TAX CULTURE AND ECONOMIC DEVELOPMENT OF THE SECOND TIER GOVERNMENT IN NIGERIA (A case study of Edo State)

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

The relative roles of the three tiers of government—the federal government, the state governments, and the local government authorities (LGAs)—in public service delivery has emerged as one of the most important topics of open and vigorous debate in the new democratic climate in Nigeria. There have been increasing calls for intergovernmental fiscal relations to be reassessed in light of a widespread belief that although the states and LGAs are assigned primary responsibility for the delivery of basic public services, they are not equipped with adequate revenue resources to fulfill their expenditure obligations because the bulk of government revenues is retained by the federal government. The second tier government which is the state government and the focus of this study has the highest responsibility to deliver infrastructure and other public services, hence the need to generate more money through taxation.

Within the last decades issues of domestic resource mobilization has attracted considerable attention in many developing countries including Nigeria. In the face of unabated debt difficulties, coupled with the domestic and external financial imbalances confronting them, it is not surprising that many developing nations have been forced to adapt stabilization and adjustment policies and increase revenue which demand better and more efficient methods mobilizing domestic financial resources with the view of achieving financial stability and promoting economic growth. Taxation plays a significant role in achieving the purpose of economic development.

According to Opuene (2006), in Ofurum and Ferry (2009), taxation is the imposition by the government of a compulsory levy on the income, profit, property, or the expenditure (consumption) of an individual, family, community, firms or corporate bodies so as to enable the government carryout its economic and social responsibilities to the citizenry.

In a federation like Nigeria, the concept of inter-governmental fiscal relations subsists, and the government’s fiscal power is based on three-tier tax structure – federal, state, and local governments, each of which has different tax jurisdiction for the enactment of tax laws, formulation of tax policies, and tax administration (Odusola, 2006). In 2002, about 40 different taxes and levies are shared by all three levels of government. Each tier of government has the sphere clearly spelt out in the Taxes and Levies (approved list for collection) Decree, 1998. The most veritable tax handles are under the control of the federal government while the lower tiers are responsible for the less buoyant sources, which imply that the federal government tax corporate bodies while the state and local governments tax individuals.

In recent times, the revenue allocation to states from the federation account is not only dwindling but also grossly inadequate. This coupled with the ever increasing financial needs of states compelled state governments to imbibe the culture of improving internally generated revenue as alternative means of meeting and sustaining the various competing financing needs. To achieve this purpose, State governments diverse various means of improving their revenue base and the most popular means is through taxation. Laffer (2012) claimed that state income tax levels have impact on economic growth. It has also been reported that taxation enhances the economy of a nation as a means of achieving financial stability and promoting economic growth. The tax system in most states of the federation is seen as an embodiment of contention and controversy whether in its policy formulation, legislation or administration. Based on the above, the researcher is to provide an overview of the impact of Edo State government taxation culture on economic development of the state.

1.2   STATEMENT OF THE PROBLEM

A state’s tax system is a major determinant of other macroeconomic indices. Specifically, there exists a relationship between tax structure and the level of economic growth arid development. Indeed, it has been argued that the level of economic development has a very strong impact on a state’s tax base (Hinricks, 1999), and tax culture objectives vary with the stages of development. Similarly, the (economic) criteria by which a tax structure is to be judged and the relative importance of each tax source vary over time. For example in Edo State, the incoming of the Governor Adams Oshiolmole in 2008 ushered in a serious tax regime, a situation where income from taxation is very important to government for the purpose of infrastructural development.

1.3   OBJECTIVES OF THE STUDY

The following are the objectives of this study:

1. To examine the relationship between tax culture and economic development in Nigeria.
2. To examine the impact of taxation on the economic development of Edo State.
3. To examine the impact of taxation by the second tier of government on the public masses.

1.4   RESEARCH QUESTIONS

1. What is the relationship between tax culture and economic development in Nigeria?
2. What is the impact of taxation on the economic development of Edo State?
3. What is the impact of taxation by the second tier of government on the public masses?

1.5   HYPOTHESIS

HO: There is no significant relationship between tax culture and economic development in Nigeria.

HA: There is significant relationship between tax culture and economic development in Nigeria.

1.6   SIGNIFICANCE OF THE STUDY

The following are the significance of this study:

1. The outcome of this study will educate the general public in Nigeria and particularly in Edo State on the relationship between taxation by the second tier of government and economic development.
2. This research will be a contribution to the body of literature in the area of the effect of personality trait on student’s academic performance, thereby constituting the empirical literature for future research in the subject area.

1.7   SCOPE/LIMITATIONS OF THE STUDY

This study will cover the taxation by the Edo State government and economic development of the state.

LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

 Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work