EFFECTIVENESS OF TAXATION AS AN INSTRUMENT FOR THE CONTROL OF MONEY
IN CIRCULATION
ABSTRACT
This study examined the Effectiveness of Taxation As An Instrument For the Control of Money in Circulation. Taxation which is an instrument used by the government to levy individuals and corporations directly or indirectly as a source of getting money for the maintenance of the state, maintaining economy stability, boasting aggregate investment, reduce inflation amongst others is adjudged to be the major source of public revenue. The problem of the study is that people see taxation as a tool for the exploitation of the ordinary man by the government and has generated a great deal of sentiments among taxpayers, some of who argue that the government unjustifiably rid them of investments and consumption income. The main objectives of the study are to examine the important role of taxation in an economy, to evaluate the various types and classes of taxation, to identify the major problems of taxation, and to determine the impact of taxation on money in circulation. The research questions and hypotheses are structured in line with the objectives of the study. The research is survey and empirical in nature. The main source of data for the study is secondary data. The instrument used for data collection include data on petroleum profit tax (PPT) and company income tax (CIT), paid by quoted companies in Nigeria spanning the period of 1999 to 2007 which was available. The average money in circulation (AMC) are also obtained for each year, and are classified according to the total tax collected (PPT + CIT) = Total tax collected (TTC). Data were analysed through the statistical tools of simple Linear regression and correlation analysis. Therefore, the correlation coefficient between the Total Tax Collected (TTC) and the Average Money in Circulation (AMC) shows that there is a positive linear relationship. The study found that the chief source of revenue for most industrialized countries is the income tax. The income tax is levied on both individual personal incomes and corporations profit. The work concludes that taxation is a veritable instrument used by government authorities to regulate and collect sums of money from both natural and legal persons for the benefit of the whole citizens. On the other hand, taxes reduces a tax payers wealth (money) and this causes the individuals to re-arrange his/her economic priorities. The study recommends that more generalized rates should be enforced to reduce tax avoidance and tax evasion. This will broaden the base and reduce the tax burden on a few individuals and firms. The study suggests that further work be carried out on this particular topic with emphasis on the areas which are not covered by this work.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Taxation which is a major source of public revenue has been variously defined to include an obligatory transfer of money from the taxpayer to a public authority (government). Odinge (2003:18) notes that the payment of tax unlike payment of price for acquisition of something of a material value implies the settlement of tax payer’s civic liability to the government.
Other definition of taxation include, a non-punitive but yet compulsory levy imposed by government on the property and incomes of individuals and corporations. According to Ajakaiye (1999:56) a tax is a form of levy imposed by the state on people, corporate bodies or goods and services.
Government action in tax collection is however justifiable in the sense that government performs at least the following functions for the welfare of its citizens.
- Provision of education, water supply, Postal and transportation services.
- Internal security which includes the prohibition of secessional tendencies.
- Prevention of external aggression e.g. protection of the country’s boarders.
- Set and maintain public infrastructure.
- Organize and execute state projects etc.
Ajayi (2002:18), notes that taxation is an instrument of fiscal policy by the government. In this regard, taxation may be defined as an instrument through which government achieves its desired goals by the variation of taxes in its fiscal policy. In other words, taxation can be defined as an instrument used by the government to levy individuals and corporations directly or indirectly as a source of getting money for the maintenance of the state, maintaining economy stability, boasting aggregate investment, reduce inflation amongst others.
As an instrument of fiscal policy, the government uses taxation to check the quantity of money in circulation. Apart from using the imposition of taxes to cover its expenditure, the government also uses it to reduce inflation and/or stimulate economic growth (Anyanwuocha, 2001:30).
Furthermore, taxation can be said to be a means of transferring resources and income (money) from the private sector in order to achieve or accomplish some of the nation’s economic and social goals, control money in circulation, the result of which will lead to a higher standard of living through the promotion of traditional basic government services in education, public health and transportation; the avoidance of excess or limited money in circulation (Lewis, 1984:26).
- STATEMENT OF PROBLEM
Taxation which is one of the major sources of revenue for all governments come back to the tax payers in form of social amenities. The payment of tax has generated a great deal of sentiments among taxpayer, some of who argue that the government unjustifiably rid them of investments and consumption income. Others see taxation as a tool for the exploitation of the ordinary man by the government. Patriots regard taxation as an inevitable tool of nationhood without which the provision of social amenities and national survival can hardly be achieved.
There is also another view that taxation lowers the investment capacity and growth of corporate entitles if the company’s profit before tax is compared to the after tax profits which are available either for distribution as dividends to shareholders or re-investment for the expansion/growth of the company. The introduction of minimum tax for companies that do not have assessable profit have also been widely criticised as being depletion on the company’s capital. The argument is based on the fact the since the company has no assessable profit, the percentage payments on the turn-over, gross profit, net assets and share capital is inappropriate.
One responsibility that the Government owes her citizens is the maintenance of a stabilized economy. Most countries’ economics (especially third world like Nigeria) are faced with either shortage or surplus funds in circulation especially during deflation and inflationary periods.
Inflation which refers to a continuous and persistent rise in the level of prices or fall in the value of money as the case for deflation, means a continuous and persistent fall in the general price level rise in the value of money are two conditions that are very differential to the well being of the economy. Taxation acts as an effective instrument to arrest these situations to ensure a stabilized economy which is necessary for business survival and growth as well as ensuring a good standard of living.
The tax system is one of the most powerful levies available to the government to change the state of the economy for better. As such, government increases or reduces the purchasing ability of the people and working through the multiplier which can reduce the disposable income and investments.
However, if an economy like that of Nigeria is going through a period of inflation, the government can make budget surplus by increasing taxes amongst other things. Moreover, the impact of the tax will be a reduction on individual disposable income and aggregate spending policy through a necessary source of governments’ revenue.
If otherwise taxation is neglected in an effort to control money in circulation, certain problems will be evident – fixed income earners’ real income will likely fall. During inflation what money can buy like real income falls. Those who suffer most are fixed income receivers e.g. pensioners, salary earners, landlords etc.
Inflation redistributes income from workers and peasants who are assumed to have low saving capacity to capitalists and entrepreneurs who presumably have high savings and investment abilities. The implication of this is that the former becomes poorer while the later gets richer. This is not an ideal situation. Inflationary trends are detrimental to wage earners especially during the initial stages when wages do not rise in the same proportion as price increased of goods and services. During inflationary period, creditors stands to loose. This is because of the continuous loss of value of money and as such lending is discouraged. Infact the major problem centres on inflation and deflation.
1.3 OBJECTIVE OF THE STUDY;
The main objective of this research is to evaluate the effectiveness of taxation in controlling money in circulation. This tend to suggest that there are other sub objectives of this study which includes the following:
- To examine the importance of taxation in an economy.
- To evaluate the various types and classes of taxation.
- To assess the impact of Total Tax Collected (TTC) on
Average Money in Circulation (AMC).
- To determine the relationship between TTC and AMC.
1.4 RESEARCH QUESTIONS
For the purpose of this study, the following research questions are formulated as follows:
- What are the importance of taxation in an economy?
- What are the various types and classes of taxation?
- What is the impact of Total Tax Collected (TTC) on Average Money in Circulation (AMC)?
- What is the relationship between TTC and AMC?
1.5 RESEARCH HYPOTHESIS
The following null and alternate hypotheses are formulated for the study as follows:
- Ho: There is no significant impact of Total Tax Collected (TTC) on
Average Money in Circulation (AMC).
H1: There is significant impact of Total Tax Collected (TTC) on
Average Money in Circulation (AMC).
- Ho: There is no relationship between TTC and AMC.
H1: There is significant relationship between TTC and AMC.
1.6 SIGNIFICANCE OF THE STUDY
This study is important because it will create awareness of the importance and effectiveness of taxation in controlling money in circulation. It will also reveal the extent of revenue accrued to the government by way of taxation. It will also show the redistribution of income among different income earners through the means of taxation in order to address the issue of tax burden as related to income.
This will enlighten corporate firms and individuals on the enormous role played by the Federal Government in the area of maintaining stability and steady growth of commerce and industry, provision of infrastructure, necessary environment and even entrepreneurship for the proper functioning and growth of businesses, provision of law and order and maintenance of peaceful atmosphere by way of defence etc., all of which depends on huge outlay of fund. Hence, the taxpayers will begin to appreciate tax payment as and when due.
The writer hopes that this research work will stimulate interest in this area of study by many researchers in Nigeria. Hence, to other users like future
researchers, fellow students and even the government this will improve their theoretical and practical knowledge about taxation as it relates to control of money in circulation. Its findings, recommendations and conclusions will be of immense assistance to those interested in making policy decision on taxation matters.
1.7 SCOPE OF THE STUDY
The scope of the study covers the effectiveness of taxation as an instrument for the control of money in circulation in Nigeria, with a case study of the Board of Internal Revenue, Enugu State.
1.8 LIMITATIONS OF THE STUDY
An exhaustive and more detailed research on this topic would have been carried out but for some obvious constraints of time, finance and attitude of respondents.
Time Constraint: Due to shortness and limited time frame for the completion of the programme, the researchers had the problem of time in covering wider scope and gathering more information.
Finance: Inadequate finance affected this work greatly as it limited the amount and quantity of information which the researcher would have accessed and gathered for this work.
Attitude of Respondents: Some of the respondents showed negative attitude towards the study because they felt that they have no financial benefit.
1.9 DEFINITION OF TERMS
Some technical terms used in the study are defined in this section as stated
below:
Taxation: The Oxford Advanced Learners Dictionary (1984:886) describes taxation as a sum of money to be paid by citizens according to income.
Company Income Tax (CIT): This is a levy imposed on the profits of business organizations or body corporate. It is a tax on the accounting profit of a company.
Petroleum Profit Tax (PPT): This is a direct tax levied annually for each accounting period of 12 months by oil companies.
Total Tax Collected (TTC): This is the addition of company income tax and the petroleum Profit Tax over a given period of time.
Average Money in Circulation (AMC): This is the sum of total tax collected as divided by the number of years involved, that is, the sample size.
Money: This is any object generally accepted as a medium of exchange and for the settlement of debts.