TAXATION AND ECONOMIC GROWTH IN NIGERIA: AN EMPIRICAL ANALYSIS
1.1 BACKGROUND TO THE STUDY
One of the most commonly discussed issues in economics is on how taxes as means of fiscal policy at stabilizing the general economy relate to economic growth of developing countries such as Nigeria. A lot of studies have tend to yield an audience of the relationship between taxation and economic. Some of the studies have rather yielded results that have established negative effects of taxes on economic growth. Taxes as means of fiscal policy raises the cost or lower the return to the taxed activity (Juliana, Mustaa and Zulkifli, 2012).
Income taxes create a disincentive to earning taxable income. Individuals and firm have an incentive to engage in activities that minimize their tax burden. As they substitute activities that are taxes at a cover rate for activities taxed at a higher rate, individuals and firms will engage in less productive activity, leading to lower rates of economic growth (Juliana Mustaa and Zlukifli, 2012). Economic growth is the basis of increased prosperity. Investments in new capital such as (human and physical) the implementation of new production techniques and the introduction of new products are the fundamentals of the growth process. Though its effect on the return to investment or the expected profitability of research and development, taxation can affect what choices are made and ultimately the rate of growth. Taxation is necessary simply because it would neither be feasible nor desirable to finance government solely by charges on services (Mwima-Swaya, 1995).
Basically, taxation refers to a system used by the government through levying assessments to obtain money from people, industries and organizations. It is not only relatively paramount but also compulsory and does not guarantee a direct relationship between the amount contributed by a citizen and the extent of government services provided to him/her. A tax is an involuntary fee paid by individuals or business to the government for the sole purpose of answering resources to society and economically beneficial use, to stabilize the economy and to redistribute wealth between the rich and the poor (Mwima-Swaya, 1995).
Moreover, the relationship between taxation and economic growth has of recent times become one of the most important economic issues. This is particularly due to the poor fiscal performance in a number of developing countries such as Nigeria. The relationship to a large extent empirical and forces one to employ methods of scientific investigation that do not yield aprioristic conclusions and external truths, but only statements of validity limited by the character of the model used or by significance of evidence provided (Dalibor, 2005).
While it could be clear that taxation might affect the level of GDP, Early growth models presumed that the langram growth depends on exogenons technical change such that it may be hard to access the eect
of fiscal policy on the rate of capital accumulation or more generally, Economic activity (Myles, 2000).
Some prior studies established a positive linkage between taxation and economic growth; others have however submitted mixed findings.It is against this backdrop, this study is under taken to evaluate the impact of taxation on the Economic growth of Nigeria with specific attention on direct taxation such as PPT, CIT and Tax