THE IMPACT OF COMPANY INCOME TAX REVENUE ON DEVELOPING ECONOMIES

THE IMPACT OF COMPANY INCOME TAX REVENUE ON DEVELOPING ECONOMIES

ABSTRACT

Taxation and its product, Tax have been very important vehicles for economic policies of many countries of the world. For a very long time, tax has been a major source of revenue for various levels of governments. For instance, in Nigeria, the laws of the land stipulate the categories of taxes that are collectable by each of the three tiers of government. This is with a view to enhancing basic economic growth and development at all levels of government. However, the manner in which taxes are administered on corporations in Nigeria is a major concern to the majority of Nigerians. Traditional  schools  of  thought  advocated  the  theory  of  low  income  tax  rates’  influencing  economic development, whereas modern  schools  of  thought  propagated  the  theory  of  higher  income  tax  rates producing greater economic growth, especially for developed nations. In order to justify these thoughts, an attempt was made taking Nigeria as a case study to pin point the effect of low and high income tax rates on economic growth of developing nations. Secondary data sources were utilized in this study. In this study various parameters were taken into account including income  tax  rates,  income  tax  revenue,  total  revenue  and GDP of  the  country  in  the nominal  and  real value of the money. It was located that high income tax rates negatively affect the economic growth of Nigeria. The study found that government’s policies on income tax affect the revenue of corporations in the country. It was concluded that tax regulation is very relevant in order for government to be able to act justly on the various sectors of the economy.

CHAPTER ONE

INTRODUCTION

1.1   Background of the study

According to Black Law Dictionary, tax is a rateable portion of the produce of the property and labor of the individual citizens, taken by the nation, in the exercise of its sovereign rights, for the support of government, for the administration of the laws, and as the means for continuing in operation the various legitimate functions of the state. The Institute of Chartered Accountants of Nigeria (2006) and the Chartered Institute of Taxation of Nigeria (2002) view tax as an enforced contribution of money, enacted pursuant to legislative authority. If there is no valid statute by which it is imposed; a charge is not tax. Tax is assessed in accordance with some reasonable rule of apportionment on persons or property within tax jurisdiction. Sanni (2007:5) advocated tax an instrument of social engineering which can be used to stimulate general or special economic growth.

The Company Income Tax amongst countries of the world varies, especially in the developing countries. Gordon and Wei Li (2008) notes that to some extent, these differences may simply reflect differences in social preferences for public vs. private goods.  Countries differ substantially, for example, in the amount spent on the military, on infrastructure investments, on publicly provided education, or on social insurance.  Higher spending levels require higher revenue, leading to higher tax rates.

To some extent, these differences may also reflect differences in the political support for redistribution.  More redistribution naturally requires higher tax rates on the rich in order to finance lower tax rates or transfers to the poor.  Governments with a stronger preference for redistribution would rely more on progressive personal income taxes, whereas other governments may choose less progressive personal taxes and make more use of proportional taxes such as a value-added tax or a payroll tax.

Other differences, though, are more puzzling based on conventional models of optimal tax structure.  Regardless of a country’s tastes for public vs. private goods or for more or less redistribution, Diamond and Mirrlees [2001] forecast that the optimal tax structure will preserve production efficiency under plausible assumptions. (Coelho, Isaias, and Graham, 2001).  This rule out tariffs in any country that lacks market power in international markets.  It rules out differential taxes on goods produced domestically in one industry vs. another.  Atkinson and Stiglitz (1996) go further and argue that as long as a country can flexibly choose the rate structure under the personal income tax, then it has no reason to choose differential tax rates on the consumption of different goods. Not only does this rule out differential excise tax rates by good but it also rules out taxes on income from savings, which implicitly impose higher tax rates on goods consumed further into the future.

THE IMPACT OF COMPANY INCOME TAX REVENUE ON DEVELOPING ECONOMIES