The contribution of taxation to any economy globally cannot be overemphasized. Apart from the revenue function it performs for the government, it is also used to assist the national government to achieve the country’s macroeconomic objectives in areas of fiscal and monetary policies. Past documentations have revealed that revenue from taxes in developed nations have high impact on its economic growth and development which is clearly seen by the amenities provided and improvements in living standards by such nations. Thus, the main objective of this study is to evaluate the relationship between taxation in Nigeria her economic growth and development. Time series data were applied in carrying out this research work. The research design adopted in the study is the Ex-post facto method of research. Hence, Simple linear regression analysis was used to analyse the data by the use of Pearson Product Moment Model, while T-test was used to test validity and reliability of instrument. The study tried to treat two hypotheses, one of which states that Taxation has no positive, significant relationship with employment in Nigeria. Findings revealed that company income tax, value added tax and custom & excise duties and petroleum profit & royalties tax, have no positive significant relationship with employment in Nigeria. Therefore, a conclusion was drawn highlighting there is no significant relationship between tax revenue and Total employment in Nigeria with a view to selected taxes used. It is however, recommended that tax revenue be used effectively to pursue economic development in terms of employment by investing in key sectors of the Nigerian economy which will transform the economy positively.



Title page

Declaration                                                                                                                 i

Certification                                                                                                                ii

Dedication                                                                                                                   iii

Acknowledgements                                                                                                    iv

Abstract                                                                                                                       v

List of tables                                                                                                               vii



1.1 Background to the Study                                                                                      1

1.2 Statement of problem                                                                                           3

1.3 Objectives of the study                                                                                         4

1.4 Research Questions                                                                                              4

1.5 Research Hypotheses                                                                                            4

1.6 Significance of the study                                                                                      5

1.7 Scope of the study                                                                                                5

1.8 Limitations of the study                                                                                       6

1.9 Definition of terms                                                                                               7



2.1 Conceptual framework                                                                                         8

2.1.1 A brief history of taxation                                                                                 9

2.1.2 Nigerian tax administration                                                                               11

2.1.3 A brief summary of the Nigerian tax system                                                     15

2.1.4 Principles of taxation                                                                                         16

2.1.5 Objectives of taxation                                                                                        17

2.1.6 Classification of taxation                                                                                   18

2.1.7 Taxation and macroeconomic factors                                                               19

2.1.8 Concepts of economic growth and development                                              20

2.1.9 Taxation as an instrument for the maintenance of economic development      20

2.2 Theoretical framework                                                                                         22

2.3 Empirical review                                                                                                   22

2.4 Gap in literature                                                                                                    25



3.1 Research design                                                                                                    26

3.2 Sources of data collection                                                                                     26

3.3 Population of the study                                                                                         26

3.4 Sampling method                                                                                                  26

3.5 Model of specification                                                                                          27

3.3.1 Description of research variables                                                                       27

3.4 Reliability and validity of data and test instruments                                            27

3.4.1 Hypotheses test statistic                                                                                     28

3.5 Data analysis techniques                                                                                       28



4.1 Presentation and analysis of data                                                                          29

4.2 Testing the research hypotheses                                                                           45

4.3 Discussion of findings                                                                                          46



5.1 Summary of research findings                                                                              48

5.2 Conclusion                                                                                                            49

5.3 Recommendations                                                                                                50

5.4 Contributions to knowledge                                                                                 50

5.5 Recommended areas for further studies                                                               50






Nigeria as a nation has the vision of becoming one among the world’s twenty biggest economies in the year 2020; this obviously, is the brain behind the priority attention the present administration is directing at infrastructural development which is essential for economic growth and development. A developed economy is one with the ingredient to stimulate investment and create wealth, this by implication offers an atmosphere that is favorable for business and has the potentials to realize its vision for 2020. The desired outcome requires a lot of money and resources to put the economy in a position that stimulates investment, therefore, tax policies need to attract potential investors, and the revenue from tax should be sufficient enough to meet the infrastructural expenditures of the government.

Tosun and Abizadeh (2005) acknowledged that taxes are used as proxy for fiscal policy. They outlined five possible mechanisms by which taxes can affect economic growth, first, taxes can inhibit investment rate through such taxes as corporate and personal income, capital gains tax, second, taxes can slow down growth in labour supply by disposing labour leisure choice in favor of leisure. Third, tax policy can have effect on research and development expenditure; fourth, taxes can lead to a flow of resources to other sectors that may have lower productivity. Finally, high taxes on labour supply can distort the efficient use of human capital high tax burdens even though they have high social productivity.

Governments in all parts of the world and at all points in history have faced similar challenges when it comes to finding their ambitions. We do not believe that government in the past nor in today’s developing world are any less rational compared to those in today’s developed world.

But important as it is, economic development does not mechanically translate into more uses in the tax take. Even in fast growing economies, such as India and China, decisions by the state are needed to yield a dividend in the form of a higher tax share in GDP.

Sustainable economic development is one of the fundamental objectives which every government mostly in developing economy seeks to achieve. The pursuit of this goal underlines the rationale behind the identification of ways of raising revenue. Nigeria just like every numerous countries through which revenue is sourced in order to finance developmental projects in the economy.

As the Nigerian economy is in recession period, there are inconsistencies in our tax laws which had made it difficult for the tax body to administer and even for the tax payer to follow. The federal government had the intension to maintain a uniform tax system but the economic condition of each state has given room for divergence system. The most important thing one should have in mind is that taxation is supposed to be an instrument of social change which is not answering as much as it should be doing presently in Nigeria. The purpose of this study is to evaluate taxation as a tool for economic growth and development in Nigeria.


In developing countries, the government has to play an active role in promoting economic growth and development because private initiative and capital are limited. Fiscal policy or budget has become an important instrument in promoting growth and development in such economies.

Taxation is an important part of fiscal policy which can be used effectively by government and developing economies. Taxation play a vital role in the economic development and growth of a country which include: resources mobilization, reduction in inequalities of income, improvement in social welfare, foreign exchange, regional development, control inflation.





Deepak (2011) defined tax as a compulsory payment made under any statute on individuals and companies. Tax has also been variously defined as a monetary value which is paid to government and also as a compulsory payment to government on income earned by individuals/entities without any consideration (Ramakanth, 2011 and Sunil, 2011).

Black’s law dictionary (1979, pp.1307) defines tax as a “pecuniary burden laid up   on individuals or property owners to support the government or a payment exacted by legislative authority”. It is also “not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority” and is “any contribution imposed by government whether under the name of toll, tribute, tillage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name”(Black’s Law Dictionary, 1979, pp.1307).

The above definition is a legal definition; however, economic definition of taxes differs in that economists do not consider many transfers to governments to be taxes. For example, some transfers to the public sector are comparable to prices. Examples include tuition at public universities and fees for utilities provided by governments at all levels. Governments also obtain resources by creating money through voluntary gifts (e.g. contributions to public universities and museums), by imposing penalties (e.g. traffic fines), by borrowing, and by confiscating wealth. Generally, the economists view a tax as a non-penal, yet compulsory, transfer of resources from the private to the public sector levied on a basis of predetermined criteria and without reference to specific benefit received (Wikipedia, 2011).


The history of direct taxation of individuals in Nigeria dates back to 1904 when the system of personal income tax was introduced in Northern Nigeria by the British colonial administration under Lord Lugard. This was a proclamation of order but not an ordinance which was preceded by the stamp duties ordinance of 1903. The Native Revenue Ordinance (NRO) which regularized all the pre-colonial personal income taxes in Northern Nigeria was introduced in 1906 but was also restricted to Northern Nigeria. With the amalgamation of Northern and Southern protectorates into a single jurisdiction (Nigeria) in 1914, the Native Revenue Ordinance of Northern Nigeria was extended to the west and east in 1917 and 1927 respectively.

Another major reform took place in 1943, this time in respect of company income tax, when the Nigerian Inland Revenue Department, the precursor to the Federal Inland Revenue Service, was carved out of the Inland Revenue Department of British West Africa. The Inland Revenue Department was renamed the Federal Board of Inland Revenue under the Income Tax Ordinance. No. 39 of 1958. This change became permanent in 1961 when the companies and income tax act no. 22 of 1961 established the Federal Board of Inland Revenue. The company’s income tax act also established the body of Appeal commissioners as the first point of call in the resolution of disputes between tax payers and the board concerning assessment and payment of tax.


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