THE IMPACT OF COMPANY INCOME TAX REVENUE ON DEVELOPING ECONOMIES

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. 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.