The Impact of Company Income Tax Revenue on Developing Economies

The Impact of Company Income Tax Revenue on Developing Economies

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Chapter one on The Impact of Company Income Tax Revenue on Developing Economies

INTRODUCTION

Background to 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.

Regarding possible revenue from seignorage, Friedman (1999) argued that a country would optimally choose a deflation rate sufficient to generate a nominal interest rate close to zero, so as to avoid any real costs of liquidity. While these forecasts of no tariffs, no taxes on capital income, uniform taxes on consumption, and deflation, are not consistent with any existing tax structures, they are not sharply inconsistent with observed tax policies among the most developed countries.  With GATT and now the WTO, tariffs are indeed very low among developed countries.

At this point, nominal interest rates are very low among most developed countries, even if deflation is rare.  While capital income is still subject to tax in various ways, Gordon, Kalambokidis, and Slemrod [2004] report evidence that the U.S. collects little or no net revenue from taxes on capital income, and imposes relatively low distortions on investment and savings.  While even the richest countries maintain some important excise taxes, e.g. on gasoline, cigarettes, and liquor, an argument can easily be made that these specific taxes help internalize various consumption externalities.

Tax policies in developing countries are much more puzzling, however, in light of these forecasts from the optimal tax models.   These differences are laid out in more detail in section I. The corporate income tax is a much more important source of tax revenue among developing vs. developed countries, as are tariffs and seignorage.  Poorer countries collect much less revenue from personal income taxes, yet it seems puzzling that distributional preferences should systematically be so much weaker among poorer countries (Bird, 1999). On net, poorer countries collect on average only two-thirds or less of the amount of tax revenue that richer countries do, as a fraction of GDP.  Yet, given the severe needs for investments in say infrastructure and education in these countries, is it plausible that the lack of revenue simply represents differing tastes for public vs. private goods in poor vs. rich countries?

One natural response to these differences between forecasted policies and those observed in developing countries is to conclude that the policies in developing countries should be changed.  Newbery and Stern [1987], for example, set out the standard forecasts from optimal tax models as an ideal tax structure that developing countries should emulate.  This is also the basis for recommendations, e.g. from the World Bank and IMF, that developing countries should reduce their tariff and inflation rates, and rely more on value-added taxes with a uniform rate across industries, rather than on excise taxes or corporate income taxes (Campillo, Marta and Jeffrey, 1997).

In this study, we explore whether the inconsistency between the forecasts from optimal tax models and the data reflects instead a problem with the models.  The starting point for our approach is the observation of greater tax enforcement problems in poorer countries.  According to the estimates reported in Schneider and Enste [2002], for example, the informal economy on average is only about 15% of GDP among OECD countries, and thus small enough that it should not be a driving factor in the choice of tax structure.  However, among developing countries, the median size of the informal economy they report is 37% of GDP, ranging from 13% in Hong Kong and Singapore to 71% in Thailand and 76% in Nigeria.

With such a large informal sector, any effects of the tax structure or of government policies more generally, on the size of the informal sector can be of first-order importance in the choice of these policies.  Yet at this point, we know relatively little about how policies affect the size of the informal sector, or why the informal sector is so much larger in developing than in developed economies (Diamond, Peter and James Mirrlees, 2011). It is in this respect that this present study shall examine the impact of company income tax revenue on developing economies using Nigeria as a reference point.

Statement of the Problem

Poorer countries have indeed shifted towards more use of the value-added tax in recent years, in part based on the advice and assistance of international organizations.  But otherwise the puzzling differences remain. This leaves unanswered why poorer countries so systematically choose the wrong policies, and why these wrong policies have remained so stable over time.  Perhaps political economy problems are more severe among developing countries, and some important domestic constituency gains from the policies that standard models find perverse.  Yet these puzzling policies are found under many different types of governments, drawing their support from many different constituencies. (Coelho, Isaias, and Harris, 2011).

Perhaps poorer countries lack the best enforcement methods, e.g. based on modern information technology.  Certainly computer technology helps pool information from different sources.  Bird (1999) argues, however, that the key problem is acquiring reliable information, not processing it. In considering problems associated with income tax of developing economies, problems statements like the following arises:

Does government policy on company income tax affect the revenue of corporations in developing countries?

Of what relevance is tax regulation on the development of companies’ in developing economies?

Does effective income tax helps in the building strong economies?

Objectives of the study

The main purpose of this study is to:

i.   To examine whether government’s policies on income tax affect the revenue of corporations.

ii.   To examine the relevance of tax regulation on the development of companies’ in developing economies and

iii.   To ascertain the impact of the company income tax revenue on the development of  the Nigeria economy.

Scope of study

This study is to effectively make an in-depth study on the impact of company income tax revenue on developing economies using Nigerian economy as reference point. This study will reveal the impact of taxation on revenue of organizations and as well focus on taxation policies and variances that occur among selected developing countries. The duration for this study will cover a five year period 2004 – 2008.

Significance of study

In this project work, efforts will be made to examine companies income tax, and organization’s efforts at fulfilling their financial obligations. This analysis will throw more light on the adequacy of revenue generation of companies and taxes imposed on such income generation. However, this study will be of great significance to shareholders, investors and management of companies as it reveals the openness of standards of financial reporting practices. It as well enable companies capitalizes on their gains while focusing on areas of comparative advantage. Also, major beneficiaries of this study are auditors and accountants, as well as financial analysts, government personnel and the revenue taxation board will benefit from this study.

Limitation of the Study

In the process of writing this project, the researcher encountered some limitations. First, the researcher was constrained by time, the insufficiency of finance made the researcher almost tired of the project work. This went further to compound the researcher’s problem, since they were using the limited resources available for them to also work on the project. Another constraint encountered by the researcher was scarcity of information. The relevant information from the CBN and other relevant bodies in most cases are not up to date. This also contributes to the delay of information been required to enhance the research.

Definition of Terms

Taxes: this is the money imposed on Individuals, groups or organizations who are engaged in business or gainful economic activities that is geared towards profit making.

Company income tax: This Tax is payable for each year of assessment of the profits of any company at a rate of 30%. These include profits accruing in, derived form brought into or received from a trade, business or investment.

Policy: can be referred to as prudent conduct, sagacity or general plan of action to be adopted by an organization.

Taxation policy: therefore, is the general plan of action on the pattern of arriving at a taxable amount that is considerable both to the management and shareholders or investors of the companies.

Financial obligation: it is the expected activities pertaining to the monetary accumulation, earnings and transactions records of companies. Paying taxes to government is one of such obligations.

REFERENCES

Atkinson, A.B. and J.E. Stiglitz.  1996.  “The Design of Tax Structure:  Direct vs. Indirect Taxation,”  Journal of Public Economics 6, pp. 55-75.

Bird, R.  (2015)  “The Administrative Dimensions of Tax Reform in Developing Countries.”  In Tax Reform in Developing Countries, edited by Malcom Gillis.  Durham:  Duke University Press.

Chartered Institute of Taxation of Nigeria (2012) Concept on income tax.

Coelho, I.K, Isaiasal, T.Y and Harris, H. (2011) “Bank Debit Taxes in Latin America — An Analysis of Recent Trends,” IMF Working Paper 01/67.

Campillo, Marta and Jeffrey A. Miron.  1997.  “Why Does Inflation Differ Across Countries?   In Reducing Inflation: Motivation and Strategy, edited by C. Romer and D. Romer.  Chicago:  University of Chicago Press.

Diamond, Peter and James Mirrlees.  2001.  “Optimal Taxation and Public Production,”  American Economic Review 61, pp. 8-27.

Friedman, Milton.  1999.  “The Optimal Quantity of Money.”  In The Optimal Quantity of Money and Other Essays, edited by Milton Friedman.  Chicago:  Aldine Publishing Company.

Gordon, Roger H.  2014.  “A Public Finance Perspective on Economic Growth.”  Mimeo.

Gordon, Roger H.  2013.  “Taxes and Privatization.”  In Public Finance and Public Policy in the New Century, edited by Sijbren Cnossen and Hans-Werner Sinn.  Cambridge:  MIT Press.

Gordon, Roger, Laura Kalambokidis, and Joel Slemrod.  (2014). “A New Summary Measure of the Effective Tax Rate on Investment.” In Measuring the Tax Burden on Capital and Labor, edited by Peter Birch Sorensen, pp. 99-128.  

Institute of Chartered Accountants of Nigeria (22016) definition of tax. 

Newbery, David and Nicholas Stern.  1987.  “The Theory of Taxation for Developing Countries.”  New York:  Oxford University Press.

Sanni, J.S (2017:5) “A Public Finance Studies on Economic Growth.” McMillan Publishing Co. IB

Schneider, Friedrich. 2012. “Size and Measurement of the Informal Economy in 110 Countries around the World.” Mimeo, Department of Economics, Johannes Kepler Universityof Linz.

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