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CHAPTER ONE

1.0 INTRODUCTION:

1.1 Background of the Study

Taxes, and tax systems, are fundamental components of government revenue generation.

Brautigam, (2008) has noted, taxes underwrite the capacity of states to carry out their

goals; they form one of the central arenas for the conduct of state-society relations, and

they shape the balance between accumulation and redistribution that gives states their

social character. Thus, taxes build capacity to provide security, meet basic needs or foster

economic development and they build legitimacy and consent helping to create

consensual, accountable and representative government. A key component of any tax

system is the manner in which it is administered (Naiyeju, 2010).

Bahi and Bird, (2008) states that no tax is better than its administration, so tax

administration matters a lot, and an essential objective of tax administration is to ensure

the maximum possible compliance by taxpayers of all types with their taxation obligations.

Unfortunately, in many countries, tax administration is usually weak and characterized by

extensive evasion, corruption and coercion. In many cases overall tax levels are low, and

large sectors of the informal economy escape the tax net entirely (Brautigani, Fjelftand and

Moore, 2008).

A nation’s tax system is often a reflection of its communal values and the values of those

in power (Ross, 2007). Thus, to create a system of taxation, a nation must make choices

regarding the distribution of the tax burden and how the taxes collected will be spent. In

democratic nations GFwhere the public elects those in charge of establishing the tax

system like Nigeria, these choices reflect the type of community that the public or

government wish to create.

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Parkin, (2006) states that in countries where the public does not have a significant amount

of influence over the system of taxation, that system may be more of a reflection on the

values of those in power as governments use different kinds of taxes and vary the tax rates.

This is done to distribute the tax burden among individuals or classes of the population

involved in taxable activities, such as businesses, or to redistribute resources between

individuals or classes in the population in addition, taxes are applied to fund foreign aid

and military ventures, to influence the macroeconomic performance of the economy, or to

modify patterns of consumption or employment within an economy, by making some

classes of transaction more or less attractive (Parkin, 2006).

In a report of the Federal Inland Revenue Services (FIRS) and presented to the federal

executive council on National Tax Policy for 2009, it says that sustainable development is

development that meets the needs of the present without compromising the ability of future

generations to meet their own needs thus, in this context sustainable development refers to

the pattern of revenue generation, which is able to meet the needs of the present generation

of Nigerians, without negatively impacting the ability of future generations to meet their

own needs. Generally, taxation is regarded as a sustainable source of Government revenue

due to the stability and certainty of the tax system (Aguolu, 1999). Unlike other sources of

revenue, taxes are constantly available in so far as economic activity is carried on in the

society (Cobham, 2005).

However, recent developments in the global and local economy which have significantly

impacted Government revenue has directed focus on taxation as a sustainable source of

income (FIRS, 2009). It is in line with this that the National Tax Policy intends to create

awareness on the importance of the role, which taxation can play in securing a stable flow

of revenue for the Government. Nigeria is currently viewed as a mono-product economy

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with significant reliance on oil revenue due to historical developments in the Nigerian

economy (FGN, 2009).

However, taxation has been identified as an alternative to oil revenue and a more reliable

source of’ revenue (McKerchar, 2003). The tax policy shall therefore promote and

encourage a shift in focus from non-tax revenue to tax revenue by Governments at all

levels of the Nigerian economy (FGN, 2009). Following from the above, the tax policy

shall also promote and encourage healthy competition amongst tax and revenue authorities

in Nigeria at the Federal and State level to facilitate rapid development of the tax sector in

Nigeria. The focus of the competition shall be to maximise tax revenue within the

jurisdiction of each Government in line with Constitutional and statutory provisions. It is

expected that there would be increased collaboration as a result of the need to grow tax

revenues by each level of Government and that improved collaboration would enhance tax

yield between and among Federal, State and Local Government.

Under direct personal taxation as practiced in Nigeria, the major problem lies in the

collection of the taxes especially from the self-employed such as the businessmen,

contractors, professional practitioners like lawyers, doctors, accountants, architects and

traders in shops among others. As observed by Ayua, (1999) self-employed persons

blatantly refuse to pay tax by reporting losses every year and many of them live a lifestyle

inconsistent with reported income, which is usually unrealistically low for the nature of

their businesses. Civil Servants and other salaried workers are the only class of people that

actually pay tax in Nigeria. However, even among the salaried workers, he observed, many

have turned the statutory personal allowances and relief into a fertile ground for tax

evasion. Almost all Nigerian taxpayer is married with four children.

While it immediately presupposes that there are legal framework put in place to punish tax

evaders it perhaps raises a poser on the efficiency and effectiveness of tax laws and tax

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administration in Nigeria (Uche and Ugwoke, 2003). Some state governments in an effort

towards solving this problem had even gone to the extent of engaging the services of tax

consultants. This government effort, notwithstanding, the problem of tax evasion and

avoidance still persists (Alabi, 2001). There is no doubt that revenue due any government

will be reduced by the unpatriotic act of tax evaders which can be attributed to corruption.

Tax avoidance and evasion have adverse effect on government revenue. Tax avoidance

and evasion generates investment distortion in the form of the purchase of assets exempted

from tax or under-valued for tax purposes (Klabel and Nwokah, 2009). Avoidance and

evasion takes the form of investment in arts collection, emigration of persons and capital.

And as observed by Toby (1983) the taxpayer indulges in evasion by resorting to various

practices. These practices erode moral values and build up inflationary pressures. This

point can be buttressed with the fact that because of the evasion of tax, individuals and

companies have a lot of money at their disposal and companies declare higher dividends

and individuals have a high take home profit. This increases the quantity of money in

circulation but without a corresponding increase in the goods and services, this then build

up what is known as inflationary trends where large money chases few goods (Toby,

1983).

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.

Olu, (2005) states that “the history of taxation in Nigeria dated back to 1861 when the

British government first entered into Nigeria”. Since then, there have been different tax

reforms and laws in Nigeria both during the British rule and after independence in 1960.

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Tax apart from being a major source of revenue to government serves as a mechanism for

correcting inflation and deflection, balance of payment deficit and redistribution of income

among others. (Ola, 2005). Between 2005 and 2008, it was noted that tax revenue

constitute 7% of the total federal government collected revenue of 12.2% while

expenditure within these periods stood at 45.89% and 76.8% respectively (Obinna, 2004).

Despite the huge amount of money generated by government through tax revenue,

development in Nigeria still remains a mirage as poverty, unemployment, low standard of

living and poor infrastructural facilities still remain at a very high rate. The essence of

taxation is to raise revenue for meeting part of government expenditure of providing

economic and social benefits to the public and for the purpose of controlling the economy.

However, when there are leakages in tax collection through evasion, no development can

take place, thus in most countries where, there is high rate tax evasion and avoidance, it is

usually associated with high unemployment. Therefore, this study seeks to investigate the

effect of tax avoidance on Nigeria’s economic growth a case study of Taraba State.

1.2 Statement of the Problem

It has been noted that tax system in Nigeria has come to play a significant role, as a major

source of revenue by all the three tiers of government(federal, state andlocal

government)thereby enabling them to carryout sustainable development expenditure.The

act of evading and avoiding tax by most registered companies and some individuals has

however affected the revenue base of the government especially in providing essential

services in the society. People naturally prefer to reduce their tax liabilities by deliberately

overstating their expenses and make false entries and fictions in their books of account.

Thus, their act however, causes tremendous reduction in the revenue accruable to the

government which eventually shrinks revenue to the treasure of government. The inability

of the revenue board to collect substantial amount of money from tax is as a result of

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evasion and avoidance of tax. This research work examines the problems facing the

revenue department in collecting taxes and levies under their jurisdiction with a view to

identifying possibilities at minimizing or even eradicating tax evasion and avoidance. This

study thus becomes imperative for it seek to investigate on the effect of tax avoidance to

the economic development of Taraba State.

1.3 Objectives of the Study

The aim of the study is to investigate and identify the effects of tax avoidance and evasion

on the economic development of Taraba State. The objectives are:

i. To investigate how taxes are avoided in Taraba State

ii. To examine the effects of tax avoidance on the economy of Taraba State

iii. To identify the determinants of tax avoidance in the study area;

iv. To identify how to control and curb tax avoidance in the study area.

1.4 Research Questions

The research seeks to answer the following questions:

i. How taxes are avoided in Taraba State?

ii. What are the effects of tax avoidance on the economy of Taraba State?

iii. What are the determinants of tax avoidance in the study area?

iv. How to control and curb tax avoidance in the study area?

1.5 Significance of the Study

This research work would be relevant to various tax authorities; the Federal Board of

Inland Revenue, State Board of Internal Revenue and Local Government revenue

committee as well as their tax officials who are responsible to collect tax on individual or

corporate bodies. It gives them insight on how to improve the tax administration. The

research would also help the professional bodies like the chartered institute of taxation of

Nigeria and the institute of chartered accountants of Nigeria as well as their members to

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see the areas of deficiency in the collections and call for improvement in tax revenue.

Findings from this study will add to existing literatures on the topic of study. More so, this

research would also be relevant to the future researchers and the dents of accounting,

economic, business administration and other social and management sciences as well as

the legislations which will also benefit immensely from this research because it will form

basis of tax policy formation, implementation and administration. Finally, findings from

this study will be beneficial to students, academicians, government agencies; accountants

and so on, for it seek to unveil the effects of tax avoidance on economic development.

1.6 Scope and Limitation of the Study

Since no single research can validly cover all areas of the topic the researcher tends that

thrust of this project will be limited within the scope of how tax payers performance on tax

are influenced by the choice of its tax system. The study will focus primarily on Taraba

State to be precise to enable the researcher carryout on extensive investigation on this

subject. The state to be studied is Taraba State. It will be limited to time, insufficient fund,

bad transport network from the researcher to the study areas. Some of the limitations

includes: - lack of cooperation from the respondents, delay in the questionnaire retrieval

and so no.

1.7 Operational Definition of Terms

In order to aid understanding of this research work by the user, special term used in this

study are defined,

Tax: This is a compulsory contribution imposed by government on individual and

corporate bodies for the use of government to provide facilities or service in the nation.

Tax Avoidance: This is a legal way by which a tax payer reduces his tax liabilities. Tax

avoidance is a way of identifying the loop-hole in the tax law and then taking advantage of

such a loop-hole to reduce the tax payable.

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Tax Liability: This is the amount that is borne by the tax payer

Paye (Pay As You Earn): This type of tax is based as the earning of the tax payer.

Capital Gain Tax: This is the type of tax that is based on the gain realized from the sale of

capital goods.

Corporate Tax: This is the type of tax that is based on the profit of a company.

Tax Evasion; Tax evasion is a deliberate act on the part of taxpayer not to pay tax due.

Tax Avoision; Tax avoision is a situation where the tax law might be unclear, thereby,

confusing taxpayer as to the correct tax payable.

Tax Morale; Tax Morale is the intrinsic motivation to pay tax.

Tax Compliance: Willingness to pay taxes without threat or coercion

Social Norms: A set of behavioural models and rules or standard of behaviour shared by

members of a social group.

Legal System: A system for interpreting and enforcing the laws

Tax System: A legal system for assessing and collecting taxes

Tax Holiday: A tax holiday is a temporary reduction or elimination of a tax. It is

synonymous with tax abatement, tax subsidy or tax reduction. Governments usually create

tax holidays as incentives for business investment.

1.8 Chapter Summary

The chapter has covers the general introduction of the topic, background to the study

which includes meaning of tax, taxation, reasons for taxation for both the individuals, firms,

industries and government. The statement of the problem, objectives, research questions and

significance of the research to be studied, as well as scope and limitation which the study is

likely to encounter was also captured in the chapter one. Finally, the chapter also has discussed

other operational terms used in the chapter.

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CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter highlighted the recent literature on the following sub-headings namely:

conceptual framework, theoretical framework, empirical review and summary of the

literatures.

2.2 Conceptual Framework

2.2.1 Concept of Tax

The term tax has been defined in various ways by different authors. Udu and Agu (2005)

defined tax as a compulsory payment made by each eligible citizen towards the

expenditure. They added that tax is levied by the specific benefit that individual tax

payers may receive.

Tax is a civic contribution imposed by the government on her subject (individuals and

corporate bodies) with a view to finance its core responsibilities of ensuring optimum

public welfare socially, economically and politically (Kiable and Nwankwo, 2009). A

number of challenges were reported to have hindered effective administration of tax

system in many states around the globe. In particular, tax evasion is argued to be the most

challenging practice in developing countries such as Nigeria. Tax evasion is described by

Olayinka et al., (2010) as an intentional illegal behavior involving a direct violation of

tax laws to avoid payment of taxes. The phenomenon of tax evasion is found in all

societies (countries),indeed, no matter the control measures put in place, some people

maneuver their ways and break government’s rules and regulations relating taxes.

The practice of manoeuvring tax laws is considered illegal which needs to be checked

and addressed by the relevant authorities. Indeed, government’s awakening efforts to

addressing tax evasion became necessary for many reasons, including, enhancing

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government’s revenue, regulating macroeconomic variables, redistributing inequality of

income and other benefits derivable from a good tax system (Dandago and Alabede,

2000).

In fact, a good tax system is said to be an instrument for regulating and stabilizing

erected behaviors in an economy (Ezeoha and Ogamba, 2010 and Toby, 1983). Equally,

tax has been argued to be a significant tool of government fiscal policy via increase or

decrease of various rates of taxes depending on macroeconomics situation (Kiabel and

Nwankwo, 2009). Engagement with literature on Nigerian tax systems showed that the

authorities responsible for managing taxes have not been transparent neither

appropriately accounts for the accrued revue in an open manner (Olayinka et al., 2010).

This has been a global phenomenon as evidence shows that accountants and tax

professionals who are expected to promote transparency of the practices and detect fraud

use their expertise to facilitate tax evasion (Sikka and Willmott, 2010; Ezeoha and

Ogamba, 2010 and Sikka, 2008). No doubt, even in Nigeria, the nontransparent attitude

of tax professionals, accountants and other stakeholders exposes the weaknesses of the

tax system in the country (Eigen, 2002).

As the Nigerian economy is in the 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 economy condition of each state as 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 impact of tax payment is not felt by payee and some do not understand

some tax laws and this indeed has put them into doubt and confusion and has definitely

made others to want to avoid and evade tax.

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Every modern state or nation requires a lot of revenue to be able to provide and maintain

essential services for its citizen. One ready means of revenue for the government is

through the imposition of tax. The imposition of tax by the government is not a new

phenomenon. There is hardly any government today that does not rely on taxation.

However, apart from the complications that has crept into the taxation system in modern

times, the reason for the imposition of tax in fact ceased to be only for the generation of

revenue for the state. It has also become the avenue for the redistribution of wealth and

re-adjustment of the economy (Ojo, 2008).

Therefore, the tax system is one of the most powerful levies available to any government

to stimulate and guide its economic and social development. The FBIR (Federal Board of

Inland Revenue) which is vested with the power to administer the act and carry out all the

act which may be deemed necessary and expedient for the assessment and collection of

tax ,and shall for all amount so collected in a manner to be prescribed by the Federal

Minister of Finance. The Board has certain reserved power which shall not be delegated

to other person to perform, e.g. power to acquire, hold and dispose properties of any

company in satisfaction to tax or any judgment debt, and to specify the forms of return

claim and notices.

The main forms of tax collected are direct and indirect taxes. For the direct taxes, it is

levied on individuals, and factors of productions e.g. Personal Income Tax (PIT), Capital

Gain Tax (CGT). However, indirect taxes are levied on goods and services e.g. import

and export duties. Thus, the consumers bear the ultimate burden. Having realized that

taxation is one of the most important sources of revenue for the various tiers of the

government and a major way of sourcing financial support to the Nigeria government at

large, it is of paramount importance that tax evasion and avoidance is discouraged with

every conceivable means. It is quite worrisome that despite numerous tax reforms in

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Nigeria no remarkable change has been recorded in Nigerian economy with regards to

economic development and adequate utilization of tax revenue. Consequently, many tax

payers in Nigeria have argued that tax revenue has not been adequately utilized in the

interest of the general public over the years. Hence, this paper is designed to investigate

the relationship between tax revenue and economic development in Nigeria.

Anyamuocha (2003) said that taxation as a concept involves more than mere imposition

of the compulsory payment of sum of money by the government or its agents. It involves

the assessment of tax, imposition of compulsory sums of money by the government or its

agents on individuals, firms, the collection and auditing of tax records. Ugwuanyi (2004)

defines tax as a compulsory contribution imposed by a public authority, irrespective of

the exact amount of service rendered to the taxpayer in return. He added that it involves a

compulsory levy from a person to the government to defray the expenses incurred on the

common interest of all without references to special benefits conferred.

Types of Taxes in Nigeria

Basically, taxes are classified into: direct and indirect taxes.Udu and Agu (2005) states

that when taxes are classified according to the method of payment, they are grouped into:

direct tax and indirect tax.

Direct Tax

This is a tax levied directly on the tax payer or tax which is imposed directly on the

individuals’ income is called direct tax. They include income tax, estate tax, stamp duties

etc (Anyamuocha, 2003).

Indirect Tax

This is a tax that is imposed and collected indirectly from those who pay the taxes.

Indirect taxes may be specific or ad volerem. It is specific if the tax is levied based on the

unit of the commodities produced. While it is advolerem when it is levied based on the

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value of goods or services produced (Anyanwu, 1993). Indirect taxes include: export

duties, excise duties import duties, sales tax, purchases tax, value added tax (VAT).

System of Taxation

Taxation as Ogundele (1999) posits, it is the process or machinery by which communities

or groups of persons are made to contribute in some agreed quantum and method for the

purpose of the administration and development of the society. In a similar description,

Soyode and Kajola (2006) explained tax as a compulsory exaction of money by a public

authority for public purposes. Nightingale (1997) described tax as a compulsory

contribution imposed by the government. And Kohonen and Alemayehu, (2011) defined

tax is a compulsory levy on privately held assets, work, transactions and other activities

and flows as designated by the parliament and enacted by the government

According to Nwite (2004), there are three systems of taxation: proportional, progressive

and regressive.

Proportional Tax

In this system of taxation, the payers pay the same percentage or proportion of their

income as tax. In other words, the tax rate is the same irrespective of the level of income

or wealth. A proportional tax according to Nwite (2004) is one whose percentages rate

remains the same as the tax base increases.

Progressive Tax

A progressive tax is one whose percentage rate increases as the tax base increases. In

other words, as the income of the person increases, the tax also increases gradually and

vice versa. Those with a higher income pay a higher proportion. Progressive taxation is

usually the system adopted with the taxation of personal income e.g. pay as you earn

(PAYE).

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Regressive Tax

A regressive tax is one whose percentage rate decreases as the base increases. The burden

of taxation falls more heavily on the lower income groups than on the higher income

group.

The Incidence of Taxation

Udude, (2005) discussed incidence of tax and conditions under which tax could be

shifted from one person to another. She defined tax incidence as the distribution of tax

burden in terms of who pays the tax. The person whom the burden of payment eventually

falls on is the person who bears the incidence of the taxation. Whereas, the person who

initially pays the tax incurs its impact. The incidence of tax lies on the person on whom it

rest after further shifting. The effect on prices, income output, employment, capitals and

technological advances are regarded as economic effects which can be both direct and

indirect in nature that is responses from tax payers and their result. She also discussed the

short run (immediate incidence) and run (ultimate incidence). (Anyanwokoro, 1999)

Obinna (2004), defines tax shifting as the process by which market adjust tax. He

mentioned three types of tax shifting to include: Forward shifting to consumers,

backward shifting to producers and partial shifting (forward and backward). Tax is

shifted forward when someone else pays the tax on product rather than the producer.

According to Anyanwuocha (2005) “the incidence of taxation refers to the burden of tax

with reference to where this burden rests”.

Adam Smith’s Cannon of Taxation

Lawal (2005) discussed explicitly the Adam smith’s cannon of taxation which include:

equality, economy, certainty, convenience, flexibility, neutrality.

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Equality

People in the same income level and having equal responsibilities ought to pay the same

amount that tax should be just and equitable based on their ability to pay.

Economy

A tax system should make tax collection economical. The cost of collecting tax should be

relatively small compared to the total revenue derived from the tax.

Certainty

The tax payer should be fully aware of the rate of tax he is to pay and should also know

when he is to pay. This helps to prevent tax avoidance and tax evasion.

Conveniences

This means that the amount of tax, the tax payable by a person and the timing of its

payment should be made to suit the tax payer. The tax system should not pose much

difficulty to the tax payer.

Flexibility

These cannon emphasized that tax system should not be rigid. It should be easy to change

to suit the changing circumstance in the economy.

Neutrality

The tax system should interfere very little with the demand for and supply of goods and

services. The tax system should not hamper production, willingness to work, save, or

affect investment adversely.

Qualities of a good taxation

A good tax according to Udude (2005) must posses the following features:

Stability

A good tax system should be stable and not to be subjected to unnecessary changes due

to political changes. That each new government should not repeal a whole sets of tax

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laws which have been introduced by its predecessors and introduce a whole set of new

tax law.

Flexibility

A good tax system must be able to accommodate differences in the exercise of political

choices in addition to reducing a possible conflict between economic efficiency and

income redistribution.

Incentive Effect

A good tax system should provide incentive to work, to save, to invest in capital

developments, to take risks and to innovate.

Efficiency Effect

A good tax system should be capable of encouraging people to use resources efficiently

and allocate them to uses which best serve the needs of society.

Income effect: A good tax system should be capable of inducing a tax payer to work

harder in order to restore parts of the income taken as tax.

Redistribution Effect

A good tax system must be structured in such a way to encourage a vertical redistribution

of income between the poor and the rich. At some time it should maintain a horizontal

equality, that is “treating like with like”. Thus the distribution of tax burden should be

equitable.

Simplicity

The tax payer should be in a position to comprehend the nature of his liability through an

understanding of what is and what is not taxable.

Minimum Sacrifice

A good tax system should always aim at minimizing the sacrifice on the part of taxpayer

since taxes are levied on income and wealth of persons.

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Problems of tax collection in Nigeria

According to Anyanwuocha (2005), a number of taxes difficult in Nigeria, they include;

Subsistence production

It is difficult to estimate the income of many people in Nigeria who do not produce in a

commercial basis thereby making tax collection difficult.

Inadequate Records of Incomes and Business Transactions: The literacy level in Nigeria

is still low; this makes it difficult for many to keep records of income and business

transactions which should be the basis of taxation. (Jhingan, 2002).

Corruption

Some tax assessors and collectors are dishonest. There are cases where there has been

bribery and corruption, sometimes they purposefully misappropriate fund, over-tax their

opponents or under asses some people in order to get favour.

There is a high incidence of tax evasion and tax avoidance in Nigeria: Many people make

false declaration of income. This is very common with self-employed individuals. This is

also true of some firms, especial the small ones. While some try to avoid tax payment

entirely by looking for loopholes in the tax law. (Anyanwokoro, 1999)

High cost of collecting tax

This is a major problem militating against tax collection in Nigeria. Lack of qualified

personnel in the Federal and State Inland Revenue Offices is also a major problem facing

tax collection in Nigeria.

Lack of necessary working facilities; The federal and state offices lack necessary

working materials that could enhance their work.

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2.2.2 Concept of Taxation and Economic Growth

Eugene and Skimmer (1996) in their study titled “Taxation and Economic Growth in

Washington revealed that higher tax can discourage investment on the net growth in the

capital through high statutory tax rates on corporations and individual income”.

More so, the study showed that tax policy influences the marginal productivity of capital

and labour by distorting investment from heavily taxed sectors into more highly taxed

sectors with lower overall productivity.

According to Solow (1996), heavy taxation on labour supply can distort the efficient use

of human capital by discouraging workers from employment in sectors with high social

productivity but a heavy tax burden.

Moreover, a number of recent studies have used endogenous growth models to stimulate

effects of a fundamental tax reforms on conclude that reducing the distorting effects of

current tax structure would permanently increase economic growth. At one extreme,

Lucca (1990) calculated that a revenue neutral income tax raise labour income taxes and

increase growth rates negligibly. At the other side, Jones et al. (1993) calculated that

eliminating all distorting taxes would raise average annual growth rates by a whopping 4-

8 percentage points. In addition, another study concluded in Britain in early 1960s; not a

single executive out of the 181 replied that they abandoned the introduction of tax

charges (Corner and Williams, 1965).

More recent studies suggested a larger impact of taxation on the discount rate used to

evaluate private investment projects (Potherb and Summers, 1995). In general studies of

taxation using cross-country data suggest that higher taxes have a negative impact on

output growth although these results are not always robust to tax measures used.

Skimmer (1988) used data from African countries to conclude that income, corporate and

import taxes led to greater reductions in output growth than average export and sales

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taxes. The above review shows no evidence of Nigerian case. Therefore, this study will

be a step in the right direction towards closing this empirical gap.

2.2.3 The Concept of Economic Development

Jhingan, (2002) defines economic development as a process where by the real per capita

income of a country increases over a period of time.

Hogendorn, (1992) conceives it as the totality of the underlying structural, institutional

and qualitative changes that expand the country’s capacities. According to him, economic

development is measured in four ways using four indicators. This includes Gross

National Product (GNP), Per Capita Income and Welfare. For an economic development

to occur there must be an increase in real national income which is possible through

increased investment. Also there must be changes in the standard of living of the people.

Standard of living is determined using per capita income, because per capita income

measures standard of living and vice versa.

Moreso, economic welfare indicates the level of economic development attained by a

country. Dowrick (1992) said that a country may have high Gross National Product with

low standard of living and economic welfare. The further factor that measures economic

development is social indicator. This includes health condition of the people nutritional

condition of the people which depend greatly on the infrastructural development on a

particular society. The extent to which this will occur depends on a great extent on

taxation policy in any country.

2.2.3Concept of Tax Avoidance

Tax avoidance arises in a situation where the taxpayer arranges his financial affairs in a

way that would make him pay the least possible amount of tax without infringing the

legal rules in short it is a term used to denote those various devices which have been

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adopted with the aim of saving tax and thus sheltering the taxpayer’s income from greater

liability which would have been otherwise incurred (Kiabel, 2001).

Tax avoidance is the legitimatize use of the tax loopholes in order to minimize/reduce

ones tax liability (Brown, 1983) and (Pyle, 1989). (Mponguliana, 2002), Explains tax

evasions as unlawful act of dodging the statutory tax obligations, tax avoidance takes

advantages of any hoop any loop holes and weakness, deficiencies, and loose or vague

clauses in tax legislations to minimize/reduce or eliminate tax liability.

No man in this country is under the smallest obligation moral or otherwise so to arrange

his legal relations to his business or to his property as to enable the Inland Revenue to put

the largest possible shovel into his stores. The Inland Revenue is not slow and quite

rightly to take every advantage, which is open to it under the taxing statutes for the

purpose of depleting the taxpayer‘s pocket. And the taxpayer is in like manner entitled to

be astute to prevent so far as he honestly can the depletion of his means by the revenue

(Kiabel and Nwokah, 2009).

Thus, it is clear that tax avoidance is legal or at least not illegal since one is mostly

probably using the tax laws to limit his tax liability under the same laws. Examples of tax

avoidance include: Seeking professional advice; reducing one’s income by submitting

claims for expenses in earning the income: increasing the number of one’s children (in

Nigeria the maximum allowable is four) and taking additional life assurance policies.

Tax avoidance is thus considered to be a matter of being sensible. While the law regards

tax avoidance as a legitimate game tax evasion is seen as immoral and illegal. Tax

evasion is an outright, dishonest action whereby the taxpayer endeavours to reduce his

tax liability through the use of illegal means. According to Farayola (1987), tax evasion

is the fraudulent, dishonest, intentional distortion or concealment of facts and figures

with the intention of avoiding the payment of or reducing the amount of tax otherwise

20
payable. Tax evasion is accomplished by deliberate act of omission or commission which

in them constitutes criminal acts under the tax laws. These acts of omission or

commission might include: failure to pay tax e.g. withholding tax; failure to submit

returns; omission or misstatement of items from returns; claiming relief (in Personal

Income Tax), for example, of children that do not exist; understating income;

documenting fictitious transactions; overstating expenses; failure to answer queries

(Aguolu, 1999).

Olabisi, (2010) defined tax evasion as a deliberate and wilful practice of not disclosing

full taxable income so as to pay less tax and as a contravention of tax laws whereby a

taxable person neglects to pay tax due or reduces tax liability by making fraudulent or

untrue claims on the income tax form. This is not new to the world, but it differs from

country to country.

Tax avoidance and tax evasion brings with it a lot of economic challenges, for instance

tax avoidance causes investment distortions and thus companies and individuals would

undervalue or even have some of their assets exempted from tax purposes. Whereas tax

evasion on the other side would cause twists in business morals or ethics are destroyed as

people look for loopholes in the system (Dalu et al., 2012)

DFID, (2009) emphasized that the obtainable knowledge on tax revenue losses in

developing countries caused by tax evasion and tax avoidance is very limited. This is

partially due to the lack of data and partially due to methodological shortcomings of

existing studies. Some of the existing evaluations of tax revenue losses due to tax

avoidance and evasion by firms systematically overestimate the losses. Other theories are

based on assumptions which are so restricting that the results are difficult to interpret.

The most common form of tax evasion in Nigeria is through failure to render tax returns

to the Relevant Tax Authority. A tax evader may be charged to court for criminal

21
offences with the consequent fines, penalties and at times imprisonment being levied on

him for evading tax (Faseun, 2001). And as observed by Sosanya (1981): Tax evading

has become the favourite crime of the Nigerian, so popular that it makes armed robbery

seem like minority interest. It has become so widespread that there now exist a cash

economy of vast proportions over which the taxman has no control and which is growing

at several times the rate of the national economy. No doubt, tax evasion and avoidance

had robbed the Nigerian government of substantial tax revenue. According to the

Nigerian Stock Exchange, 85 percent of corporate tax revenue in the country accrues

from the 257 companies listed on the exchange compared to the 30,000 companies

registered with the Corporate Affairs Commission. This is a serious indictment of the

administrative machinery and capacity of the tax authorities in Nigeria.

2.2.4 Concept of Tax Evasion

In general refers to illegal practices to escape from taxation. To this end, taxable income,

profits liable to tax or other taxable activities are concealed, the amount and/or the source

of income are misrepresented, or tax reducing factors such as deductions, exemptions or

credits are deliberately overstated (Alm and Vazquez, 2001). According to Chiumya,

(2006) tax evasion refers to the willful or deliberate refusal of the tax payer towards

his/her tax obligation (Malkawi and Haloush, 2008). It is the deliberate distortion of facts

and figures relating to an assessment after tax liability has been incurred with the

intention of reducing the liability. Deliberate refusal to disclose one’s tax sources of

income to the tax authorities with the intention of paying nothing or something less in

terms of one’s tax liability is an attempt to evade tax. Tax evasion is an offense as

described by the law and so the sanctions are very severe.

22
2.2.5 Reasons for Tax Evasion and Tax Avoidance

The definition of tax evasion and tax avoidance seems to contradict many scholars and

tax practitioners. The demarcating line between tax evasion and tax avoidance is always

not clearly put forward as one may be thinking of avoiding tax but end up with evading

tax. However, the concepts are always distinguished on legal basis.

There are various reasons for tax evasion and tax avoidance. In order to develop methods

and instruments for fighting tax evasion and avoidance, it is important to foremost

establish a broad understanding of the different reasons underlying these problems. These

reasons can be filed in two categories. The first category comprises factors that

negatively affect taxpayers’ compliance with tax legislation. These factors can be

subsumed either contributing to a low willingness to pay taxes (low tax morale) or to

high costs to comply with tax laws (Kirchler et al., 2007).

The second category contains reasons for the low ability of tax administration and fiscal

courts to enforce tax liabilities (Kirchler et al., 2007). These factors can be summarized

as resulting from insufficiencies in the administration and collection of taxes as well as

weak capacity in auditing and monitoring tax payments which limit the possibility to

detect and prosecute violators. These facilitating factors are discussed below: -

i) Low level of (voluntary) tax compliance

a) Low tax morale

Taxpayers’ willingness to pay taxes differs widely across the world. It cannot be viewed

as simply depending on the tax burden. Rather, Alm et al., (2007) indicates that taxpayers

throughout the world pay more taxes than can be explained by even the highest feasible

levels of auditing, penalties and risk aversion. These high levels of tax compliance result

from the tax morale of society that fosters self-enforcement of tax compliance. Tax

morale is, however, not easy to establish. Especially countries without a deep-rooted

23
‘culture’ and habit of paying taxes find it difficult to establish tax morale (Alm et al.

1992). This “willingness to pay” of the taxpayer is influenced by the following factors:

Low quality of the service in return for taxes: In general, citizens expect some kind of

service or benefit in return for the taxes paid. If the government fails to provide basic

public goods and services or provides them insufficiently, citizens may not be willing to

pay taxes and tax evasion and avoidance will be the consequence (Pashev, 2005).

Tax system and perception of fairness: Some studies suggest that high tax rates foster

evasion. The intuition is that high tax rates increase the tax burden and, hence, lower the

disposable income of the taxpayer (Chipeta, 2002). However, the level of the tax rate

may not be the only factor influencing people’s decision about paying taxes. In fact, the

structure of the overall tax system has an impact as well. If, for example, the tax rate on

corporate profits is relatively low, but individuals are facing a high tax rate on their

personal income, they may perceive their personal tax burden as unfair and choose to

declare only a part of their income. Similarly, large companies can often more easily take

advantage of tax loopholes, thereby contributing to the perceived unfairness of the

system. Tax rates and the overall structure of the tax system, therefore, have a significant

effect on the disposition to evade and avoid taxes.

Low transparency and accountability of public institutions: Lack of transparency and

accountability in the use of public funds contributes to public distrust both with respect to

the tax system as well as the government. This, in turn, increases the willingness to evade

taxes (Kirchler et al., 2007).

b) High compliance costs

High compliance costs, these are the costs the taxpayer has to bear to gather the

necessary information, fill out tax forms etc, can be an additional reason for tax evasion

and avoidance. The World Bank’s 2008 World Development Indicator for “time to

24
prepare and pay taxes” shows huge differences between countries: While preparing and

paying taxes requires 210 hours on average in high income OECD countries, the required

time extends to 1080 hours in Bolivia and Vietnam and even 2600 hours in Brazil.

Similarly, Everest-Philips (2008) describes a recent mapping of local taxes in Yemen

which found over 1500 different taxes, licenses and fees covering various bases at

different rates. This situation led businesses to worry more about the administrative

burden than about the actual tax burden. In such a situation it can be assumed that

compliance costs are very high and the probability of the taxpayer complying with such a

great variety of taxes low.

Particularly small and medium sized enterprises (SME) suffer from high compliance

costs. A survey among South African firms on the regulatory costs of doing business

revealed that taxes, in particular VAT, are perceived as the most problematic set of

regulations followed by labor regulation (SBP, 2005). Above all it is the paperwork that

has to be mastered to comply with tax legislation which is deterring firms from paying

their taxes appropriately. When asked on their strategy to cope with regulatory costs of

running their business about 18 percent responded to simply try to avoid or evade

taxation.

ii) Weak enforcement of tax laws

a) Insufficiencies in tax collection

Regarding tax collection, many developing countries face difficulties with respect to

important premises for a well-functioning tax administration, especially with respect to

identifying and administering those citizens and firms that are liable to tax payments.

Although there has been progress, tax administrations’ capacity to introduce and sustain

e.g. well-functioning tax registers still pose severe difficulties in many developing

25
countries. Problems of insufficient capacity may also occur due to the organizational set

up of the tax administration and its relationship to the ministry of finance.

In general, there are two approaches for the organizational set up of tax administration.

The first option is where the ministry of finance itself assumes the tax administration

function and departments within the ministry of finance collect taxes. The second option

is a semi-autonomous revenue authority where tax administration is moved out the

ministry of finance into a separate entity. Often, tax administration and collection by

ministries of finance were considered inefficient and suffering from corruption and high

compliance costs (Moore, 2009). Therefore the creation of semi-autonomous revenue

authorities has been pursued.

Moreover, one has to bear in mind that tax administration and tax policy are intertwined

spheres. Tax policy directly affects the costs and the organization of the tax

administration. Additionally, the capacities of tax administration influence the way tax

policy is implemented. Thus, both areas tax policy as well as tax administration have to

be taken into consideration when designing successful tax reforms. Otherwise, the proper

functioning of the overall system is affected. For this reason, the tax system should be

aligned to the administrative and legal prerequisites of the respective country (Moore,

2009).

Qualified, well trained and motivated tax officials are crucial for the collection of taxes

and the performance of tax administration bodies as a whole. In order to motivate tax

officials to work in accordance with the interests of the government and to reduce their

vulnerability to corruption, attention has to be given to wages and other incentives

(Kirchler et al., 2c007).

Finally, insufficiencies in tax collection according to Moore, (2009) also result from the

fact that economies of most developing countries are characterized by a large informal

26
sector. Firms and individuals active in the informal sector usually do not pay direct taxes

on personal or business income, and they do not charge consumption taxes or excises on

their sales. The state loses these potential tax revenues and, as a consequence, lacks

necessary funds to provide goods and service. Often, the reasons to be active in the

informal economy are not directly related to attempts to avoid taxation but rather to

limited options or excessive administrative requirements to enter the formal economy or

excessive costs of labour regulations. However, there are also cases where individuals

and companies choose to be active in the informal sector with the intention to escape

their tax liabilities. Nevertheless, tax evasion does not need to be the primary reason why

firms remain or become informal.

b) Weak capacity in detecting and prosecuting inappropriate tax practices

A well-functioning body of tax investigation is essential for the detection and prosecution

of cases of tax fraud. The lack of sufficient capacities in tax administrations reduce the

probability of detection that again influences the decision of a taxpayer as to whether

evade or not. Additionally, the legal framework is an important prerequisite for any

enforcement activity. For example, the size and nature of penalties that are incurred after

evasion has been detected is directly connected to the level of tax compliance (Fishlow

and Friedman, 1994).

c) Source of Income

Source of income has a significant effect on tax compliance. Bruce (2000) argues that

some individuals inter to self-employed to avoid tax. This may due to cash receipts, or

the weak of tax information reporting. Furthermore, the lack of visibility of income for

the self-employed encourages tax payers to transform to this branch.

Finally, tax laws in many countries, especially in developing countries, changes rapidly,

thus producing instability and low transparency of the tax code. As a result, complicated

27
tax legislation and on-going changes of the tax code confuse tax administrators and

taxpayers alike. This produces ample opportunity for tax avoidance (Mo, 2003).

Furthermore, it results in tax evasion which is not intentional, but occurs due to lack of

knowledge, that is ignorance. In extreme cases, tax evasion and avoidance even become

inevitable when the tax system becomes too complex and/or contradictory to follow.

2.3 Effect of Tax Avoidance and Evasion in the Nigerian Economy

As stated earlier, taxes, and tax systems, the theoretical basis for this research is based the

relationship between finance and economic growth. According to Brautigam, (2008)

taxes underwrite the capacity of states to carry out their goals; they form one of the

central arenas for the conduct of state-society relations, and they shape the balance

between accumulation and redistribution that gives states their social character. Thus,

taxes build capacity to provide security, meet basic needs or foster economic

development and they build legitimacy and consent helping to create consensual,

accountable and representative government.

Thus, as revealed by Okafor (2012), tax revenue and growth of the economy have

positive and significant relationship. This is consistent with the findings of this study that

tax evasion and avoidance stifle the growth of the economy.

Again as observed by Okafor, (2012) that over the years that income tax revenue has

generally been grossly understated due to improper tax administration arising from under

assessment and inefficient machinery for collection. This fact has been collaborated by

Ola (2001), Oluba, (2008) and Adegbie and Fakile, (2011) when they state that in Nigeria

revenue derived from income taxes has been grossly understated due to improper tax

administration, assessment and collection. This could be due to persons and companies

are known to routinely evade and avoid taxes due to corrupt practices and the existence

of various loopholes in the tax laws. Thus, according to Naiyelu (1996), the success or

28
failure of any tax system depends on the extent to which it is properly managed; the

extent to which the tax law is properly interpreted and implemented. The finding of this

study again is consistent with the assertion of Okafor (2012), Ola (2001), Oluba, (2008)

and Adegbie and Fakile (2011).

Tax evasion and avoidance is an illegal act of intentionally reducing accrual taxes or

completing skipping the payment of such taxes by under reporting income, overstating

expenditures, deductions or exemptions (Aguolu, 2010). Tax avoidance and evasion is a

serious problem in Nigeria which arises from many sources including outright ignorance

of extent tax laws, lack of faith in the ability of government to utilize tax revenue well

and high tax rates which make evasion very attractive and economical. Thus, as stated by

Kiabel and Nwokah (2009), the problem of tax evasion and avoidance have reduced

government revenue which has led to government inability to create employment

opportunities for her teaming populace.

A nation’s tax system is often a reflection of its communal values and the values of those

in power (Ross, 2007). Therefore, to create a system of taxation, a nation must make

choices regarding the distribution of the tax burden and how the taxes collected will be

spent. In democratic nations where the public elects those in charge of establishing the

tax system like Nigeria, these choices reflect the type of community that the public or

government wish to create.

Parkin, (2006) states that in countries where the public does not have a significant

amount of influence over the system of taxation, that system may be more of a reflection

on the values of those in power as governments use different kinds of taxes and vary the

tax rates. This is done to distribute the tax burden among individuals or classes of the

population involved in taxable activities, such as businesses, or to redistribute resources

between individuals or classes in the population in addition, taxes are applied to fund

29
foreign aid and military ventures, to influence the macroeconomic performance of the

economy, or to modify patterns of consumption or employment within an economy, by

making some classes of transaction more or less attractive (Parkin, 2006).

Tax evasion and avoidance have adverse effect on government revenue. Tax avoidance

generates investment distortion in the form of the purchase of assets exempted from tax

or under-valued for tax purposes (KIabel and Nwokah, 2009). Avoidance takes the form

of investment in arts collection, emigration of persons and capital. And as observed by

Toby, (1983) the taxpayer indulges in evasion by resorting to various practices. These

practices erode moral values and build up inflationary pressures. This point can be

buttressed with the fact that because of the evasion of tax, individuals and companies

have a lot of money at their disposal and companies declare higher dividends and

individuals have a high take home profit. This increases the quantity of money in

circulation but without a corresponding increase in the goods and services, this then build

up what is known as inflationary trends where large money chases few goods (Toby,

1983).

Tax avoidance and evasion has been defined by Soyode and Kajola (2006) as deliberate

and wilful practice of not disclosing full taxable income in order to pay less tax. This

behavior is portrayed as criminal act of violating the provision of tax laws which will

eventually lead to reduction in total government revenue (Kay, 1980). Hence, in general,

paying less tax or not at all than what one is legally obliged to, described the concept of

tax avoidance and evasion. Eboziegbe, (2007) posited that the act of tax evasion

remained one of themost serious threatsto the revenue and indeed entire economy of the

Nation. Feld and Frey (2002) asserted that in most cases tax avoidance and evasion arises

in a situation where a taxpayer arranges his financial affairs in a way that would make

him not to pay or pay the least possible amount of tax by infringing the legal rules.

30
Faruyola, (1987) is of the opinion that tax evasion can be accomplished through

deliberate act of omission or commission which might include: Failure to pay tax, failure

to submit returns, omission or misstatement of items return intentionally, claiming relief

in personal income tax which do not exist, understating income, documenting fictitious

transactions, overstating expenses and/or failure to answer queries. Although these acts

are more or less ways through which tax evasion are perpetrated but in themselves

constitute criminal act under tax laws and of all these failure to render tax returns is the

most common form found in Nigeria (Kiabel and Nwankwo, 2009).

2.3.1Tax Evasion and Rule of Law

Respecting rule of law is one of the obligations of every good citizen of a country.

However, governments have a bigger obligation to ensure that those laws are respected

and followed. In case of tax collection and administration, authorities are obliged to

ensure taxes are properly paid and evaders are bringing to book (Schneider and Enste,

2002 and Brunetti and Wader, 2003). Supporting this view earlier, Kiabel (2001) posited

that tax evasion became rampant in Nigeria because there is little or no legal enforcement

in place and indeed, weak and arbitrary enforcement of tax laws encourage the evader

and fraud starts. Nwachukwu (2006) further stressed that the only way to reduce tax

evasion and corruption in developing countries is ensuring strict implementation of rule

of law. Not only in Nigeria, tax evasion in most developing countries is so rampant and

worsens by day due to the fact that governments have not made required effort to

arresting the situation. Hence required revenue for the governance of the countries cannot

be raise, these countries (developing states) often resort to borrowing public debt (both

internal and external) which may not only crowd out the private sector including self-

employed individuals of their economies but also lead them to debt traps (Chiuma, 2006).

31
In similar vein, Sikka and Hampton (2005) and Olatunde (2007) identified tax evasion as

one of the major social problems inhabiting development in developing countries and

eroding the existing welfare nature even in developed economies of the world. This has

led to a growing attention among policy makers and stakeholder across the globe to call

for the intervention of law agencies within individual countries. In summary,

governments and tax authorities must resort to enforcing laws for proper implementation

of taxes and success of its administration.

2.3.2 Nigerian Informal Sector and Tax Challenges

Nigerian informal sector is described as any commercial activities from all sector of the

economy that operate outside the purview of government regulation (Ekpo and Umoh,

1996). This may be visible, irregular, non-structured, backyard, underground,

subterranean, unabsorbed or residual. Informal economic activities in Nigeria entails

wide range of small and medium scale activities largely self-employment activities, most

of them are traditional occupations and adopt traditional method of production(Boyland

and Burckhardt, 2002).Others include financial intermediation and economic endeavours

of subsistence nature or retail trade, transport repair services and household or other

personal sources. Activities of the informal sector in Nigeria are difficult to measure.

This is because they are highly dynamics but contribute substantially to the general

growth of the economy.

The informal sector contributes significantly to national economy in terms of output and

employment. The government must therefore encourage and empower their activities

through the provision of conducive environment and policies to enhance their operations

(Alm and Martinez, 2008). The informal sector has no tendency to be missed out; it must

therefore be sustained for optimal contribution to the growth of the economy. In response

to this, the Nigerian government have attempted severally to positively impact on the

32
operation of informal sector like family economic advancement programme (FEAP) in

1997 whose objective is to serve as a catalyst to stimulate and encourage the growth of

informal sector, capacity building and credit support through peoples bank.

Entrepreneurship development policy has also been implemented in late 80s.

2.4 Empirical Literature Review

Hanousek and Palda (2007), in their study on Displacement Deadweight Loss from Tax

Evasion, found that in the presence of the underground economy taxes give rise to a

deadweight loss from displacement of efficient producers by inefficient producers. They

considered an economy in which a producer faces two types of costs: the cost of

production and taxes. If the ability to evade taxes is inversely proportional to the ability to

keep production costs low, high tax rates may cause inefficient producers to crowd out

efficient producers. They estimated this deadweight loss from surveys of 426 Czech firms

taken in 2004 and 2005. They further found that the deadweight loss due to this crowding

out could be several times as large as the deadweight losses from discouraged

consumption.

In another vein the study by Sookram and Watson (2005) had two main objectives. The

first objective was to determine the extent of tax evasion in Trinidad and Tobago during

the period 1960-2000. This was done using estimates of the hidden economy based on a

variant of Tanzi’s monetary model. The second objective was to determine if, and to what

extent, any relationship exists between certain key macroeconomic variables and the level

of income tax evasion in Trinidad and Tobago. The bounds testing procedure to

counteraction within an autoregressive distributive lag (ARDL) framework is used to

address the issue. The study established a long-run relationship between tax evasion, per

capita economic growth, imports, external debt, unemployment and inflation.

33
Cerqueti and Coppier, (2009) explored tax revenues in a regime of widespread corruption

in a growth model. They develop a Ramsey model of economic growth with rival but non-

excludable public good which is financed by taxes which can be evaded via corrupt tax

inspector. They show that the relationship between the tax rate and tax collection, in a

dynamic framework, is not unique. The study revealed that growth rates - both of income

and of tax revenues - decrease, as the tax rate increases but they differed in how the growth

rate decreases as the tax rate increases among countries.

Mironov, (2010) examines the effect of tax evasion on firm growth using a unique set of

data that contains 236 million banking transactions of 1.7 million Russian firms over the

period 2003 to 2004. The study estimated income diversion in Russia to be 11.3% to 3.1%

of GDP, which corresponds to tax evasion of 4.6% to 5.8% of GDP respectively.

Fisman and Svensson (2000), study the relationship between bribe payments, taxes, and

firm growth in Uganda for the period 1995-97. Using industry-location averages to

circumvent the potential problem of endogeneity and to deal with issues of measurement

error, they find that both the rate of taxation and the rate of bribery are negatively

correlated with firm growth. For the full data set, a one percentage point increase in the

bribery rate is associated with a three percentage point reduction in firm growth-an effect

about three times that of taxation. Moreover, after excluding outliers, the authors find that

bribery has a much greater negative impact on growth, and taxation a considerably smaller

one. This provides some validation of firm-level theories of which posit that corruption

retards development even more than taxation does.

The issue of tax evasion has received a considerable attention from researchers and policy

making institutions such as the International Monetary Fund, United Nations and various

organisations involved in the collection of revenue over the past decades. Various studies

have been conducted on tax evasion and tax avoidance, to analyse developments in various

34
economies such as tax evasion, income inequality and opportunity costs of compliance

studies by Bloomquist (2003) and possible causes of tax evasion by Wallschutzky (1984),

whereas Davies and Rattso (1996) analysed the impact of government regulations on the

economy.

As pointed out by Reynolds (2009), that since tax is a principal source of government

revenue, if persons are able to escape by legal or illegal means the tax to which they

should logically be subject under the general scope of the tax, the theoretical equity of the

tax to a large measure is lost. Tax evasion and avoidance no doubt deny any government

the tax revenue due to her, which results in a gap between the potential and actual tax

collections. Hence this study is aimed at bridging this gap.

A precursor of the tax evasion was the change in the mix of financing flows between

commercial banks, multilateral lending agencies and companies. In doing so, it raises a

number of longer-term questions about international public policy, the role of multilateral

lending agencies, and the economic policies of the country (Pommerehne et al., 1994).

In seeking to identify how much tax each person pays, it is important to distinguish

between the ‘statutory incidence’ (the legal liability to pay the tax) and the economic

incidence, which in practice is often the belief regarding who ultimately bears the burden

of the tax. Tax evasion affect the ability of those legally liable for various taxes to shift

these as traditionally assumed. Tax evasion does affect incidence but is difficult to

incorporate, Gemmell and Morrissey (2003).

The resulting tax revenue loss may cause serious damage to the proper functioning of the

public sector, threatening its capacity to finance its basic expenses, Franzoni, (1999).

Provision of public services offers a rationale for taxation. Hitherto, taxation and tax

evasion, in turn, influence public expenditure and capital accumulation, which affect

output and economic growth, Chen (2003).

35
Some of transactions that are part of our daily routine are, either deliberately or

accidentally, concealed from the tax authority Russo, (2010). Tax evasion and fiscal

corruption have been universal and persistent problems throughout history with many-

sided important economic consequences Fjeldstad, (1996). Hence, Gillman and Kejak

(2006) argued that tax evasion is produced in a competitive decentralized corruption

services sector. The consumer pays a competitive market price for the service and as

representative agent, owns shares in the corruption sector and receives its dividend profits

(kickbacks).

Tax evasion has had a variety of fiscal effects and there are at least three reasons for

concern. According to Fjeldstad (1996), in the first place, revenue losses from non-

compliance and corruption become particularly significant at a time of substantial budget

deficit. Second, horizontal and vertical equity suffer because the effective tax rates faced

by individuals may differ because of different opportunities for tax evasion, Alm et al.,

(1991). Again, Shome (2005) stress that, an important adverse effect of tax evasion is

perhaps on equity. There is horizontal and vertical inequity where in both forms of

inequity, the higher-taxed person pays for the lower-taxed person since, had there been no

tax evasion; the tax rates would have been lower under the premise of revenue neutrality.

Russo (2010) reported that, in Italy, one of the effects of tax evasion is loss of revenue to

the government. Estimates from the Ministry of Finance indicate that roughly 20% of the

income earned within the national border is not reported, resulting in a loss of more than

300 million euros every year in forgone tax revenue. This example is not an exception

because it is prevalent across the globe. Marion and Muehlegger, (2008) have added that

lack of compliance with tax laws are likely to alter the distortionary costs of raising a

given level of government revenue and may affect the distributional consequences of a

36
given tax policy. Furthermore, resources spent evading taxes represent a deadweight loss

to the economy.

2.4.1Controlling Tax Avoidance and Evasion

The role of tax administration in maximizing revenue generation and minimizing tax

avoidance and evasion cannot be over-emphasized. These remain challenging tasks at

every stage of development of a tax administration. This is because it is not just a matter

of maximization or minimization but, rather, one of optimization, Shome, (2005).

The strategies which could be utilised by governments to address the problem of tax

evasion, can be categorised into those which define and criminalise tax evasion (for

example, anti-avoidance legislation), those which punish evasion (revenue powers), those

which forgive tax evaders and allow them to re-enter the formal economy (settlements

and amnesties), and those which appeal to, or seek to, create group norms of compliant

behaviour (naming and shaming) Oberholzer, (2007). Shome, (2005) also stated that,

there has to be a genuine threat and actual carrying out of audit, scrutiny, investigation,

penalty and punishment for an errant taxpayer.

However, regarding this issue, Lewis (1982) cited in Oberholzer, (2007) is of the opinion

that two major policy initiatives remain: increasing the deterrence capabilities of tax

authorities and seeking an improvement in taxpayers’ attitudes and perceptions vis-à-vis

the government and tax authorities. He believes that what is required is compliance to

rules prompted by conscience, rather than fear of punishment.

Further, Shome (2005) summed up modalities in order to keep tax evasion in check, the

tax administration must: (i) incorporate genuine threat of penalty but ensure due process;

in order to do this, of course the tax administration should be adequately financed and

structured; (ii) computerize as many administrative processes as possible to minimize the

interface between taxpayer and tax official; and (iii) not remain aloof from tax policy but

37
assist in every way possible to help design, in reflection of its field experience, a simple

tax structure and its commensurate tax law.

Green, (2009) also simplified the how to control tax evasion in his research on the topic

‘What Is Wrong with Tax Evasion?’ stating that, there are presumably many potential

fixes for the state of affairs and they are:

i. Simplify the tax code, making clearer the distinction between lawful and unlawful

behavior (though we should recognize how difficult this would be, particularly in

the context of taxes paid by large businesses); and distinguish more clearly

between what constitute criminal and civil violations of the code;

ii. Change our political rhetoric, attempting to educate people about the importance

of tax revenues; and modify priorities for government spending;

iii. Make the Code more equitable, from both a vertical and horizontal perspective;

and distinguish more clearly between choate and inchoate violations;

iv. Rethink the requirements of mens rea (criminal intent; the thoughts and intentions

behind a wrongful act (including knowledge that the act is illegal); and increase

enforcement and make the level of enforcement more uniform.

Chiumya (2006) has therefore stated that, counteracting tax evasion is one of the most

complex activities in tax Administration. This is because tax evasion takes many forms

and facets. One of the major keys to successfully carry out such activities is to first and

foremost understand the behavior of taxpayers and the reasons that cause such specific

behavior. Thus, taking into consideration the emphasis by Vogel (1974) cited in

Oberholzer, (2007), on the importance of education and information in the process of

opinion formation. A deeper understanding of the benefits provided for by taxes, as

well as the technical reasons for tax laws and regulations are necessary preconditions to

both positive attitudes about the tax system and appropriate fiscal behaviour.

38
2.5 Theoretical Framework

2.5.1 Ability Theory

Harley (1943) explained the ability to pay as an influential in the modeling of income

tax policy. This theory has some relation to the tax evasion, by means of not convincing

the taxpayers to go tax authorities in order to compute the tax due, but the tax payer

goes tax offices only when he/she is afford, this can simplify the taxpayer to evade or

make avoidance claiming he is not able to pay.

Palao, (1976) criticized this theory saying the ability to pay principle alone is not

enough to achieve tax justice, but it is obvious that this inclusion would frequently lead

to extreme hardship, to say nothing of the administrative difficulties involved. The

amount of income received is commonly regarded as the best indicator of ability. In the

case of the property tax, all non-income producing property is assessed and taxed.

This ability theory focuses that the taxation should be charged only according to an

individual’s ability regardless of the income and his business’s activities. According to

this theory public expenditure should come from those can afford to pay tax. This is

actually the basis of progressive tax as the tax rate increases by the increase of the

taxable amount. This principle on other hand is the most reasonable tax system, and has

been widely used in industrialized economics. The common and most maintained

justification of ability to pay is on grounds of sacrifice. The payment of taxes is viewed

as a deprivation to the taxpayer because they surrendered money to the government

which they would have used for their own personal use. However, there is no concrete

approach for the measurement of the equity of sacrifice in this theory, as it can be

measured in absolute, proportional or marginal terms. Thus, equal sacrifice can be

measured (Cesar, 2008).

39
2.5.2 Benefit Theory

The benefit theory is one of the theories of taxation from public finance. It is based on

taxes to pay for public- goods expenditures on willingness to pay for benefits received

(Knut and Erik, 1919). The theory also been put on to such subjects as tax progressivity,

corporation taxes, and taxes on property or wealth, the benefit principle approach shows

to general business taxation offers resolution of these confrontational issues, much as

user fees for highways and business license fees for regulatory services are used today.

The theory offer priority to the grounds of fairness to individuals, with respect to their

ability to pay the current basis for business taxation, this theory points the benefits

individuals receive should be based on the tax system, but on other hand the benefit is

what the individuals and businesses hide in order to evade tax.

2.5.3 Equal Distribution Theory

Oakland, (2000) discussed theory of equality, and explained as a treaty of articles

touching dimensions, quantity, likeness, similarity in accordance with two things

compared. We express the equality of two or more areas, of two bodies in length,

breadth or thickness, of advantages or failings. The same degree of dignity or claim, so

taxes must be equal and uniform. Not only does that mean geographically, but in

presentation to people. That is, one set of procedures cannot apply to one individual and

another set of rules apply to another. All people are assumed to be equal before the law,

therefore, from a revenue collection perspective, there can be no classes of people or

exceptions, or graduated tax rates.

Appah, (2010) stated that without the rule of equality and uniformity, people tend to

believe it’s not fair, and then avoid and evade tax systems, Basically, without the rule of

equality and uniformity, many people influence other people to bear the burden of

taxation. What happens is those people who enjoy the so-called benefits of a political

40
system, the protection of rights and property will avoiding the cost of that protection.

Such tax patterns inherently violate the concept of equal protection of the laws.

Furthermore, when some people are forced to pay the liability of other people directly

or indirectly, then the rule of consent is violated.

2.5.4 Optimal Taxation Theory

Gregory and Mathew (2011), discussed the standard theory of optimal taxation and

proposes that a tax system should be chosen to exploit a social welfare function subject

to a set of constraints, in order to solve social problems this theory highlight social

problems and solves social hardships, since tax evasion is social problem this theory has

some relation to the topic, and as justified below this theory states the taxpayers should

be the same according to paying tax whether rich or poor. This theory is based on the

values of individuals in the society.

To simplify the problem facing the social planner, it is often assumed that everyone in

society has the same preferences over, say, consumption and leisure (Mirrlees, 1971).

Sometimes this homogeneity assumption is taken one step further by assuming the

economy is populated by completely identical individuals. The social planner’s goal is

to choose the tax system that maximizes the representative consumer’s welfare,

knowing that the consumer will respond to whatever incentives the tax system provides.

In some studies of taxation, assuming a representative consumer may be a useful

simplification.

2.6 Summary

In summary, this chapter has discussed the literature review (both theoretical and

empirical), Conceptual framework and the relationship of variables in study. It also

reviewed other authors work such as Tax Avoidance and Evasion, Effects of Tax

Avoidance and Evasion on the economy of Nigeria and other developing countries.

41
Works of Kiable and Nwankwo, (2009), Olayinka et al., (2010), and (Sikka and

Willmot, 2010; Ezeoha and Ogamba, 2010 and Eigen, 2002). Other authors cited on

their contribution on tax avoidance and evasions are Mponguliana (2002), Brown

(1983), Farayola, (1987), Aguola (1999), Dalu et al., (2012), Olabisi (2010) and

Kirchler et al., 2007).

42
CHAPTER THREE

METHODOLOGY

3.1 Introduction

This chapter discusses how the research is carried out. It comprises the following sub-

headings; the research design, the study area, population, sample and sampling technique,

data collection instruments, validity and reliability of the instrument, research procedure

and data analysis.

3.2 Research Design

The researcher adopted a case study as the type of research design for the study in which a

survey technique and a questionnaire is being used to establish the tax evasion and its

effects on the Nigerian economy. The argument for better construct validity is based on the

fact that case studies can use more and more diverse indicators for representing a

theoretical concept and for securing the internal validity of causal inferences and/or

theoretical interpretations for these cases.

3.3 The Study Area

Taraba state lies between latitude 60 30’ and 9o 36’ north of the equator and longitude 9o

10’ and 11o 50’ East of the Green meridian (Taraba State government Diary, TSGD,

2014).

The state has a land area of 54,473km2 with a population figure of 2,300,736 people

(NPC, 2006). The state shares common boundary with Gombe state in the North – east and

Bauchi state in the North, Plateau state in North West and Adamawa state in the east. It is

also bounded to the west by both Nasarawa and Benue states. It shares an intentional

boundary with the republic of Cameroon to the south and south east (TSGD, 2014). It has

sixteen (16) local government areas with a tropical climate marked by two (2) distinct

seasons (the wet or rainy season and the dry season). The rainy season lasts from April to

43
October with an August break. The wettest months are August and September. The mean

annual rainfall ranges from 800mm in the north to 1800mm in the south. The dry season

begins in November and ends in March with a dust laden spelt, the harmattan wind that

blows from across the Sahara. Mean temperature fluctuates between 14.8oC and 34.4oC

(TADP, 2014)

3.4 Population of the Study

The population of the study comprises of all the tax payers in Taraba State and the

Forest/Timber Business Company in Taraba State.

3.5 Sampling Size and Technique

For the purpose of this study the researcher employed the use of the simple random

technique of sampling respondents and purposive sampling as per the location of the

second hand Timber sellers. So for this study purposive sampling was employed.

Purposive sampling is virtually synonymous with qualitative research, Palys, (2008). Palys

(2008), further stated that, in Critical Case Sampling: ‘the researcher might be looking for

a decisive case that would help make a decision about which of several different

explanations is most plausible, or is one that is identified by experts as being a particularly

useful choice because of the generalizations it allows’. Thus, the decision is informed by

the nature and purpose of the study as well as making sure that respondents have equal

chance of being selected.

A total of 50 Timber Wood marketers were selected from about 215 Madrid dealers,

Taraba State, (2017). This is being sampled by means of random sampling and purposive

sampling techniques to ensure that each person used as in the sampling frame has an equal

chance of being selected.

44
3.6 Data Collection Instruments

Three-Point Likert-type scale close-ended questionnaire and an open-ended questionnaire

are the main instruments being used for data collection. Sections B and C of the

questionnaire contain questions and statements which addressed tax avoidance and its

effects on the Nigerian economy. The items on the questionnaire has options from which

respondents have options that is best suited to the extent to which they agree with the

statements (1 = agree, 2 = disagree, 3 = no opinion).

3.7Methods of Data Collection

For the purpose of this study, both primary and secondary data collection were employed.

By using primary data, a survey of the study area was conducted to collect and collate

information on the tax evasion and its effects on the Nigerian economy. A primary source

of data involved first-hand information from the field or the study population through the

use of structured questionnaires. Secondary sources are primarily the works of other

researcher and authors which are in the form of books, articles from journals and

newspapers, in addition to the use of electronic information especially from the internet,

where related articles to the topic is being accessed for the purposes of the study.

3.8 Data Analysis and Presentation

Data collected from the field were analyzed by means of descriptive statistical tools. Mean

and frequency tables will be used for data representation. Data collected will be quantified

and analysed thematically in relation to the objectives of the study using statistical package

for social science (SPSS). After the frequency tables are derived and interpreted, they will

be analyzed with reference to the literature that was reviewed. Attempts are made to draw

relations as to whether a particular finding is supported or not by the reviewed literature.

45
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 Introduction
This chapter highlights the data collected from demographic characteristics and the three

research questions. The demographic shows the sex, age, marital status, educational

background, daily sales deductions and status of membership tax payer registration. The

questions includes: how tax are avoided in Taraba State, causes of tax avoidance, effects of

tax avoidance and solutions to tax avoidance in the study area. The results are presented in

Tables, frequency, percentage and mean.

4.2 Presentation and Analysis

SECTION ‘A’ Demographic Information of the Respondents

Table 1: Age of the Respondents

Response Frequency Percentage %


20-29 yrs 11 22
30-39 yrs 34 68
40-49 yrs 5 10
50-59 and yrs - -
Total 50 100%
Source: Field Survey, 2017.

Table 1 above shows the age of the respondents. Data revealed that 34 respondents

representing 68% are aged between 30-39 years, 11 respondents representing 22% are aged

between 20-29 years while few (5) representing 10% are 40-49 years of aged.

46
Table 2: Sex of the respondents

Response Frequency Percentage %

Male 47 94

Female 3 6

Total 50 100%

Source: Field Survey, 2017.

Table 2 above shows the sex of the respondents. Data revealed that 47 respondents representing

94% are male while only few (3) of the respondents representing 6% are females.

Table 3: Marital Status of the Respondents

Response Frequency Percentage %

Single 14 28

Married 30 60

Separated/Divorce/Widowed 6 12

Total 50 100%

Source: Field Survey, 2017.

Table 3 above was designed to elicit information on respondents’ marital status. Data revealed

that majority (30) of the respondents representing 60% are married, 14 respondents

representing 28% are single while only few respondents representing 6(12%) are either

separated, divorced or widowed.

47
Table 4: Educational Qualification of the Respondent

Response Frequency Percentage %

No formal education 10 20

Primary 8 16

Secondary 30 60

Tertiary 2 4

Total 50 100%

Source: Field Survey, 2017.

Table 4 was focused on getting respondents educational attainment. The data above disclosed

that majority of the respondents representing 30(60%) have completed their secondary

education, 10 respondents representing 20% have no formal education, 8 respondents

representing 16% have attained primary education while only few (2) of the respondent

representing 4% have attained tertiary educational level.

48
SECTION ‘B’ Research Questions

Table 5: Research Question 1. How Tax are avoided in Taraba State?

Statement Agree Disagreed No response Mean Decision

1. Over stating of 33 12 5 2.83 A


expenses and fiction
on the account 66% 24% 10%

2. Smuggling 29 14 7 2.71 A

58% 28% 14%

3. Tax collectors 38 10 2 2.95 A


reduce amount of
burden on the 76% 20% 4%
payers through
collection of pocket
money
4. False report by the 31 11 8 2.81 A
tax collectors
(corruption from tax 62% 22% 16%
administration)
5. Tax payers reduce 41 7 2 2.98 A
tax rate as a result
of low income 82% 14% 4%

Source: Field Survey, 2017. Mean Magnitude: 2.5

Decision Rule: 2.50 above = Agreed; 2.50 below = Disagreed

Table 5 present analyses of responses base on research question 1. From statement 1 it shows

that majority of the respondents 33(66%) agreed that tax is avoided through over stating of

expenses and fiction on the account, 12 respondents representing 24% disagreed while few

respondents representing 5(10%) have no response on the statement. From research statement

2, majority 29(58%) of the respondents agreed that tax is avoided through smuggling, 14

respondents representing 28% disagree while only few (7) representing 14% gave no response.

Also, statement 3 in table 5 disclosed that 38 respondents representing 76% agreed with the

49
statement that tax collectors reduce the amount of burden of the payers through collection of

pocket money, 10 respondents representing 20% disagree while only few of the respondents

representing 2(4%) gave no response.

Moreso, statement 4 in table 5 above showed that majority of the respondents 31(62%) agreed

with the statement that tax can be avoid through false report by the tax collectors (corruption

from tax administration; 11 respondents representing 22% disagree with the notion while few

respondents representing 8(16%) have no opinion on the statement.

Finally, statement 5 in table 5 shows respondents on views on if tax payers reduce tax rate as a

result of low income. Data revealed that majority of the respondents representing 41 (82%)

agreed, 7 respondents representing 14% disagree while only few of the respondents

representing 2(4%) have no opinion on the statement. Based on the analysis it can be asserted

that all the statements in the table have mean rating of 2.50 and above which shows that tax can

be avoided through the above mentioned statements. This finding is in agreement with the

findings of Gupta (2007), Tahseen and Eatzaz (2009), who asserted that corruption, has a

significantly negative effect on revenue performance. Therefore, people would be motivated to

avoid tax because they think the system is corrupt and taxes collected are not used properly.

Similar findings also highlighted that the ambiguity in implementation costs businesses time

and increases the scope for corruption' (Briefing Papers, 2011). And Tahseen and Eatzaz

(2009) argued that low wages of tax administrator foster corruption. Shome (2005) could very

well be an increase in tax rates, or the imposition of distortive taxes, thereby initiating a vicious

cycle of inequity and inefficiency.

50
Table 6: Research Question 2. What are the Causes of Tax Avoidance in Taraba State?

Statement Agree Disagreed No response Mean Decision

6. A large proportion of 43 2 5 2.73 A


taxes is used by the
government for 86% 4% 10%
meaningless purposes
7. The A lot of people do not 48 2 - 2.89 A
pay tax that is why I don’t
pay tax. 96% 4%

8. The burden of tax is so 29 13 8 2.55 A


heavy that many people
are forced to avoid it in 58% 26% 16%
order to survive.
9. Government receive 11 35 4 1.04 D
enough tax so it does not
matters if some people 22% 70% 8%
avoid tax
10. Tax agents do not collects 41 5 4 2.59 A
the right amount of tax
from us. 82% 10% 8%

11. Waste and corruption in 48 2 - 2.98 A


government is high
96% 4%

12. It is unfair to pay tax. 10 37 3 1.23 D

20% 74% 6%

13. The government does not 47 3 - 2.81 A


provide enough
information about how 94% 6%
they use tax payer money

Source: Field Survey, 2017. Mean Magnitude: 2.5

Decision Rule: 2.50 above = Agreed; 2.50 below= Disagreed

Table 6 present analysis of responses base on research question 2: it shows from statement 6

that 86% (43 respondents) agree that a large proportion of taxes is used by the government for

meaningless purposes, 10% (5 respondents) have no opinion about the above statement, while

51
only few 2(4%) disagree with the statement. In response to question 7 of table 6, it shows that

96% (48 respondents) agree with the statement that a lot of people do not pay tax that is why

they don’t pay tax while only few respondents representing 2(4%) disagree. This indicated that

majority of the respondents agree with the statement in statement 7.

Furthermore, question 8 of table 6 show that 58% (29 respondents) agree that the burden of tax

is so heavy that many people are forced to avoid it in order to survive, 26% (13 respondents)

disagree with the statement while 16% (8 respondents) have no opinion about the statement.

Thus the majority of the respondents that the burden of tax made tax payers avoid tax.

Also question 9 of table 6 shows that 70% (35 respondents) disagree with the statement that

government receive enough tax so it does not matters if some people avoid tax, 22% (11

respondents) agree that some people believed that government have received enough tax so it

does not matters if they avoid tax while only few 8% (4 respondents) gave no response to the

statement in question 9. Thus the majority of the respondents disagreed with the statement that

some people avoid tax because they think government has enough tax.

Nevertheless, table 6 above disclosed that in question 10, majority of the respondents

representing 41(82%) agree with the statement that the reasons why they avoid tax is because

tax agents do not collects the right amount of tax from them. 5 respondents representing 10%

disagree while only few (4) representing 8% of the respondents gave no response on the

question. In addition statement 11 in table 6 showed that 48 respondents representing 96%

agree with the statement that waste and corruption in government is high so they avoid paying

tax while only few respondents representing 2(4%) disagree with the statement.

Furthermore, in table 6 statement 12 disclosed that majority of the respondents representing

37(74%) disagree with the statement that it is unfair to pay tax, 10 respondents representing

20% disagree while only few 3(6%) have no opinion on if it is unfair to pay tax.

52
Finally question 13 of table 6 shows that 94% (47 respondents) agree that with statement that

government does not provide enough information about how they use tax payer money while

only few 3(6%) disagree. From the table 6 above it could be revealed that the respondents

agree with the statement except statement 9 and 12 which are less than 2.50 mean rating.

This finding is in agreement with the finding of Richardson, (2006), that an increased

knowledge of tax evasion opportunities has a negative influence on tax compliance as it assists

non-compliance. On the other hand, the vast majority of studies examining the impact of

education on tax evasion use a taxpayer's general education level as the approach to measure

education. This seems to suggest that as tax payers are faced with complexities in calculation,

they tend to find ways to evade tax. And also confirmed with the findings of Tahseen and

Eatzaz (2009) who noted that the primary function of a tax system is to raise enough revenue to

finance essential expenditures on the goods and services provided by government but the

reverse is the case where tax payers think the taxes they paid are not used meaningfully.

53
Table 7: Research Question 3. What are Effects of Tax Avoidance to the Economic

Development of Taraba State?

Statement Agree Disagreed No response Mean Decision

14. If we do not pay 32 10 8 2.66 A


taxes government
would not be able to 64% 20% 16%
carry out
development project
15. If we do not pay tax 30 15 5 2.61 A
government would
not be able to pay it 60% 30% 10%
workers
16. If we do not pay tax 28 8 14 2.58 A
government would
not be able to 56% 16% 28%
provide
infrastructure
17. Tax avoidance and 45 3 2 3.08 A
evasion would
decrease 90% 6% 4%
government revenue
18. Tax avoidance 8 16 26 1.49 D
cause inequality and
the tax burdens on 16% 28% 52%
others

Source: Field Survey, 2017. Mean Magnitude: 2.5

Decision Rule: 2.50 above = Agreed; 2.50 below= Disagreed

Table 7 was designed to sought respondents views on the effects of tax avoidance on the

economic development in Taraba State. Data revealed that statement 14 in table 7 above

revealed that 32 respondents representing 64% agreed that if they do not pay taxes government

project,10 respondents representing 20% disagree white only few gave no response on the

statement. Also statement 15 in table 7 depicted that 30 (60%) agree that if they don’t pay tax

government would not be able to pay if workers; 15(30%) disagree with the statement while 5

54
(10%) gave no response. This indicates that majority of the respondents agree with the

statement tax is need by government to pay its workers.

Moreso, statement 16 in table 7 highlighted that majority (28) respondents representing 56%

agree with the statement that if they do not pay tax government would not be able to provide

infrastructure to its citizens, 14 respondents representing 28% have no opinion on the statement

while only few (8) representing 16% disagree with the statement nevertheless, statement 17 in

gable 7 was designed to know if tax avoidance would decree government revenue. Data

revealed that majority of the respondents representing 45(90%) agree that tax avoidance and

evasion would decrease government revenue; 3(6%) disagree while 2 (4%) have no opinion on

the statement.

Finally, statement 18 on able 7 revealed 26(52%) respondent and tax burdens on others,

16(28%) disagree while 8 respondents representing 16% agree with the statement. Result

therefore indicated that majority of tax payers doesn’t have any idea if tax avoidance cause any

inequality and the tax burden on others. Based on the analysis it can be asserted that all the

statements except statement 18 in the table have mean rating of 2.50 and above which shows

that tax avoidance have the above mentioned effects.

This finding concurred with the findings of Brautigam et al., (2008), Cobham, (2005), and

Cummings (2005), who asserted that tax avoidance, has negative effect on the economic

development of any nation. They further disclosed that taxation is the most important of all

sources of revenue to any state and to its economic development. Annual expenditure, budgets

are based largely as the projected tax revenue of any state. Where tax is avoidance and evasion

are the order of the day relevant tax authorities finds it very difficult to meet their target

collection resulting in less revenue to the state and which in turn has serious effect on the

state’s economy. Also, this finding is in agreement with the findings of Russo (2010) cited in

55
Magesa, (2014) who discovered that tax avoidance and evasion has negative impact on the

level of tax collection performance. He argued that the countries with high rate of tax evasion

also has low rate of revenue collection and vice versa. Russo, (2010) in Magesa (2014) further

reported that, in Italy, one of the effects of tax evasion and avoidance is loss of revenue to the

government. Estimates from the Ministry of Finance indicate that roughly 20% of the income

earned within the national border is not reported, resulting in a loss of more than 300 million

euros every year in forgone tax revenue. This example is not an exception because it is

prevalent across the globe.

Moreso, the finding above on the effects of tax avoidance corroborates with the findings of

Adebisi and Gbeji (2013) who discovered that effects of tax evasion and avoidance manifest in

two ways: i) Inadequate supply of service: the government finds it difficult to execute its socio-

economic programme like the provision of social amenities such as portable water supply,

constant power supply, security for the general wellbeing of the people. ii) Decrease in

Revenue: this implies that when tax are avoided or evaded there is drastic decrease in the

amount of money that would have been realized by the government as revenue through

taxation.

56
Table 8: Research Question 3. What are the Solutions to Tax Avoidance in Taraba State?

Statement Agree Disagreed No response Mean Decision

19. Tax rate should be 43 5 2 3.12 A


reduce to enable
everybody to pay 86% 10% 4%

20. Enforcement of 24 18 8 2.51 A


penalties for tax
default should be 48% 36% 16%
made clearer and
public
21. Priorities should be 30 15 5 3.15 A
placed on tax
education 60% 30% 10%

22. Government 35 10 5 3.08 A


spending should be
development 70% 20% 10%
oriented to
encourage tax
payers
23. The tax 18 28 4 1.49 D
administration
structure should be 36% 56% 8%
computerized to
eliminate corruption

24. Information on tax 35 12 3 2.98 A


should be made
available to the 70% 24% 6%
public

Source: Field Survey, 2017. Mean Magnitude: 2.5

Decision Rule: 2.50 above = Agreed; 2.50 below= Disagreed

Table 8 present analyses of responses base on research question 4. From statement 19 it shows

that majority of the respondents 43(86%) agreed that tax avoidance can be corrected if tax rate

is reduce, 5 respondents representing 10% disagreed while few respondents representing 2(4%)

have no response on the statement. Also, from research statement 20 in table 8, majority

57
24(48%) of the respondents agreed that to correct tax avoidance enforcement of penalties for

tax default should be made clearer and public, 18 respondents representing 36% disagree while

only few (8) representing 16% gave no response. Moreso, statement 21 in table 8 disclosed that

majority (30) respondents representing 60% agreed with the statement that one of the solutions

to tax avoidance is for government to point more priorities on tax education, 15 respondents

representing 30% disagree while only few of the respondents representing 5(10%) gave no

response.

Nevertheless, statement 22 in table 8 above showed that majority of the respondents 35(70%)

agreed with the statement that to solve the problem of tax avoidance government spending

should be development oriented to encourage tax payers, 10 respondents representing 20%

disagree with the notion while only few respondents representing 5(10%) have no opinion on

the statement. Data in table 8 statement 23, also revealed that majority of the respondents

representing 28(56%) disagreed with the statement that tax administration structure should be

computerized to eliminate corruption, 18 respondents representing 36% agree while only few

(4 or 8%) have no opinion on the statement. This finding is in agreement with findings of

Alfred et al., (2012) who suggested that that tax payers would not appreciate computerization

of tax administration in order to reduce corruption though this is in sharp contrast with Shome

(2005) where it was indicated that it is important to computerize as many administrative

processes as possible to minimize the interface between taxpayer and tax official.

Finally, statement 24 in table 8 shows respondents on views on if information on tax should be

made available to the public. Data revealed that majority of the respondents representing 35 or

70% agree, 12 respondents representing 24% disagree while only few of the respondents

representing 3(6%) have no opinion on the statement. Based on the analysis it can be asserted

that all the statements except statement 23 in the table have mean rating of 2.50 and above

58
which shows that tax avoidance problems can be solved through the above mentioned

statements.

This finding is in agreement with the findings Alfred et al., (2012) whose findings seem to

imply that more emphasis should be put into education and the provision of information on tax.

Thus, as Vogel (1974) cited in Oberholzer, (2007), puts it on the importance of education and

information in the process of opinion formation. 'A deeper understanding of the benefits

provided for by taxes, as well as the technical reasons for tax laws and regulations are

necessary preconditions to both positive attitudes about the tax system and appropriate fiscal

behaviour'.

It also concurred with the findings of Alfred et al., (2012) The who suggested that when laws

on defaulting in tax obligations are well publicized and enforced to the letter, tax payers would

not find means of avoiding and evading tax. It also confirmed Shome, (2005) as stated that,

there has to be a genuine threat and actual carrying out of audit, scrutiny, investigation, penalty

and punishment for an errant taxpayer.

4.3 Major Findings

Major findings of this research work from above includes overstating of expenses and fiction

on the account, smuggling, burden reduction of the taxpayers by the collectors through

collection of pocket money, false report by the tax collectors (corruption from tax

administration),tax payers reduce tax rate as a result of low income. This finding is in

agreement with the findings of Gupta (2007), Tahseen and Eatzaz (2009), who asserted that

corruption, has a significant negative effect on revenue performance. Therefore people would

be motivated to avoid tax because they think the system is highly corrupt.

Another finding of this work are a large proportion of taxes is used for meaningless purpose,

enough of people do not pay tax that is why I don’t pay tax, the burden of tax is so heavy that

59
many people are force to avoid tax, tax agents do not collects the right amount of tax from

payers, waste and corruption in government is high, government does not provide enough

information about how they used tax money. This finding is in agreement with the finding of

Richardson (2006), that an increased knowledge of tax avoidance and evasion opportunities has

a negative influence on tax compliance as it assists non-compliance. Also confirmed with the

finding of Tahseen and Eatzaz (2009), who noted that the primary function of a tax system is to

raise enough revenue to finance essential expenditure on the goods and services provided by

government but the reverse is the case where tax payers think the taxes they paid are not used

meaningfully.

Finding also show that tax avoidance would cause government not to be able to carry out

development project, failure to pay tax would lead to poor infrastructure, tax avoidance and

evasion reduce government revenue, inequality. This finding is similar with the finding of

Brautigan et al.,(2008), Cobham (2005), and Cummings (2005), who asserted that tax

avoidance, has negative effect on the economic development of any nation. They further

disclosed that taxation is the most importance of all source of revenue to any state and it

economic development. Annual expenditure, budget are based largely as the projected tax

revenue of any state where tax avoidance and evasion reduce revenue of the state. More so, this

finding on the effects of tax avoidance correlates with the finding of Adebisi and Gbeji (2013),

which discovered that effects of tax avoidance and evasion manifest in two ways.

i. Inadequate supply of service: the government finds it difficult to execute its socio-

economic programmes like the provision of social amenities such as portable water supply,

constant power supply, security for the general wellbeing of the people.

ii. Decrease in revenue: this means that when tax are avoided, it drastically decrease

revenue of government realizing through taxation.

60
Another important finding of this research work is that, tax rate should be reduce to enable

everybody to pay, enforcement of penalties for tax default should be made clearer and public,

information on tax should be made available to the public, government spending should be

developed oriented to encourage tax payers. This finding agrees with the findings of Alfred et

al., (2012) whose findings seem to imply that more emphasis should be put into education and

the provision of information on tax.

4.4 Discussion of Major Findings

Based on the analysis, the following findings were highlighted:

Overstating of expenses and fiction on the account: tax payers reduce tax liability by

overstating expenses, fiction of their account book.

Smuggling: tax payers reduce tax liability through smuggling in this research field; it is

asserted that, most of the timbers are diverted into illegal road in order to avoid tax.

Burden reduction of tax payers by the administrators: the tax administrators collected

pocket money from the tax payers as bribe to enabling the tax payers reduce their liability and

avoid tax corruption of the tax administrators when money are collected by the tax collectors, it

is only part of the collected money that are sent into the government account, some of the

amount collected are diverted into the collectors own accounts.

Large proportion of taxes are used by the government for meaningless purpose: social

amenities and facilities, infrastructural project are short coming, the tax payers felt

marginalized as the government use tax money in buying cars, travelling outside countries for

tourism, building mansion.

Burden of tax are so heavy that many people are forced to avoided tax: Udude, (2005)

discussed tax incidence as conditions under which tax could be shifted from one person to

another. She defined tax incidence as the distribution of tax burden in terms of who pays the

tax. The person whom the burden of payment eventually falls on is the person who bears the

61
incidence of the taxation whereas; the person who initially pays the tax incurs its impact. The

incidence of tax lies on the person on whom it rest after further shifting.

Information: the tax payers have no information on the priorities of taxes. Information about

how government uses tax money is also not coming. Information regarding all laws on tax are

not provided to the tax payers.

Development Project: failure of tax payment, would lead to poor development project

development project such as building of hospital, schools, provision of energy supply and

social facilities etc.

Infrastructural Project: tax avoidance lead to poor infrastructural project such as building of

public tenement, construction of road and bridge, irrigation and drainage system, dams etc.

Reduction of Government Revenue: According to Brautigan et al., (2005), Coham (2005) and

Cummings (2005) who asserted that tax avoidance, has negative effect on the economic

development of any nation, they disclosed that taxation is the most important of all source of

revenue to any state and its economic development.

62
CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary

This research work entitled “Effects of Tax Avoidance on the Economic Development of

Taraba State” was carried out to investigate how taxes are avoided in Taraba State,

examine the effects of tax avoidance on the economy of Taraba State, identify the

determinants of tax avoidance in the study area; and suggest how to control and curb tax

avoidance in the study area. Descriptive statistic was adopted for the study. Data for the

study was subjected to primary source of data collection. Three-Point Likert-type scale

close-ended questionnaire and an open-ended questionnaire are the main instruments being

used for data collection. A total of 50 Timber Wood marketers were selected from about

215 Madrid dealers, Taraba State, (2017). This is being sampled by means of random

sampling and purposive sampling techniques to ensure that each person used as in the

sampling frame has an equal chance of being selected. Data collected from the field were

analyzed by means of descriptive statistical tools. Mean and frequency tables will be used

for data representation. Data collected will be quantified and analysed thematically in

relation to the objectives of the study using statistical package for social science (SPSS).

After the frequency tables are derived and interpreted, they will be analyzed with reference

to the literature that was reviewed. Attempts are made to draw relations as to whether a

particular finding is supported or not by the reviewed literature. Findings on the

demographic characteristics revealed that majority of the respondents are adults, married

and have attained at least secondary educational level. Findings on the four research

questions revealed that taxes are avoided through various means such as overstating of

expenses and fiction on the account, smuggling, collection of pocket money by tax

63
administrators etc. On the causes of tax avoidance it was disclosed that waste and

corruption in government engineered tax avoidance, lack of government provision of

information on how tax are utilized, lack of people’s knowledge on the use of tax etc.

Furthermore, findings depicted that tax avoidance has diverse effect on the economic

development of Taraba State such as lack of execution of developmental projects by

government and decrease in revenue generation. Finally, it was suggested that tax should

be publicize through the media; more priorities should be placed on tax education and

government should use the tax collected to develop the state rather than sharing it into

personal accounts.

5.2 Conclusion

Tax evasion is extensive, always has been, and almost certainly always will be.

Differences in educational level and the capacity to calculate tax returns can explain some

of the across- individual and, perhaps, across-country heterogeneity of evasion. But the

stark differences in compliance rates is an individual's knowledge of the uses of tax

revenue by the government, publicity and the education of the general public on their tax

obligation and its effects on the national economy and the penalties on the default on non-

compliance.

Using the cognitive theory as a basis where the assumption is that humans are logical

beings making choices that make the most sense to them, tax payers would make decisions

on fulfilling their tax obligation based on what make sense to them. Thus, if tax payers

agree that taxes are used for meaningless ventures by government and the system of tax

collection is fraught corruption, they would devise innovative ways of evading tax. And

secondly, if tax payers lack the necessary information and the capacity to compute tax

appropriately, there would be reluctance to comply and motivate evasion.

64
Finally, the study characterized the importance of publicizing penalties on defaulting tax

payment and enforcing punishment, tax defaulter would be inclined to fulfill their

obligations to avert punishment and shame.

5.3 Recommendations

The study after the findings seeks to recommend that:

i. Taraba State Government should embark upon other means of publicity such as radio

messages, television advertisement, post bills as well as the use of town criers to inform

taxpayers of changes in tax legislation and need for compliance. Suitable personnel

should be recruited and Revenue personnel generally trained and retrained to cope with

the demands of the job. Staff should also be motivated through good salary package to

insulate them from fraud and other corrupt practices.

ii. The tax authority should properly review and evaluate the assessment and collection

procedures so as to encourage compliance by the taxpayers. The usual practice of

reprinting parts of the tax laws and sending same to the taxpayers expecting that they

would understand is not encouraging since these laws are written in legal jargons or

terms that are not easily understood. Moreover, tax forms should be made less complex.

Vast improvement can be made by improving the design of the forms. Since majority of

the people are poor tax evasion becomes inevitable. Government should therefore

aggressively tackle the inflationary trend and also ensure that the poor pay very

minimal tax.

iii. The handling of tax clearance certificates should be well decentralized such that neither

the assessor nor the collector can issue tax clearance certificates. The Audit Unit of the

Authority should be strengthened to always audit tax remittance by collectors at all

levels. This measure will go a long way to curb corrupt practices among tax officials.

65
iv. A legislation compelling banks to inform the tax authorities, on request of any income

standing in the account of any taxable person (especially the sell-employed taxpayers)

should be put in place by Taraba State Government. Taraba State Government should

endeavour to provide social amenities to all nooks and crannies of the state’ (not just

the state capital alone), provide employment opportunities to all by the judicious use of

tax proceeds. In this way all will feel belong thereby encouraging voluntary

compliance. A census of the taxable population should be conducted throughout the

state. This will now update the tax register so that at any given point in time the tax

office cart give details of taxable adults and businesses thus reducing the incidence of

tax evasion.

v. The Taraba In-Land Revenue Authority (TIRA) should ensure an enforcement of

penalties for tax default, and these penalties should be made clearer and public. This

will create real threat and actual carrying out of audit, inspection, inquiry, penalty and

punishment for an errant taxpayer.

vi. The government should resource Taraba In-Land Revenue Authority to prioritize tax

education for the informal sector by organizing periodic workshops on the calculation

and deductions on taxes. And during these workshops, the Information Service

Department of the government can also be made to give a presentation on the

importance of taxes and what the revenues accrued are used for. This bring about a

deeper understanding of the benefits provided for by taxes, as well as the technical

reasons for tax laws and regulations are necessary preconditions to both positive

attitudes about the tax system and appropriate fiscal behavior.

66
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APPENDIX I

Department of Economics

Faculty of Arts and Social Science

Taraba State University,

P.M.B 1167 Jalingo

23rd June, 2017.

Dear Respondent,

LETTER OF INTRODUCTION
I am a final year student of the above mentioned department currently undergoing a
research work on “Effects of Tax Avoidance on the Economic Development of Taraba
State”
I am soliciting for your assistance to help me answer the following questions in
Appendix II below. All information retrieved will be treated confidentially and for the
purpose of this research work only.
Thanks
Yours Faithfully,
Dauda Zaphaniah
TSU/FAS/ECO/13/1072

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APPENDIX II
QUESTIONNAIRE
INSTRUCTION:
Please tick [ ] the appropriate box and where necessary supply an answer.
SECTION A: PERSONAL INFORMATION
1. Please indicate your age group. (A) 20yrs-29yrs [ ] (B) 30yrs-39yrs [ ] (C) 40yrr and
above [ ]
2. Please indicate your sex:
(A) Male [ ] (B) Female [ ]
3. What is your marital status?
(A) ingle [ ] (B) Married [ ] (C) Separated [ ] (D) Divorced [ ] (E) Widowed
4. Please indicate your educational background:
(A) No formal education [ ] (B) Primary education [ ] (C) Secondary education [ ]
(D) Tertiary [ ]
SECTION ‘B’ RESEARCH QUESTIONS

INSTRUCTION:

Please indicate whether: Agree, Disagree or No response on the statements on the box provided
below.

RESEARCH QUESTION 1: HOW TAX ARE AVOIDED IN TARABA STATE?

S/N Statements Agreed Disagree No Response


1 Over stating of expenses and fiction in
the account book by the tax payers.
2. Smuggling
3. Tax collectors reduce the amount of
burden of the payers through collection of
pocket money.
4. False report by the tax collectors
(corruption from tax administration)
5. Tax payers reduce tax rate as a result of
low income

73
RESEARCH QUESTION 2: WHAT ARE THE CAUSES OF TAX AVOIDANCE IN
TARABA STATE?

S/N Statements Agree Disagree No Response


6. A large proportion of taxes is used by the
government for meaningless purposes
7. A lot of people do not pay tax that is why I
don’t pay tax.
8. The burden of tax is so heavy that many
people are forced to avoid it in order to
survive.
9. Government receive enough tax so it does
not matters if some people avoid tax
10. Tax agents do not collects the right amount
of tax from us.
11. Waste and corruption in government is
high
12. It is unfair to pay tax.
13. The government does not provide enough
information about how they use tax payer
money

RESEARCH QUESTION 3: WHAT ARE EFFECTS OF TAX AVOIDANCE ON THE


ECONOMIC DEVELOPMENT OF TARABA STATE?

S/N Statements Agree Disagree No Response


14. If we do not pay taxes government would not
be able to carry out development project.
15. If we do not pay tax government would not be
able to pay it workers.
16. If we do not pay tax government would not be
able to provide infrastructure
17. Tax avoidance and evasion would decrease
government revenue.
18. Tax avoidance cause inequality and the tax
burdens on others.

74
RESEARCH QUESTION 4: WHAT ARE THE SOLUTIONS TO TAX AVOIDANCE IN
TARABA STATE?

S/N Statements VR QR FR M IR
19. Tax rate should be reduce to enable
everybody to pay.
20. Enforcement of penalties for tax default
should be made clearer and public.
21. Priority should be placed on tax
education.
22. Government spending should be
development oriented to encourage tax
payers.
23. The tax administration structure should be
computerized to eliminate corruption.
24. Information on tax should be made
available to the public.

25. do you have any further comment with regard to tax avoidance in Taraba state (for

example, would you like to more informed about tax by receiving brochures, pamphlets, etc).

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Thank You

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