THE IMPACT OF TAX ON GOVERNMENT CAPITAL EXPENDITURE

THE IMPACT OF TAX ON GOVERNMENT CAPITAL EXPENDITURE AND ECONOMIC GROWTH IN NIGERIA BY

OUTLINE � � � � Background of the Study Statement of the problem Objectives of study Research Questions and hypotheses Significance of Study Scope/Limitations of Study Theoretical Framework Conceptual Framework Empirical Review of Literature Research design and Methods Model Specification Presentation of Results Discussion of Findings Conclusion Recommendation References

BACKGROUND OF THE STUDY For several years the relationship between tax, government capital expenditure and economic growth has continued to occupy series of debate among researchers and policy makers. The common consensus among the researchers is that taxation and government capital expenditure has been identified as an important instrument which the government uses to influence the performance of the economy. The avenue through which public authorities satisfy the collective want of the people can be classified under government capital expenditure. Oni, Aniakam and Akinsanya (2014) observed that government capital expenditure is the expenses incurred by the government for the infrastructural development, the economy and the society at large. Government capital expenditure are funds used by the government to acquire or upgrade physical assets such as property, industrial/official buildings or equipment. It is often used to undertake new projects or investments by the government. Capital expenditure is an important mechanism which the government uses to pilot significant effects on the general growth of the economy. Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP, usually in per capita terms.

BACKGROUND OF THE STUDY (Cont’d) However, Anyanwu (1993) observed that capital expenditure is simply government spending from revenue derived from taxes and other sources. A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer (an individual or a legal entity) by a state or the functional equivalent of a state in order to fund various government capital expenditures. A failure to pay, or evasion of or resistance to taxation, is punishable by law. However, empirical literature has shown different and disaggregated findings. Anyanwu (1997); Ogbonna and Appah (2012); Yaya (2013); Akwe (2014) indicated positive relationship between taxation, capital expenditure and economic growth, others, Saibu (2015); Gareth (2000); Bonu and Pedro (2009); Saima et al. (2014) showed negative relationship. Most of the studies testing empirically the relationship between taxation, capital expenditure and economic growth have found a negative impact of the aggregate tax on capital expenditure and economic growth, but there are some articles that do not find such results. Some others like Essoh (2011) suggested a no significant relationship between these two major variables.

STATEMENT OF THE PROBLEM Some researchers have maintained that increase in government capital expenditure can be an effective tool to stimulate aggregate demand for a stagnant economy and to bring about crowed-in effects on private sector which will bring about the needed economic growth. Supporting this view, scholars such as Al-Yousif (2000), Abdullahi (2000) and Cooray (2009) concluded that expansion of government expenditure contributes positively to economic growth. The call for concern here is centered on the needed fund for the capital expenditure. The major sources of fund for Nigeria government include crude oil exploration, agriculture, tax etc. this study will concentrate on the impact of tax on government capital expenditure and overall economic growth in Nigeria Conversely, it is important to make clear here also that some scholars did not support the claim that increasing government expenditure promotes economic growth, instead they assert that higher government expenditure may slowdown overall performance of the economy. For instance, in an attempt to finance rising expenditure, government may increase taxes and/or borrowing. Higher income tax discourages individual from working for long hours or even searching for jobs. This in turn reduces income and aggregate demand. In the same vein, higher profit tax tends to increase production costs and reduce investment expenditure as well as profitability of firms. This mixed assertion has made it necessary for the current researcher to carry out the impact analysis of tax on government capital expenditure and economic growth in Nigeria.

Research Objectives • To examine the impact of tax on economic growth in Nigeria • To examine the impact of tax on government capital expenditure in Nigeria. • To examine the impact of government capital expenditure on economic growth in Nigeria. Research Questions • What is the impact of tax on economic growth in Nigeria? • What is the impact of tax on government capital expenditure in Nigeria? • What is the impact of government capital expenditure on economic growth in Nigeria?

Research Hypothesis Significance of the Study • HO 1: There is no significant relationship between tax and economic growth in Nigeria • HO 2: There is no significant relationship between tax and government capital expenditure in Nigeria • HO 3: There is no significant relationship between government capital expenditure and economic growth in Nigeria • The study will assist the government in policy formulation as it relates to the impact of taxation on government capital expenditure to help strengthen the operation of the relevant government agencies such as federal board of inland revenue, central bank of Nigeria, joint tax board and others. • This research will be a contribution to the body of literature in the area of the impact of tax on government capital expenditure and economic growth in Nigeria, thereby constituting the empirical literature for future research in the subject area.

SCOPE/LIMITATIONS OF THE STUDY This study will cover the impact of tax on government capital expenditure and economic growth in Nigeria. The study covers a period of 1984 to 2014. It will also cover the major variables of Real Gross Domestic products (RGDP), Total capital expenditure (TCE), Company income tax (CIT), Value added Tax (VAT) and the inflation rate (IFR). 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.

THEORETICAL FRAMEWORK BENEFIT THEORY OF TAXATION The benefit theory of taxation proposed that taxes are to be imposed on individuals according to the benefit conferred on them. The more benefits a person derives from the activities of the state, the more he should pay to the government (Cooper, 1994). ABILITY TO PAY THEORY OF TAXATION The Ability to pay theory of taxation (Pigou, 1920) is synonymous with the principle of equity or justice in taxation. People with higher incomes should pay more taxes than people with lower incomes.

A tax is a obligatory financial charge or some other type of levy imposed upon a taxpayer (an individual or a legal entity) by a state or the functional equivalent of a state in order to fund various public expenditures. A failure to pay, or evasion of or resistance to taxation, is punishable by law. Types of tax include income tax, capital gain tax etc GOVERNMENT CAPITAL EXPENDITURE TAX CONCEPTUAL FRAMEWORK Government Capital expenditure or capital expense is the money the government spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure when the asset is newly purchased or when money is used towards extending the useful life of an existing asset, such as repairs the roof.

EMPIRICAL REVIEW OF LITERATURE Nworji and Oluwalaiye (2012) employed investigative and empirical methods to analyze the relationship between tax and government expenditure on road infrastructure and economic growth in Nigeria. The variables used in the study includes GDP which is a proxy for economic growth and it is the explained variable, while the explanatory variables include expenditure on defense, transport and communication used as a proxy for road, internally generated revenue as a proxy for tax and inflation rate. Multiple regression analysis was employed to analysis the parameter estimate. The a priori expectation of the study is to have positive signs for the parameters. The estimate value of the partial regression coefficient in the study is that tax, expenditure on defense, transport and communication expenditure and inflation rate correlate positively with economic growth. The model exhibited a very high explanatory power. Gemmell and Kneller (2001) provide empirical evidence on the impact of fiscal policy on long-run growth for European economy. Their study required that at least two of the taxation/expenditure/deficit effects must be examined simultaneously and they employ panel and time series econometric techniques, including dealing with the endogeneity of fiscal policy. Their results indicate that while some public investment spending impacts positively on economic growth, consumption and social security spending have zero or negative growth effects. Olorunfemi, (2008) studied the direction and strength of the relationship between tax, public expenditure and economic growth in Nigeria, using time series data from 1975 to 2004 and observed that tax and public expenditure impacted positively on economic growth and that there was no link between gross fixed capital formation and Gross Domestic Product. He averred that from disaggregated analysis, the result reveal that only 37. 1% of government expenditure is devoted to capital expenditure while 62. 9% share is to current expenditure.

The research design employed in this study includes the survey, ex post facto and descriptive research design. It is ex-post facto research design in that the data generated were already put in place and are not subject to the manipulation of the researcher. SOURCE OF DATA RESEARCH DESIGN/SOURCES OF DATA The sources of the data to be generated for this study are from the secondary source. These data are generated from Central Bank of Nigeria statistical bulletin which can readily be obtained from the shelf in the library room and from the CBN website. The data were extracted from the National Bureau of Statistics in Nigeria.

MODEL SPECIFICATION It is presumed that the real gross domestic product as a proxy for economic growth (real GDP) is dependent (dependent variable) on Total capital expenditure TCE (independent variable), Company income tax CIT (independent variable), Value Added Tax VAT (independent variable) and inflation rate (independent variable). Multiple regression analysis was applied for the data analyses. However, the model specification adopted in this study is premised on the choice of variables used in previous studies. In this study, the model used based on the above is of the mathematical form as: RGDP = F(tce, cit, vat, ifr, ) The stochastic form of the above model is: RGDP = β 0+ β 1 tce+ β 2 cit+ β 3 vat+ β 4 ifr + e Where: RGDP = Real GDP Β 1 - β 3 is the coefficient of the independent variables measuring the impact of tax on government capital expenditure and economic growth in Nigeria. TCE = Total Capital Expenditure CIT = Company Income Tax VAT = Value Added Tax IFR = Inflation Rate β 0 Is the constant and e is the error term presumed to act as a surrogate in the construct. Our data analysis plan will be the panel data regression analysis. using e-views 7. 0 econometric software will be employed for the study.

PRESENTATION OF DATA TABLE 1: RGDP, TCE, CIT, and VAT Year RGDP TCE CIT VAT 1987 47. 6 10. 1 0. 33 6. 82 1988 49. 1 9. 9 0. 22 4. 47 1989 53. 1 10. 9 0. 40 6. 90 1990 59. 6 9. 2 0. 25 4. 55 1991 67. 9 9. 4 0. 31 4. 84 1992 69. 1 11. 1 0. 49 6. 36 1993 105. 2 8. 4 0. 29 3. 26 1994 139. 1 6. 9 0. 25 0. 58 1995 216. 8 5. 5 0. 65 5. 42 1996 267. 6 5. 9 0. 31 1. 95 1997 312. 1 7. 2 0. 23 1. 02

PRESENTATION OF DATA (Cont’d) 1998 532. 6 6. 1 0. 49 1. 51 1999 683. 8 6. 8 0. 66 1. 41 2000 899. 9 7. 3 0. 99 1. 51 2001 1, 933. 2 8. 9 1. 84 1. 08 2002 2, 702. 7 10. 7 7. 06 2. 47 2003 2, 801. 9 9. 2 11. 07 3. 79 2004 2, 708. 4 9. 7 13. 57 5. 16 2005 3, 194. 0 9. 4 14. 08 4. 69 2006 4, 582. 1 10. 4 28. 15 5. 88 2007 4, 725. 1 14. 0 57. 64 8. 70 2008 6, 912. 4 11. 1 60. 32 7. 90 2009 8, 487. 0 16. 0 120. 70 8. 88

PRESENTATION OF DATA (Cont’d) 2010 11, 411. 1 18. 5 255. 82 9. 07 2011 14, 572. 2 19. 9 262. 94 9. 18 2012 18, 564. 6 27. 6 470. 25 9. 18 2013 20, 657. 0 64. 4 2, 086. 3 15. 69 2014 23, 842. 2 40. 1 2, 379. 1 24. 89 Source: CBN Statistical Bulletin, 2017.

PRESENTATION OF RESULTS Presentation and Interpretation of OLS Result Table 2 Regressors Co-Efficient TCE 13. 4442 CIT -3. 3168 VAT 351. 7013 R 2 = 0. 90389, R 2 adjusted = 0. 88205 F(5, 22) = 41. 3828 Durbin Watson (DW) = 1. 3214

PRESENTATION OF RESULTS (Cont’d) An examination of the OLS result in table 4. 6 above indicates that 90% of the systematic variation in the dependent variable is explained by the regressors. This is disclosed by the co-efficient of determination (R 2 = 0. 90389). The adjusted co-efficient of determination (R 2 = 0. 88205) indicate that changes in the explanatory variables account for 88% of the changes in the dependent variable, RGDP. This is evidence that the model has a good fit and is a good predicator of economic growth in Nigeria. The T-ratio which is used to test the statistical significance of the individual parameter estimate of the explanatory variables show that the parameter of VAT is statistically significant at 5% and 1% levels respectively. This indicates that they individually have a significant impact on RGDP. However, the T-test shows that the individual slope parameters of TCE and CIT are not statistically significant as they fail to pass the test at both 5% and 1% levels of significance. Additionally, the Durbin Watson (DW) statistic of 1. 3214 points to the presence of auto correlation in the estimated model. The F-statistics of 41. 3828 is statistically significant at 5% and 1% level of significance. This helps to establish that the overall regression is statistically significant, indicating that the R 2 is significantly different from zero. In other words, the hypothesis of a linear relationship between RGDP and the explanatory variables taken together is validated.

PRESENTATION OF RESULTS (Cont’d) Test of Hypothesis To better evaluate the relationship between the dependent and explanatory variables used in this study, the following hypothesis is formulated: Ho: There is no significant relationship between the individual explanatory variables and RGDP. Ho: Bi = (i = 1, 2, 3) H 1: There is a significant relationship between the individual explanatory variables and RGDP. H 1: Bi ≠ 0 (for i = 1, 2, 3) To determine the acceptance or rejection of the above hypothesis, the t-statistic of the individual parameter estimates as well as their critical values are presented in the table below:

PRESENTATION OF RESULTS (Cont’d) Table 3: t-statistics for variables and their critical values’ Variables t-statistic Critical Remarks Variables value at 5% value at 1% TCE 0. 91255 2. 074 2. 819 Not Significant TCE CIT 0. 59480 2. 074 2. 819 Not Significant CIT VAT -2. 9469 2. 074 2. 819 Significant VAT The result presented in table 4. 9 above show that the TCE and CIT are not significant at 5% and 1% levels, since their t-values are less than the critical values. They thus fall within the acceptance region. Hence, we accept the null hypothesis for B 1 and B 2. On the other hand, the variable VAT is significant at 5% and 1% levels of significance, since its t-values is greater than its critical value at both levels. It thus fall within the rejection region, making us reject the null hypothesis for B 3, and accept the alternative hypothesis at 5% and 1% level of significance.

DISCUSSION OF FINDINGS The deductions made from empirical findings of this study are based on the signs and magnitude of the co-efficient of the explanatory variables. From the result of the short-run ECM presented in table 4. 6, it can be seen that the co-efficient of total capital expenditure and company income tax to economic growth are positive and correctly signed, the co-efficient of value added tax is negatively signed. This means that the value added tax impacts negatively on the real gross domestic product. The negatively signed value added tax is attributable to low level of profitability on the part of the citizens thus hurting economic growth. An examination of table 4. 7 which represent the long-run relationship between RGDP and the explanatory variables show that all the co-efficient of the explanatory variables are positive and well signed except value traded CIT. The negatively signed company income tax is due to the non availability of necessary infrastructural facilities e. g. electricity, public water that can be easily accessed by the companies in Nigeria, resulting in low volume of transaction. The low volume of transaction has adversely affected investment and thus economic growth. On the whole, it can be said that the dependent variable RGDP is significantly influence by the explanatory variable VAT in the short-run but does not influence significantly any variable in the long-run.

CONCLUSION From the results of this study, the researcher can conclude as follows: 1. There is significant relationship between the government capital expenditure and economic growth in Nigeria. 2. There is no significant relationship between the company income tax and economic growth in Nigeria. 3. There is significant relationship between the value added tax and growth of the economy in Nigeria.

RECOMMENDATIONS The inability of the tax to significantly impact positively on the government capital expenditure and economic growth in Nigeria is indicative that the nation’s tax administration system is still underdeveloped. However, based on over bearing evidence from empirical literature, tax may significantly contribute to government capital expenditure and economic growth in Nigeria if well managed and harnessed. Hence, the following recommendations are made: 1. That government should encourage companies/organizations in Nigeria by providing necessary and needed public infrastructures and other incentives that will encourage prompt payment of tax. 2. Organizations on their own part should keep adequate financial accounts of their business operations as this is one of the prerequisite in determining the amount of tax to be paid.

REFERENCES Anyanwu JC (1993) Monetary Economics: Theory, Policy and Institutions, Hybrid Publishers, Nigeria. Barro, R. , and Martin, I. (1992). "Public Finance in Models of Economic Growth” Review of Economic Studies, 59(3): 645 -661. Bleaney, M. ; Gemmell, N. and Kneller, R. (2001). “Testing the Endogenous Growth Model: Public Expenditure, Taxation, and Growth over the long-run”, The Canadian Journal of Economics, 34(1): 36 -57. CBN, (2009). Central Bank of Nigeria Statistical Bulletin Engert, E. A. and Hendry, D. (1998). “Public Sector Growth, an Econometric Test of Wagner’s Law”, Economic and Financial Review, 35(3), Central Bank of Nigeria. Expenditure and its Impact on Sustainable Economic Growth Middle Eastern Finance and Economics. Euro Journal, Publishing, www. eurojournals. com/MEFE. htm. Fan, S. and Rao, N. (2003). “Public Spending in Developing Countries: Trends, Determination, and Impact”, EPTD Discussion Paper No. 99, USA. Gemmell, N. and Kneller R. (2001). “The Impact of Fiscal Policy on Long Run Growth, European Economy”, London Loto, M. A (2011) “Impact of government sectoral expenditure on economic growth” Journal of Economics and International Finance Vol. 3(11), pp. 646 -652. Mitchel, J. D. (2005). ”The Impact of Government Spending on Economic Growth”, Available at: www. heritage. org. Nkwatoh, L. S. (2012) “Government Expenditure and Economic Growth in Nigeria: An Empirical Investigation (1961 -2009)” The Journal of Economic Analysis, Vol 3 No I, pp 38 -51. Okemini EB, Uranta DT (2008) Poverty and Criminality in the Niger-Delta Region: A critical analysis. Integrated Social and Management Journal 1: 1 -8. Okojie, C. E. E, (1995). "Human Capital Formation for Productivity Growth in Nigeria”, Nigerian Economic and Financial Review, June, pp. 44 -5.