ABSTRACT
This research work evaluates the Impact of Taxation on Inequality in
Nigeria from (1980-2010). From our finding, we found out that
taxation does not have a statistical significant effect on inequality in
Nigeria. Taxation is one of the most important and easy source of
revenue to any government as the government possesses inherent
power to impose taxes and levies. Inequality can be reduces in
Nigeria if the government will take a special look at the rural areas
than in the urban areas and help to bridge the gap between the have
and the have not (rich and the poor). Finally, a tax reduce inequality
if it lightens the tax burden on the poor and ensures a greater burden
on the better – off.
TABLE OF CONTENTS
Title page
Approval page
Dedication
Acknowledgement
Abstract
Table of Contents
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Objective of the Study
1.4 Statement of Research Hypothesis
1.5 Scope and Limitation of Study
1.6 Significance of the Study
CHATTER TWO: LITERATURE REVIEW
2.1 Theoretical Literature
2.2 Empirical Literature
2.3 Limitation of Previous Studies
2.4 Current Taxation Reforms in Nigerian
2.5 Challenges of the Draft National Tax Policy
2.2.4 Principles of Taxation
CHAPTER THREE: METHODOLOGY
3.1 Analytical Framework
3.2 Model Specification
3.3 Methods of Evaluations
3.3.1 Economic Theoretical Test
3.3.2 Statistical Criteria (First Order Test)
3.3.3. F-ratio Test:
3.3.4 R2 and Adjusted R2
Test (Coefficient of Determination):
3.3.5 Standard Error Test:
3.3.6 t-Statistic Test:
3.4 Econometric Criteria
3.4.1 Autocorrelation Test
3.4.2 Multicollinearity Test
3.4.3 Heteroscedasticity Test
3.4.4 Normality Test
3.4.5 Reset Test
3.4.6 Stationarity Test
CHAPTER FOUR
4.1 Presentation of Regression Results
4.2 Evaluation of Results
4.2.1 Evaluation Based on Economic Criteria “LOG (CED)”
4.2.2 Evaluation Based on statistical criteria (first-order Tests)
4.2.3 Evaluation Based on econometrics criteria
CHAPTER FIVE
5.1 Research Finding
5.2 Policy Recommendation
5.3 Conclusion
BIBLOGRAPHY
APPENDIX
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Taxation is a form of compulsory levy imposed by government on
individuals, corporate bodies, goods and services in order to finance its
expenditure and create condition for the economic well being of the society.
Taxation is a compulsory levy imposed on a subject or upon his property by
the government to provide security, social amenities and create condition for
the economic well being of the people (Appah and Oyandonghan, 2011).
Anyanwu (1997) stated that tax are imposed to regulate the production of
certain goods and services, protection of infant industries, control business
and curb inflation, reduce income inequalities etc.
According to Anyanfo (1996), the principle of taxation means the
appropriate criteria to be applied in the development and evaluation of the tax
structure. Such principles are essentially on application of some concepts
derived from welfare economists, in order to achieve the broader objectives
of social justice. The tax system of a country should be based on sound
principle. Ihingan (2004), and Osiegbu et al., (2010) listed the principles of
taxation as equality, certainty, convenience etc. Anyanfo (1996) convenience
principle of taxation states that the time and manner should be convenience to
the tax payer. Nevertheless, principle of taxation provides the rationale for
pay-as-you earn (PAYE) system of tax payable system of tax collection
certainty principle of taxation states that a tax which each individual is bound
to pay ought to be certain, and not arbitrary (Bhartia, 2009).
Jhingan (2004) equity principles of taxation states that every tax payers
should pay the taxing proportion to his income. The rich should pay more and
at a higher rate than the other person whose income is less. However, these
sagacious and magnanimous intention of the government are dedevited by a
number of draw backs ranging from unfairness of tax payments to tax payers,
arbitrary importation of taxes, show tax law development, inaccurate
presentation of income figure for assessment, indirect taxation, poverty,
illiteracy, poor vehicle as a tool for tax collection etc indeed the above short
coming engender inequality taxation in Nigeria (HalimAli2010).
The term inequality according to Longman dictionary of contemporary
English (2000), Third edition, is an unfair situation, in which some groups in
society have less money influence or opportunity than others. In the same
view inequality means “the unfair difference between groups of people in
society when some have more wealth, status, or opportunities than others
(Oxford Advanced Learners Dictionary 2001) sixth edition inequality with
respect to taxation is the unfairness and disparity resulting from the way and
manner Nigerians and inhabitants from the way also individuals pay taxes. It
is not out of place to say that taxes causing inequality in Nigeria is as old as
the Nigerian tax system. In so far there was a time variance between when the
North, West and the eastern pan began tax payment while the Northern and
Western regions began payment of taxes before 1904 through the already
defined way of leadership of the Emires and Obas respectively.
The eastern regions which believed in family head syndrome had no such
constituted leaders and resultantly lagged behind for about 23 years later
before taxation was planted in the area. But the bottom line is that while some
Nigerians paid tax to them, others never paid, this increasing inequality level
in Nigeria. On the same vain the evil of inequality taxation was still
unleashed on those Nigerians and resident tax payers between 1904 and 1957
when taxes were collected at various times from individuals and companies
without distinctions. The basic of assessment allowable deduction and tax
rates were the same. The period under review was be deviled by show tax law
development, arbitrary imposition of taxes and multiplicity of tax liability
and protests by tax payers were examples. They were actually engendered by
inequality taxation.
Widening income inequality in Nigeria has triggered a debate over the
extent to which taxes are to used as a means of curbing inequality. Generally
taxes can cause inequality as well as being used to reduce inequality.
According to Black et al., 1999 Taxation are considered as the dominant way
of reducing inequality. Taxes are imposed for a variety of purpose, they can
be used to correct distortion in the market, they can raise revenue for the
government, taxes can also be used for redistribution of income, thus in this
work we will concentrate on taxes as a tool for income distribution in the
country. In Nigeria federal income tax is administered by the federal inland
revenue service (FIRS). In Nigeria inequality which exist in arrange of
dimension like mortality rate, poverty rate, life expectancy and so on has
been on the increase. In fact, inequality in Nigeria is multifaceted and has
manifested inform of inadequate shelter, lack of access to other basic needs
of life, such as good food, water, good health etc. Argbokhan (1999) found
that income inequality worsened after structural adjustment programme
(SAP) of 1986. Also a high level of inequality exist between Nigeria’s rural
and urban areas. This is because most communities depend on Agriculture
while urban engage mostly in paid jobs.
The Nigerian government in a way to reduce income inequality has
introduced policies like (PAP) poverty alleviation programme, NEEDs –
National economic empowerment and development programme etc also
taxation policies like PAYE (pay as you earn) and all forms of progressive
tax system like inheritance tax, property tax etc. All these policies and
programmers have not yet achieved its main objective. Using the head count
index the study found that an increasing number of Nigerians were living or
absolute poverty over the study periods: 38% in 1985, 43% in 1992, 47% in
1996, 35% and 37% in urban areas, and 41%, 49% and 51% in rural areas.
The depth and security of poverty generally increased over the study period,
but the trend was not uniform over geopolitical zones. During the 1990s the
depth of poverty increased in the middle belt, Northeast and northwest while
it declined in other areas. The increase was more pronounced in rural areas
than in the urban areas.
1.2 Statement of the Problem
A tax reduces inequality if it lightens the tax burden on the poor and
ensures a greater burden on the better-off. The relationship between a
country’s income distribution and taxation is not far from consensus that is to
a large extent; the method of income distribution in a country can enhance or
reduce inequality. In Nigeria, inequality which exists in a range of dimension
like mortality rate, poverty, life expectancy and so on has been on the
increase. In fact, inequality in Nigeria is multifaceted and has manifested
inform of outbreak of diseases such as Aids, measles, small pox, chicken pox
and so on. Inequality has also manifested inform of inadequate shelter (poor
home) lack of access to other basics needs of life, such as food, water etc.
The Nigerian government in a view to solve or reduce this inequality
had adopted a lot of policies like SAP-structural adjustment programme of
1986, poverty alleviation programme (PAP), Needs-National Economic
Improvement and development Strategy etc. Also some taxation policies that
the government adopted include PAYE (pay as you Earn) property and
inheritance taxes as well as other progressive tax systems. All these
programmes and policies has not yet achieve its desired objective which is to
curb inequality, maybe due to implementation problem thus leading to high
rate of inequality.
The aim of this research work is as follows:
– To determine the nature of relationship between taxation and Inequality
– To test whether there is a causal relationship between inequality and
Taxation in Nigeria.
– To determine the extent in which taxes affects inequality.
1.3 Objective of the Study
Our interest in this research work is to know the impact taxation has on
inequality. The specific objective includes;
1) To ascertain the nature of relationship between taxes and inequality.
2) To determine the extent in which taxes can be used in curbing inequality.
3) To find out whether there is any causal relationship between taxes and
inequality.
1.4 Statement of Research Hypothesis
For the purpose of answering the questions raised at the end of our
statement of problem the following working hypothesis were employed.
H0: There is no casual relationship between taxes and inequality
HI: There is casual relationship between taxes and inequality.
H0: Taxes cannot be used in solving inequality problem
Hi: Taxes are used in solving inequality problem.
1.5 Scope and Limitation of Study
The scope of study is from 1980 to 2010. Basically, this study focuses
on only inequality in taxation as a factor to the failure and non-actualization
of the tax system in Nigeria.
What is more, the study fails to look at other factors hindering the
progress and success of Nigeria tax system. Also, the study is limited to Nigeria
and it also includes time and financial constraints.
1.6 Significance of the Study
The crucial role played by taxation towards inequality in our society
today is indispensable. This study is significant because it is interested on the
role taxation has played in creating a big gap between the have and the have
not’s (inequality) in the society. This study advocates for taxation prudence on
the side of government so as to bring about adequate tax policy in the country.
This study also encourages flexible tax policy such that based on the
condition of the economy the poor does not pay more than the rich in terms of
tax. The result of this study would also assist policy makers and other
researchers and students working on related fields to do more in-depth work and
it would be significant in policy forecasting.
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