1.0 Introduction
1.1 Background of Study
Taxation has remained a fundamental tool for revenue generation by governments across the world. It is the process through which governments impose financial charges on individuals, organizations, and properties in order to fund public expenditures and promote economic and social development. According to Musgrave and Musgrave (2017), taxation serves as a critical instrument not only for revenue collection but also for economic regulation and income redistribution. Governments rely on taxes to finance the provision of essential services such as healthcare, education, infrastructure, security, and public administration, which are necessary for the well-being of the citizens and the growth of the nation.
Nightingale (2018) asserted that taxation is indispensable to national development, as it provides the financial backbone upon which governments can plan and execute developmental projects. She affirmed that without a functional tax system, the government's ability to fund public services would be significantly weakened, thereby impeding socio-economic progress. Similarly, Moore, Prichard, and Fjeldstad (2018) contended that taxation plays a vital role in state-building and governance by fostering accountability and strengthening the social contract between the government and its citizens. However, the effectiveness of taxation as a system of generating revenue is often influenced by several factors, especially in developing countries. Fjeldstad and Heggstad (2012) reported that weak institutional capacity, tax evasion, and poor compliance levels are some of the major barriers to effective tax administration. They further stated that these challenges not only limit revenue generation but also erode public trust in the tax system, thereby affecting the legitimacy of the government.
According to Cobham and Janský (2018), tax evasion and avoidance remain significant concerns for many governments. They asserted that multinational companies and wealthy individuals often exploit loopholes in tax laws to minimize their tax liabilities, depriving countries of substantial revenue needed for development. Bird (2015) also affirmed that in many countries, especially those with large informal sectors, the inability of tax authorities to effectively capture informal economic activities into the tax net has resulted in widespread revenue losses. On the other hand, political interference, frequent policy changes, and administrative inefficiencies have been reported by Joshi, Prichard, and Heady (2014) as factors that hinder the stable and predictable operation of tax systems in several countries.
Taxation is generally defined as a compulsory financial charge or levy imposed by a government on individuals, businesses, or other legal entities in order to fund public expenditures and government obligations (Musgrave & Musgrave, 2017). It is a critical instrument used by governments across the world to generate revenue for the provision of essential services such as education, healthcare, infrastructure, security, and social welfare. The collected taxes serve as a major source of government income, which supports national development and economic growth.
According to Nightingale (2018), taxation plays a dual role not only does it provide the government with revenue, but it also acts as a tool for wealth redistribution, regulation of economic activities, and stabilization of the economy. In most modern economies, taxes are levied on income, profits, goods and services, property, and various transactions. The ability of taxation to influence fiscal policy, promote equitable income distribution, and stimulate economic development makes it indispensable in governance and public administration. However, the efficiency and success of taxation as a system of generating revenue largely depend on the structure of the tax system, the administrative capacity of tax authorities, and the compliance behavior of taxpayers. In developing countries, weak tax administration, high rates of tax evasion and avoidance, widespread corruption, and political interference often hinder the effectiveness of taxation (Fjeldstad & Heggstad, 2012). This study is set against the backdrop of examining taxation as a system of generating revenue by government, with a focus on its significance, challenges, and implications for sustainable national development.
1.2 Statement of Problems
Investigation revealed that taxpayers, both individuals and corporate entities, often exploit loopholes in the tax laws to either evade or avoid tax payments, thereby depriving the government of much-needed revenue (Cobham & Janský, 2018). On the other hand, the complexity of tax systems and the cumbersome processes involved in tax collection discourage compliance, especially among small and medium enterprises. In many cases, poor tax education and inadequate enlightenment campaigns mean that taxpayers lack sufficient knowledge of their obligations, which leads to inadvertent non-compliance (Bird, 2015).
On the other hand, political interference and policy inconsistencies often distort tax administration and undermine long-term fiscal planning. Governments may introduce tax reforms or exemptions based on political motives rather than economic rationale, which creates uncertainty and affects revenue stability (Moore et al., 2018). Additionally, in some developing countries, a narrow tax base compounded by a large informal sector poses a significant barrier to effective taxation. The inability of tax authorities to capture informal sector activities into the tax net leads to revenue leakages and reduces the government's capacity to provide essential public services (Joshi, Prichard, & Heady, 2014).
Furthermore, inefficiencies within tax administration agencies, such as corruption, lack of transparency, and poor enforcement mechanisms, diminish the integrity of the taxation system (Fjeldstad & Heggstad, 2012). When taxpayers perceive the tax authority as corrupt or ineffective, their willingness to comply reduces, thereby further frustrating revenue generation efforts. It is against this backdrop that this study seeks to examine taxation as a system of generating revenue by government, highlighting the challenges confronting its implementation and exploring ways to enhance its effectiveness for sustainable economic development.
1.3 Purpose of the Study
The purpose of this study is to examine taxation as a system of generating revenue by government, with particular focus on its role in economic development, the challenges affecting its administration, and how effective tax policies and systems can be structured to enhance government revenue generation in Nigeria.
1.4 Aim and Objectives of Study
The aim of this study is to evaluate taxation as a system of generating revenue by government and its impact on national development. In achieving this aim, the following specific objectives were laid out as follows:
- To examine the role of taxation in government revenue generation.
- To identify the challenges affecting tax administration and compliance.
- To assess the impact of tax policies on economic development.
- To explore ways of improving tax collection systems and enforcement mechanisms.
1.5 Research Questions
Based on the objectives above, the following research questions will guide the study:
- What role does taxation play in government revenue generation?
- What are the challenges affecting tax administration and taxpayer compliance?
- How do tax policies impact economic development?
- In what ways can tax collection systems and enforcement be improved for better revenue generation?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: There is no significant relationship between taxation and government revenue generation
- H1: There is a significant relationship between taxation and government revenue generation
Hypothesis Two
- H0: Challenges in tax administration and compliance does not significantly affect revenue collection
- H1: Challenges in tax administration and compliance significantly affect revenue collection
Hypothesis Three
- H0: Tax policies has no significant impact on national economic development
- H1: Tax policies have a significant impact on national economic development
Hypothesis Four
- H0: Effective tax collection systems and enforcement mechanisms do not contribute significantly to increased government revenue
- H1: Effective tax collection systems and enforcement mechanisms contribute significantly to increased government revenue
1.7 Significance of Study
The outcome of this research study will benefit scholars, researchers, and students by providing a resourceful academic material that will support further research on taxation and public finance. It will contribute to the existing body of knowledge on how taxation impacts governance, economic regulation, and societal development.
For the general public, the study will create awareness of the significance of taxation and its indispensable role in national development. This research will help taxpayers understand their civic responsibilities and the need to comply with tax laws for the collective good of the society.
Lastly, this research will contribute to existing literature on public finance, aid policymakers in designing better tax reforms, and inform taxpayers about the importance of tax compliance.
1.8 Scope of Study
This study focuses on taxation as a means of revenue generation, using the Lagos State Internal Revenue Service (LIRS) as a case study. The scope includes assessing the tax collection processes, identifying challenges facing tax administration, and evaluating compliance levels among taxpayers within Lagos State.
1.9 Limitations of the Study
A study of this nature is bound to experience certain problems as such the constraints imposed on the research include:
- Time Constraints: A study of this nature needs relatively long time during which information for accurate or at least near accurate inference could be drawn. The period of the study was short, time posed as constraints to the research.
- Financial Constraints: The research would have extended the survey to other area at the empirical level, but limitation as included cost of transportation to the source of material and the cost of time setting of the already completed work.
- Lack of Cooperation: Many of the respondents are usually aggressive on issue that border cooperation among the respondents border.
- Response Bias: The study will involve surveys and interviews with cooperative managers and members. Response bias may occur if respondents provide socially desirable answers or if there is reluctance to disclose negative financial information due to privacy concerns or fear of repercussions.
1.10 Definition of Terms
Taxation:
Taxation is defined as a compulsory financial contribution imposed by a government on individuals, businesses, and other entities for the purpose of financing government expenditure and public services (Musgrave & Musgrave, 2017). It represents a key tool for revenue mobilization, economic regulation, and social equity.
Revenue Generation:
Revenue generation refers to the process through which governments collect funds, particularly through taxes, levies, and duties, to finance public services and infrastructure development (Nightingale, 2018). It is critical for national development and governance.
Tax Administration:
Tax administration is the management and implementation of tax laws, including tax collection, enforcement, compliance monitoring, and taxpayer education (Bird, 2015). Effective tax administration is essential for maximizing government revenue.
Tax Compliance:
Tax compliance is the degree to which a taxpayer meets tax obligations as prescribed by law, including accurate reporting, timely filing, and full payment of taxes (Fjeldstad & Heggstad, 2012). High compliance levels are vital for a functional tax system.
Tax Evasion:
Tax evasion refers to illegal practices where individuals or organizations deliberately avoid paying taxes by misrepresenting or concealing income, deductions, or other taxable information (Cobham & Janský, 2018). It is a major challenge in tax administration.
Tax Policy:
Tax policy refers to the laws, regulations, and guidelines governing how taxes are imposed, collected, and managed by the government (Moore, Prichard, & Fjeldstad, 2018). It shapes the structure and effectiveness of a country's taxation system.
Public Finance:
Public finance is the study of government revenue, expenditure, and debt management, including the policies and systems involved in managing the financial activities of the public sector (Musgrave & Musgrave, 2017). It underscores the significance of taxation in governance.
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