DETERMINANTS OF TAX REVENUE EFFORT IN DEVELOPING COUNTRIES

(Accounting)
DETERMINANTS OF TAX REVENUE EFFORT IN DEVELOPING COUNTRIES 
ABSTRACT

The objective of the study is to examine the determinants of tax revenue effort in Nigeria. Specifically, the study examines the impact of GDP, Investment, openness and population growth rate on total tax revenue. The study adopts a time -series research design with an extensive reliance on secondary data from the CBN statistical bulletin. The study covers the period 1985 -2011. The methodological approach builds extensively on multivariate co-integration and error correction model which incorporates a thorough examination of the characteristics of time series economic data. The study makes use of regression analysis as the data analysis method. We also conduct the Generalized Method of Moments (GMM) analysis to examine of the model parameters reflect biased estimates arising from the    problem of endogeneity.  Eviews econometric software 7.0 was utilized for the analysis. The findings of the study show that there is a positive relationship between GDP growth and Tax revenue effort. There is a positive relationship between OPENNESS and Tax revenue effort. There is a negative relationship between Investment and Tax revenue effort and finally there is a negative relationship between Population growth and Tax revenue effort. The recommendation is that there is the need for economic policies to be focused on ensuring sustained economic growth through various productive channels. This is necessary as a more vibrant economy will result in improved tax revenue.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study                        
Statement of the Research Problem                     
Objectives of the Study                            
Research Hypotheses                            
Scope of the Study                            
Significance of the Study                    
Limitation of the Study                        
References                            
CHAPTER TWO: LITERATURE REVIEW
Introduction                            
Tax Policy Reforms in Nigeria                    
Problems of Tax Administration in Nigeria                
Impact of Tax Administration on Government Revenue in a Developing
Economy                                
Determinants of Tax Revenue Efforts in Developing Countries        
Empirical Studies on Determinants of Tax Revenue Collection    
References                            
CHAPTER THREE: METHODOLOGY AND MODEL SPECIFICATION
Introduction                                
Research Design                            
Scope of the Study                            
Sources of Data                        
Data Analysis Method                            
Model Specification                        
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF RESULT
Introduction                                
Presentation and Analysis of Result                
Discussion of Findings                     
Hypotheses Testing                             
CHAPTER FIVE:    SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
Summary of Findings                            
Conclusion                                
Recommendations                             
Bibliography                                 
Appendix                            
CHAPTER ONE
INTRODUCTION
BACKGROUND TO THE STUDY
Many developing countries need to spend more on public infrastructure, education, health services and so on, and hence they need to increase their tax effort – tax revenue as a percentage of gross domestic product (GDP) – if they want to grow and to be less poor. The emphasis in earlier analysis of the low tax effort observed in many developing countries was on the ‘supply side’ factors or ‘tax handles’, such as the ready availability of (easily taxed) economic activities, for example, foreign trade and mining. These factors remain important in explaining what countries do, but telling a country that wants to raise its tax levels to find and tax natural resources is not a particularly promising piece of policy advice (Bird, Martinez-Vazquez and Torgler, 2008).
Most developing countries are increasingly focusing on domestic resources mobilization toward economic development. studies or growth have demonstrated that raising domestic revenue is the most feasible way to achieve fiscal sustainability. In this contest, strengthening domestic revenue base is especially crucially important for the developing countries. The governments all face a common challenge of how to meet public spending needs. All forty eight countries are classified as still developing, a majority is largely dependent on foreign assistance, face fiscal and typical lag behind in terms of raising sufficient revenues to address their socio-economic development.
  Ariyo (1997) opined that, a country’s tax system is a major determinant of other macroeconomic indexes. Specifically, for both developed and developing economics, according to him, there exists a relationship between tax structure and the level of economic growth and development.
    Chaudhry and Munir (2010) buttress that, tax revenue collection is one significant issue of economic development among others. It has been said that `what the government gives it must first take away’. The economic resources available to society are limited, and so an increase in government expenditure normally means a reduction in private spending. Taxation is one method of transferring resources from the private to the public sector, but there are other i.e. creation of more money, to charge for the goods and services it provides or to borrow. Taxation has its limits as well, but they considerably exceed the amounts that can be raised by resorting to the printing press. Charging consumers directly, or borrowing. So while governments often use all four methods of raising resources, taxation is usually by far the most important source of government revenue.
    In Nigeria, as in some other developing countries, tax non compliance is a serious challenge facing income tax administration and hindering tax revenue performance. Despite the various tax reforms undertaken by Nigerian government to increase tax revenue over the years, prior statistical evidence has proven that the contribution of income taxes to the government’s total revenue remained consistently low and is relatively shrinking. However, from all the taxes, personal income tax has remained the most disappointing, inefficient, unproductive and problematic in Nigerian tax system. Tax non compliance is of the failure of taxpayer to meet tax obligations whether the act is done intentionally or unintentionally (Alabede, Ariffin and Idris, 2011).
    The payment of tax is obligatory duty of every citizen whether natural or corporate citizen. As a civic duty, it is expected that citizens will voluntarily comply with such obligation but that is not the case with some citizens (Alabede, Ariffin and Idris, 2011).
    Tax compliance has been an important subject of research in a large number of developed and a number of developing countries. Since such country has its own approach to managing tax compliance levels and each has different tax laws and relations, the factors impacting tax compliance behaviour appear to vary among countries. Factors affecting tax compliance can be viewed from various continuous; for example, economists and policy analysts have given increasing attention to tax compliance theoretically and empirically.
STATEMENT OF THE RESEARCH PROBLEM
Most developing countries are increasingly focusing on domestic resource mobilization toward economic development. Studies on growth have demonstrated that raising domestic revenues is the most feasible way to achieve fiscal sustainability. In this context, strengthening domestic revenue bases is especially crucially important for the developing countries such as Nigeria.
Taxation has been an important subject of research in a large number of developed and a number of developing countries. Since each country has its own approach to managing tax revenue and each has different tax laws and regulations, the factors impacting tax revenue behaviour appear to vary among countries.
    Against this backdrop, the following research questions are raised:
Is there a positive relationship between GPD growth and tax revenue effort in Nigeria?
Is there a positive relationship between openness and tax revenue effort in Nigeria?
Is there a positive relationship between investment and tax revenue effort in Nigeria?
Is there a positive relationship between population growth and tax revenue effort in Nigeria?
OBJECTIVES OF THE STUDY
The following are the objectives of this study.
To determine the relationship between GDP growth and tax revenue effort in Nigeria.
To verify the relationship between openness and tax revenue effort in Nigeria.
To find out the relationship between investment and tax revenue effort in Nigeria.
To examine the relationship between population growth and tax revenue effort in Nigeria?
RESEARCH HYPOTHESES
    The following hypotheses shall be tested in this study.
Hypothesis I
Ho:    There is no relationship between GDP growth and tax revenue effort in Nigeria.
H1:    There is a relationship between GDP growth and tax revenue effort in Nigeria.
Hypothesis II
Ho:    There is no relationship between openess and tax revenue effort in Nigeria.
H1:    There is a relationship between openess and tax revenue effortin Nigeria.
Hypothesis III
Ho:    There is no relationship between investment and tax revenue effort in Nigeria.
H1:    There is a relationship between investment and tax revenue effort in Nigeria.
Hypothesis IV
HO:     There is no relationship between population growth and tax revenue effort in Nigeria.
H1:    There is a relationship between population growth and tax revenue effort in Nigeria.
SCOPE OF THE STUDY
This research work is an empirical study on the determinant of tax revenue effort in Nigeria. The population of the study is Nigeria using some macroeconomic variables.
The length of period covered by the study is 1980 – 2011.
SIGNIFICANCE OF THE STUDY
This study will be of relevance to the following:
Future researchers: This study will be relevant to future researchers, students, academicians as it will serve as a spring board i.e. literature review for them.
Serve as a guide to the public: This research work will enable the public, shareholders and intending investors to know the determinant of tax revenue effort in Nigeria.
LIMITATION OF THE STUDY
A study of this nature cannot be carried out without constraints.
A major limitation in this research work is the time duration which is insufficient to cover more geographical locations.
The low response rate from respondents is also a limiting factor including the imprecise measurement of variables.
The sample size and the inability to obtain a completely random sample is also a limiting factor to this research work.
 REFERENCES
Alabede, J.O., Ariffin, Z.B. & Idris, K.M. (2011). Determinants of Tax Compliance Behaviour: A Proposed Model for Nigeria, International Research Journal of Finance and Economics, 78:121-136.
Ariyo, A. (1997). Productivity of the Nigerian Tax System: 1970-1990. Nairobi: Research Paper, African Economic Research Consortium Nairobi, 1-48.
Chaudhry, I.S. & Munir, F. (2010). Determinants of Low Tax Revenue in Pakistan, Pakistan Journal of Social Sciences, 3(2): 439-452.
Palil, M.R. & Mustapha, A.F. (2011). Tax Evolution and Concept of Tax Compliance in Asia and Europe, Australian Journal of Basic and Applied Sciences, 5(11): 557-563.

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