investigation of the growth implications of

a nonlinear tax structure with special attention on the distortionary not the

23
redistributive effects of taxation, revealing from his findings that the tax structure

or what is referred to as tax progressivity through time may be another source of

differences between observed per capita growth rates. More broadly, Widmalm

(2014) utilized pooled cross-sectional data from 23 OECD countries to analyze the

effect of tax structure on economic growth and found evidence supporting the

effect of tax structure on economic growth with the proportion of tax revenue

raised by taxing personal income having a negative correlation with economic

growth.

Gap in Literature

This section critically analyses the conceptual, empirical and theoretical review

relating taxation and government capital expenditure in Nigeria. A Tax refund or

tax rebate is a refund of taxes when the tax liability is less than the tax paid. When

a tax is over paid, the law requires it be refunded. Section 23 of FIRS

(Establishment Act) 2007 makes provision for tax Refund to eligible taxpayers.

The Act gives FIRS the power to make tax refund after proper auditing. A

dedicated account is to be set up by the AGF and funded from the Federation

Account based on approved budget. The Tax refund is to be made from this

account. Payment should be made from this account within 90 days. The

prescribed 90 days commences from the time a claim is made. What if the claim is

frivolous? It is presumed the claim will be registered to avoid controversies. The

24
service is to decide on who is eligible for refund. This may be unfair to a legitimate

taxpayer if there is undue delay. There is no time-frame stipulated for the tax audit

instigated by a claim for tax refund.

25
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research design

The study adopted both longitudinal research strategy and quasi-experimental

research design as the research designs. The rationale behind adopting the design is

after finding whether revenue derived from the administration of tax over the

years’ impacts government capital expenditure, while quasi-experimental research

design approach was adopted because it combines theoretical consideration (a prior

criterion) with the empirical observation and extracts maximum information from

the available data. It enables us therefore, to observe the effects of explanatory

variables on the dependent variables.

3.2 Sources of data

The study mainly used secondary data which were analyzed with both descriptive

and inferential statistics were extracted from the annual reports and statistical

bulletin of Central Bank of Nigeria, National Bureau of Statistics and Federal

Inland Revenue Service (FIRS). The data is for the period of 10 years ranging from

2010-2019.

3.3 Method of data analysis

The study used multiple regression, augmented dickey fuller (ADF) test, unit root

26
test (URT), Johansen’s co-integration test, standard error test, coefficient of

multiple determinations, F-test, DW-test as techniques of data analysis.

3.4 Models Specification

The model specified below involved two variables namely independent and

dependent variable. The independent variables were: Companies Income Tax

(CIT), Petroleum Profit Tax (PPT), Value Added Tax (VAT), while government

capital expenditure (CAPEX) as the dependent variable. The model was used to

test all the research hypotheses.

CAPEX= f (CIT, PPT, VAT)

CAPEX= β + a1CIT + a2PPT+ a3VAT+ µ

CIT= Companies’ Income Tax PPT= Petroleum Profit Tax VAT= Value Added

Tax

CAPEX= Government Capital Expenditure

27
 CHAPTER FOUR
RESULTS AND DISCUSSION
4.1 Introduction

This study enquires into the empirical and quantitative analysis of the impact of tax

revenue on government capital expenditure in Nigeria with the use both descriptive

and inferential analysis. The descriptive analysis entails the use of average,

standard deviation, minimum value, maximum value while the inferential analysis,

involves the use of multiple regression, F-test, Augmented dickey fuller (ADF)

test, unit root test (URT), Johansen’s co-integration test, standard error test,

coefficient of multiple determinations, DW-test. The data obtained were based on

the variables identified in the research hypotheses which are: explained variable

which is captured by the Government Capital Expenditure (CAPEX) and four

explanatory variables which are companies’ income tax (CIT), petroleum profit tax

(PPT), value added tax (VAT) and total tax revenue (TTR).

4.2 Descriptive Analysis

The descriptive statistics was computed, so that it gives detail understanding to the

trend of variables (CAPEX, PPT, CIT, VAT, TTR) and it is used as stand to give

recommendations after identifying the association between the variables from

correlation and regression analyses. Descriptive analysis shows the average, and

standard deviation of the different variables of interest in the study. It also presents

the minimum and maximum values of the variables which help in getting a picture

28
about the maximum and minimum values a variable can achieve.

Table: 4.1 Statistics Summary, using the observations 2010 - 2019

Variables Mean C.V. Minimum Maximum
CAPEX 1041.15 0.587792 519.470 2681.08
CIT 564.920 0.467277 162.200 872.000
PPT 2880.98 0.459482 1256.50 4534.80
VAT 497.290 0.431449 178.100 742.000
TTR 6013.94 0.285914 3191.94 8878.97
Source: Authors’ Statistics Summary result.
The table 4.1 above shows that federal government expensed averagely 1041.15

billion naira on developmental projects with a deviation of 59 per cent and ranges

from 519.47 to 2681.08 billion naira for the period under consideration. The

revenue derived from administration of companies income varies with 46.73 per

cent with a mean value of 545 billion naira and ranges from 162 to 872 billion

naira. The petroleum profit tax yields average revenue of 2880 billion naira in 10

years with a variation of 46 per cent, minimum and maximum value of 1257 and

4535 billion naira respectively. Value added tax generates an average 497 billion

naira in 10 years, varies with 43 per cent and ranges from 178 to 742 billion naira.

Revenue derived from taxation in Nigeria from 2010- 2019 averages 6014 billion

naira, a variation of 29 per cent and ranges from 3192 to 8879 billion naira.

4.3 Presentation of Ordinary Least Square Result

In the respect of the specific objectives (one to three) of the study to establish the

short-run relationship between variables, the ordinary least square result showing

the short-run relationship is presented in the table below: -

Table 2: OLS, using observations 2010-2019 (T = 10), Dependent variable:

29
l_CAPEX

Coefficient Std. t-ratio p-value

Error
Const 3.139 2.12517 1.4771 0.19013
l_CIT 0.27825 2.54632 0.1093 0.91655
l_PPT -0.0198693 0.417965 -0.0475 0.96363
l_VAT 0.349158 3.02082 0.1156 0.91175
R-squared 0.549540 Adjusted R-squared 0.324311
F(3, 6) 2.439911 Durbin-Watson 1.195563
Source: - Authors’ Ordinary Least Square result.
From the above table, it could be inferred that the short-run relationship between

revenue generated by the government from taxation and capital expenditure can be

expressed mathematically below:

^l_CAPEX = 3.14 + 0.278*l_CIT - 0.0199*l_PPT + 0.349*l VAT

The result above shows that the constant parameter is positively related with total

government capital expenditure with a coefficient of 3.14 units, which implies that

if all explanatory variables are held constant in the short-run, total government

capital expenditure will increase by 3.14 units. Also, companies’ income tax

showed a positive relationship with capital expenditure with a coefficient of 0.278

which implies that a unit increase in CIT will results to 27.8 per cent increase in

revenue expensed on capital expenditure. Petroleum profit tax (PPT) showed a

negative effect of 0.0199 on the financing of government development project. The

coefficient of the Value Added Tax (VAT) showed a figure of 0.349 units which

implies a direct relationship with the dependent variable. It therefore implies that a

unit increase the level of value added tax will result into

34.9 per cent increase in the value of total government capital expenditure.

30
All explanatory variables except petroleum profit tax are in conformity with the

prior expectation in the short-run as they showed expected results from the

analytical result. The deviation of petroleum profit tax with the expected result

may be adduced to inefficiency in the administration of tax on petroleum.

Meanwhile, the coefficient of multiple determinants (R 2) showed a coefficient of

0.5495 which implies 54.95 per cent explanation of the behaviour of total

government capital expenditure is by the totality of the explanatory variables (PPT,

CIT, and VAT) on the short-run. The Adjusted R2 further prove this with the

adjusted value of 0.324311which implies a 32.43 per cent explanation of the

behaviour of capital expenditure is by the totality of the explanatory variables with

the remaining 67.57 per cent behaviour attributed to other variables outside the

model otherwise referred to as the stochastic variables.

4.4 Tests of Variable Significance(T-Test)

The T-test is used to test the statistical significance of the explanatory variables in

the model. It is done by comparing the T-statistics in the OLS result and the table

value (T-tab).

Table 3: T-Statistics
Variables T-Cal T-tab Decision
Const 1.4771 2.3534 Insignificant
l_CIT 0.1093 2.3534 Insignificant
l_PPT -0.0475 2.3534 Insignificant
l_VAT 0.1156 2.3534 Insignificant
Source: Researchers’ T- Statistics result.
The table 2 above shows that all the explanatory variables (CIT-Companies

31
Income Tax, PIT-Petroleum Profit Tax, VAT-Value Added Tax ) does not have

significant effect on the spending of government on capital expenditure during the

period under consideration which makes null hypotheses (Ho) to be accepted for

research hypotheses one, two and three.

4.5 Tests for Overall Significance of Model (F-Test)

The F-test is used to test the statistical significance of the entire model. This is

done to determine the overall significance of behaviour of all explanatory variables

adopted in the model. It is done by comparing the F- statistics in the OLS result

and the table value (F-test).

For F-tabulated, the F-distribution value with

K – 1 = K’

And N – K degree of freedom @ 95% confidence level

Hence, (F95, V1, V2) dof

Where V1 = K – 1= K’

V2 = N – K

V1 = 4 – 1= 3

V2 = 10 – 4 =6

(F95≃ 3, 6) dof

F-tab = 4.7571 (as given in the statistical table) F-cal=2.4399 (as given in the

OLS result)

32
Since F-cal (2.4399) is lesser than F-tab (4.7571), the model is said to be not to be

statistically significant in explaining the behaviour of CAPEX. This is also

evidence in the above T-test and the adjusted R-squared, which means taxation,

does not spending of government on capital expenditure. This can be presented in a

table below:

Table 4: F-Test

F-calculated F-tabulated H0 H1 Remarks

2.4399 4.7571 Accept Reject Insignificant
Source: Authors’ F-Test result.
The table above shows that F-calculated is lesser than F-tabulated; therefore, we

reject the Alternate hypothesis (H1) and accept the Null hypothesis (H0).

4.6 Co-Integration Test

In testing research hypothesis four which is on long run relationship between total

tax revenue and government capital expenditure in Nigeria, the co-integration test

is used in the determining whether long-run relationship exists between variables.

It is in line with the proposition of the Johansen in 2017.

Table 5: Presentation of Johansen Co-Integration Result

Rank Eigenvalue Likelihood Ratio Lmax test 5% HypothesisedNo
of (CES)
0 0.45149 5.4570 5.4050 Accept (H1)
1 0.0057660 0.052044 0.052044 Accept (H1)
Source: Authors’ Co-integration result.
The table above shows that long-run relationship (co-integration) exists between

total tax revenue (TTR) and capital expenditure (CAPEX). This is reflected in the

likelihood ratio in the table that shows a value greater than that of the 5 per cent

33
lmax test (critical value). Hence, the hypothesis of no co-integration (H 0) is

rejected and that of presence of co-integration (H1) is upheld.

4.7 Long-Run Model

From the co-integration result in the Johansen co-integration test above, it could be

inferred that there is long-run relationship among the dependent and the

explanatory variable. This prompted the need for the establishment of a co-

integration model. From the Johansen co-integration result, all log likelihood ratio

of the respective co- integrating equations are positively signed. Therefore, the

highest log likelihood ratio is chosen. The highest log likelihood ratio is 5.4570

and its corresponding co-integrating equation is stated below;

CAPEX = -4.6349TTR-2.59174

From the above long-run equation, total tax revenue (TTR) and constant parameter

are negatively related with government capital expenditure (CAPEX) on the long-

run with -4.6349 and -2.59174 respectively.

4.8 Discussion of Findings

The study succinctly evaluated the influence of tax revenue on government capital

expenditure and economic growth in Nigeria using both qualitative and

quantitative approach. The short-run analysis showed that companies’ income tax

(CIT) and value added tax (VAT) are positively related to capital expenditure

(CAPEX), on the contrary, petroleum profit tax showed an inverse relationship

34
with capital expenditure (CAPEX). In determining the goodness of fit of the

model, the coefficient of multiple determinants (R 2) showed a coefficient of 0.5495

which implies 54.95 per cent explanation of the behaviour of total government

capital expenditure is by the totality of the explanatory variables (PPT, CIT, and

VAT) on the short-run. The Adjusted R 2 further prove this with the adjusted value

of 0.324311which implies a 32.43 per cent explanation of the behaviour of capital

expenditure is by the totality of the explanatory variables with the remaining 67.57

per cent behaviour attributed to other variables outside the model otherwise

referred to as the stochastic variables. Testing the significance of the explanatory

variables of each research hypotheses on the explained variable using T-test, It was

showed that all the explanatory variables (CIT- Companies Income Tax, PIT-

Petroleum Profit Tax, VAT- Value Added Tax) does not have significant effect on

the spending of government on capital expenditure during the period under

consideration which makes null hypotheses (Ho) to be accepted for research

hypotheses one, two and three.

Also, the F-test used in the determination of the overall significance of the whole

model was carried out and it revealed that the model is not statistically significant

at 95 per cent level of confidence (5 per cent significance level). This implies that

taxation does not explain the spending of government on capital expenditure.

Meanwhile, the Johansen co-integration test revealed that negative long-run

35
relationship (co-integration) exist between total tax revenue (TTR) and capital

expenditure (CAPEX) which contradict the findings of Saeed and Somaye (2012)

who disclosed unidirectional long run positive relationship between tax revenue

and government expenditure.

36
 CHAPTER FIVE

CONCLUSION ANDRECOMMENDATIONS

5.1 Conclusion

This research work critically evaluated the impact of taxation on government

capital expenditure in Nigeria and economic growth with the use of both

qualitative and quantitative approach in other to determine the significant impact of

various taxes administered in Nigeria on the overall government capital

expenditure.

The research work revealed majorly that the revenue derived from taxation in

Nigeria from 2010 to 2019 has been impressive over the period but not efficient.

This is in conformity with the findings of Onaolapo, Aworemi &Ajala (2013);

Abiola & Asiweh (2012); Oziengbe (2013). Furthermore, the study showed that

companies’ income tax (CIT) and value added tax (VAT) are positively related to

total government capital expenditure (CAPEX) while petroleum profit tax (PPT)

showed an inverse relationship with total government capital expenditure. Based

on T-test which test significance of the explanatory variables of each research

hypotheses on the explained variable, It is revealed that all the explanatory

variables (CIT-Companies Income Tax, PIT-Petroleum Profit Tax, VAT-Value

Added Tax) does not have significant effect on the spending of government on

capital expenditure during the period under consideration which makes null

37
hypotheses (Ho) to be accepted for research hypotheses one, two and three and

supported the findings of Oziengbe (2013) that showed insignificant relationship

exist between capital expenditure and overall government revenue. In addition,

based the F-test and coefficient of determination it is disclosed that the whole

model was not significant in explaining the relationship between the dependent

variable which is captured by the Total government capital expenditure (CAPEX)

and three explanatory variables which are companies’ income tax (CIT), petroleum

profit tax (PPT), value added tax (VAT), while negative long-run relationship (co-

integration) exist between total tax revenue (TTR) and capital expenditure

(CAPEX) which contradict the findings of Saeed and Somaye (2012)

whodisclosedunidirectionallongrunpositiverelationshipbetweentaxrevenueandgove

rnmentexpenditure.

Therefore, taxation is a monetary charge levied on citizens by government in other

to make funds available to perform its statutory responsibilities to the people. In

Nigeria though the contribution of taxation to total government revenue have been

impressive over the period but it is insignificant if compared to the revenue derived

from petroleum which is regarded as oil revenue and other most advanced

countries of the world in which their economy is tax driven.

Based on the findings of the study, it is concluded that tax revenue does not impact

the spending on capital expenditure in the sense that companies income tax which

38
is the tax charged on companies’ profit does not have a corresponding significant

impact on the spending of government on developmental and infrastructural

projects which will encourages the payment of tax by reducing evasion and

avoidance of tax and also directly influence industrialization which will increase

revenue derivation from companies income tax.

The administration of petroleum profit tax for the period under consideration does

not granger-cause government spending on capital expenditure of the government,

while the tax on value added to goods and services exhibited insignificant effect on

government expenditure.

5.2 Recommendations

The contributions of tax revenue to government revenue and indirectly to total

government spending cannot be overemphasized in Nigeria, but these contributions

can still be enhanced if the following are adopted by the government.

 The use of presumptive tax, where small scale trader are asked to pay a

particular amount because they cannot afford auditors and accountants that will

help them in the preparation of financial statement that is suitable for tax purpose

so that there will be increase in government revenue and minimize deficit

spending.

 The use of aggressive tax drive, where by defaulters are taken to court and

asked to pay heavy penalty. The utilization of tax revenue on public goods will

39
encourage the payment of tax by tax payers. This should be implemented where by

any tax revenue expended on public goods should be indicated and that the

chairman of federal Inland Revenue service should be a member of federal

executive council (FEC) in other to influence this move.

 The policy implication derivable from this study is that the increase in

government expenditure without corresponding revenue will widen the budget

deficit. Thus, government will be left with an option to borrow which could

increase indebtedness to lending countries and institutions.

 Government should reduce the size of large recurrent expenditure and move

towards capital and other investment expenditures. The cost of running the

government should be reduced, ghost workers as well as redundant ones should be

terminated and funds recovered from such put to investment use. Deliberate efforts

should be made to check inflation of contracts sums, these will help reduce budget

deficit.

 Government should diversify the economy. Other sources of revenue should

be explored especially the non-oil minerals sector so as to correct the disparity

between revenue and expenditure and reduce the attendant budget deficit.

 Taxes have a role to play in the economy especially in deemphasizing the

mono-economic (petroleum sector) nature of Nigeria. Expenditure reforms analysis

should be considered vis-à-vis taxes and all other revenues sources (oil and non-

40
oil) reforms; this will help set targets for revenue mobilization and utilization as

well as expenditure spreading over the entire economy.

5.3 Limitation of the study

This research was limited by certain constraints which include difficulty in

sourcing data from certain relevant organization, non availability of data on certain

variables, restrictions and accessing certain materials on the internet and

insufficient financial resources for the study. Lastly, this study was also

constrained by inadequate time on the part of the researcher, since attention had to

be given to other course work.

41
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