CHAPTER ONE INTRODUCTION
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Background to the Study
The whole essence of tax revenue is to generate revenue to advance the welfare of the people of a nation with focus on promoting economic growth and development of a country through the provision of basic amenities for improved public services via proper administrative system, and structures. Tax revenue plays a crucial role in promoting economic activity growth and development. Through tax revenue, government ensures that resources are channeled towards important projects in the society, while giving succor to the weak. The role of tax revenue in promoting economic activity and growth may not be felt if poorly administered. This calls for a need for proper examination of the relationship between revenue generated from taxes and the economy, to enable proper policy formulation and strategy towards its efficiency. A critical challenge before tax administration in the 21st century Ghana is to advance the frontiers of professionalism, accountability and awareness of the general public on the imperatives and benefits of tax revenue in our personal and business lives which include: promoting economic activity; facilitating savings and investment; and generating strategic competitive advantage. If tax administration does not for any reason meet the above challenges, then there is a desperate need for reform in the area of the tax regime, and in the administration of taxes.
A country‘s tax system is a major determinant of other macroeconomic indexes, specifically, for both developed and developing economies; there exists a relationship between tax structure and the level of economic growth and development. Indeed, it has been argued that the level of economic growth has a very strong impact on a country‘s tax base (Kiabel, 2009, and Vincent, 2001), and tax policy objectives vary with the stages of development. Similarly, the economic criteria by which a tax structure is to be judged and the relative importance of each tax source vary over time (Vincent, 2001). For example, during the colonial era and immediately after the Ghana‘s political independence in 1960, the sole objective of tax revenue was to raise revenue. Later on, emphasis shifted to the infant industries protection and income redistribution objectives. In his discussion of the relationship between tax structure and economic development, (Vincent, 2001) divided the period of economic development into two, the early period when an economy is relatively underdeveloped and the later period when the economy is developed. During the early period, there is limited scope for the use of direct taxes because the majority of the populace resides in the rural areas and is engaged in subsistence agriculture. Because their incomes are difficult to estimate, tax assessment at this stage is based on presumptions prone to wide margins of error.
Tax revenue is a powerful tool of economic reform and a major player in every economy of the world. It is never static but dynamic and should reflect current realities prevailing in the economy. The tax system is an opportunity for government to collect additional revenue besides other sources of income, which is needed in discharging its pressing obligations. A good system of tax also offers itself as one of the most effective means of mobilizing a nation’s internal resources and it lends itself to creating enabling and conducive environment to the promotion of economic growth and development (Ogbonna, 2010).
Further, the rudimentary nature of the economy precludes retail form of taxes. At this stage also, taxes are difficult to collect because of the lack of skills and facilities for tax administration (Kiabel, 2009). Given this, a complicated tax structure is not feasible and the amount of revenue from personal income tax will depend on taxpayers‘ compliance and the efficiency of the tax collector. An important source of government revenue during the early stage of economic development is the foreign trade sector because exports and imports are readily identifiable and they pass through few ports. However, revenue from export and custom duties is not stable because of periodic fluctuations in the prices of primary products. This tends to complicate plan implementation in many developing countries (Kiabel, 2009).
Tax revenue mobilization as a source for financing development activities in Ghana has been a difficult issue primarily because of various forms of resistance, such as evasion, avoidance and corrupt practices attending to it. These activities are considered as sabotaging the economy and are readily presented as reasons for the underdevelopment of the country. (Adegbie et al, 2010:2). Government exists in order to effectively collect taxes from available economic resources and make use of same to create economic prosperity such that available and willing human and other resources are gainfully employed, infrastructures provided, essential public services (such as the maintenance of law and order) are put in place etc. Tax resistance only makes the development process unattainable. (Onairobi, 1998). It could be deduced that changing or fine-tuning, tax rates is used to influence or achieve macroeconomic stability. Some of the most recently cited examples are the governments of Canada, United States, Netherland, United Kingdom, who derive substantial revenue from Company Income tax, Value Added Tax, Import Duties and have used same to create prosperity (Adegbie et al, 2010:3). Thus it can be said that the economic development of a country depends on various reasons one of which is the presence of an effective and efficient tax revenue policy. In Ghana the contribution of tax revenue has not met the expectations of Government. Government has equally expressed this disappointment and has accordingly vowed to expand the non-oil tax revenue. (Festus and Samuel, 2007). It is in the light of the foregoing that this study examines the extent to which the tax system has contributed to economic growth of Ghana.
Statement of The Problem
There is a general lack of consensus among scholars on the contribution of tax revenue to the economic growth of nations. For instance, whereas Ariyo (1997) in his study on productivity of the Ghanaian tax system documented a satisfactory level of productivity of the tax system before the oil discovery, Festus and Samuel (2007) established that the role of tax revenue in promoting economic activities and growth is not felt in Ghana.
Bonu and Pedro (2009) investigated the impact of income tax rates (ITR) on the economic development of Botswana which shows that the impact of income tax revenue over the nations GDP is not impressive in developing nations. This calls for the need to further investigate the current tax performance vis-à-vis the Ghanaian economy.
Objectives of the Study
Broadly, the objective of this study is to identify the impact of tax revenue on the Ghanaian economic growth and development. Other specific objectives include:
- To investigate the impact of company income tax on the growth of the economy of Ghana.
- To investigate the impact of custom and excise duties on the growth of the economy of Ghana.
- To investigate the impact of value added tax on the growth of the economy of
Research Questions
The study would examine the following questions:
- Does tax revenue have any significant impact on the economy of Ghana?
- What is the impact of Company income tax to the development of the economy of Ghana?
- What is the impact of Customs excise and Duties to the development of the economy of Ghana?
- What is the impact of Value Added tax to the development of the economy of Ghana?
Research Hypotheses
Hypothesis One
H01: Taxation does not have any significant impact on the growth of the Ghanaian economy.
Hypothesis Two
H03: Company Income Tax has no significant impact on Ghanaian economic growth.
Hypothesis Three
H04: Custom and Excise Duties has no significant impact on Ghanaian economic growth.
Hypothesis Four
H05: Value Added Tax has no significant impact on Ghanaian economic growth.
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Scope of the Study:
The scope of this study assesses tax as a stimulus for growth and development in Ghana. The trend of Company Income tax, Customs and excise duty and Value added tax are examined for the period to determine their correlation with the Ghanaian economy which will be captured as Gross Domestic Product(GDP).
Significance of the Study:
Tax revenue ought to be one of the sources of revenue to the government. This can be used to achieve economic growth, maintain equilibrium in the economy by combating elements of depression, inflation or deflation, achieve equity in income and wealth distribution and address issues of poverty and promote socioeconomic development, hence the need to find out the extent tax revenue impacts on Ghana‘s economic growth.
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