The Effect of Tax Evasion on Nigeria Budget
Abstract
This study, which adopted a correlational research design, investigated the topic of tax evasion in Nigeria by exploring the relationships among various macroeconomic indicators. Data for the research were gathered from secondary sources, predominantly official websites providing macroeconomic data covering the period from 2010 to 2023. Employing SPSS27 as the analytical tool, the study aimed to scrutinize the intricate connections between tax evasion, socio-economic factors, and their impact on the Nigerian national budget. The hypotheses formulated for the study were rigorously tested through the application of ANOVA estimates. The research yielded noteworthy findings, revealing the interplay of macroeconomic variables in the context of tax evasion. Contrary to conventional beliefs, the study found no significant increase in the prevalence of tax evasion in Nigeria over the specified decade. Furthermore, socio-economic factors such as corruption and inequality were identified as having an inconsequential impact on tax evasion, challenging prevailing assumptions. Most strikingly, the study revealed that tax evasion did not exert a significant influence on the Nigerian national budget during the examined period. These results contributed valuable insights into the nuanced dynamics of tax evasion in Nigeria, prompting a reevaluation of contributing factors and their implications. In conclusion, the correlational research design provided a comprehensive understanding of the relationships among macroeconomic variables related to tax evasion. Leveraging SPSS27 as the analytical tool enabled the thorough presentation and examination of data collected from secondary sources. The use of ANOVA estimates in hypothesis testing added a robust statistical dimension to the study. Recommendations stemming from the findings underscored the importance of tailored policy measures and enhanced enforcement strategies to address tax evasion in Nigeria effectively. This study, serving as a cornerstone for future research, opened avenues for exploring the multifaceted dimensions of tax evasion in developing economies.
CHAPTER ONE
INTRODUCTION
Background to the Study
The issue of tax evasion has been a longstanding concern for governments globally, and Nigeria is no exception (Nabb, 2017). As an emerging economy with vast resources and potential, Nigeria faces the challenge of ensuring a robust and sustainable budget to finance its developmental goals. Taxation serves as a critical revenue source for the government, contributing significantly to the budget (Ayua, 2023). However, the pervasive issue of tax evasion threatens the effectiveness of this revenue stream, as identified by various studies on taxation and state-building in developing countries (Brautigam et al., 2020; Brautigam, 2019).
Tax evasion involves the illegal and deliberate act of individuals or businesses evading their tax obligations, thereby undermining the revenue collection efforts of the government (Aguolu, 2021). In Nigeria, where tax reforms have been implemented with unrealized expectations (Aguolu, 2020), tax evasion has emerged as a major impediment to the efficient functioning of the budgetary system. The complexity of the tax system in Nigeria, coupled with unrealized expectations from reforms, creates an environment conducive to tax evasion (McKerchar, 2021). To address this challenge, policymakers need to consider the insights provided by studies on taxation policy and development (Cobham, 2021).
Understanding the intricate dynamics of tax evasion and its impact on the national budget is crucial for policymakers and stakeholders to devise effective strategies for revenue generation and economic development (Ani, 2019). Studies on the impact of tax revenue on economic growth in Nigeria emphasize the importance of a well-functioning tax system (Ojong et al., 2022). The Nigerian Tax Law, as outlined in legal publications (Ayua, 2023), plays a crucial role in shaping the regulatory framework for tax administration. However, the unrealized expectations from tax reforms highlight the need for a comprehensive assessment of tax policies and their impact on revenue collection (Aguolu, 2020).
The Budget Implementation Report of the Federation (2017) provides insights into the practical challenges faced by the government in translating budgetary allocations into actual implementation. Tax revenue, as a crucial component of the budget, plays a pivotal role in determining the success of budget implementation. The impact of tax evasion on the budget becomes evident when considering cases like the study on curbing tax evasion in the South-South states of Nigeria (Kiabel & Nwokah, 2021). Such studies shed light on the practical challenges faced by tax administrators in implementing effective strategies to curb evasion.
The intricate relationship between tax revenue and trade liberalization is explored in studies such as the IMF Working Paper by Baumsgaard and Keen (2023). Trade liberalization can influence tax revenue, and understanding this relationship is essential for policymakers to develop holistic economic policies. Moreover, the study on inter-governmental fiscal relations in developing countries emphasizes the importance of coordinated efforts between different levels of government in revenue collection (Bahi & Kinn, 2021). This highlights the need for a multi-faceted approach to address tax evasion comprehensively.
The issue of tax evasion not only affects revenue collection but also has broader implications for state-building and governance (Brautigam, 2019). Taxation is a key instrument for state-building, and its effectiveness is crucial for creating a capable and responsive government (Brautigam et al., 2020). In this context, the problems and prospects of budgeting and budget implementation at the local government level in Nigeria, as explored by Ugoh and Ukpere (2019), underscore the challenges faced in aligning revenue collection with developmental goals.
 Statement of Problem
The issue of tax evasion in Nigeria presents a complex challenge with various gaps that need to be addressed to ensure effective fiscal management and economic development. Despite the implementation of tax reforms and policies, tax evasion remains a persistent problem, hindering the government’s ability to achieve its developmental goals.
One major gap is the lack of a comprehensive and up-to-date assessment of the extent of tax evasion in Nigeria over the past decade. Existing studies (Nabb, 2017) provide valuable insights, but a more recent and thorough analysis is needed to capture the evolving dynamics of tax evasion. Understanding the current landscape of tax evasion is essential for policymakers to tailor interventions that align with the present challenges faced by tax authorities.
Furthermore, there is a gap in identifying and analyzing the specific factors contributing to tax evasion in Nigeria. While some studies touch upon the broader issues of corruption and inequality (Ayua, 2023; Bahi & Kinn, 2021), a deeper exploration is required to uncover the intricacies of these factors. A nuanced understanding of the socio-economic, institutional, and cultural determinants of tax evasion is crucial for developing targeted policies and enforcement mechanisms.
The impact of tax evasion on the national budget is another area that requires further investigation. While reports like the Budget Implementation Report shed light on challenges in implementing budgetary allocations (Budget Office of the Federation, 2017), a comprehensive analysis linking tax evasion to budget deficits and hindered development is lacking. Bridging this gap is essential to quantify the direct consequences of tax evasion and advocate for evidence-based policy reforms.
Additionally, there is a need to explore the effectiveness of existing enforcement mechanisms and policy reforms in curbing tax evasion. Studies such as McKerchar’s research on the impact of complexity on tax compliance (2021) provide valuable insights, but a more comprehensive evaluation of the regulatory framework and its enforcement is required. Identifying gaps in the current approach to tax administration will guide the development of more effective strategies.
Objectives of the Study
The following specific objectives were examined in this study:
- To assess the extent of tax evasion in Nigeria over the past decade.
- To identify the key factors contributing to tax evasion in the country.
- To analyze the direct impact of tax evasion on the Nigerian national budget during the specified period.
Research Questions
The following research questions were investigated in this study:
- What is the historical trend of tax evasion in Nigeria over the past decade?
- What are the primary factors contributing to tax evasion in Nigeria?
- How does tax evasion directly affect the Nigerian national budget?
Research Hypotheses
The following hypotheses were tested:
Null Hypotheses(H0):
- There has been no significant increase in the prevalence of tax evasion in Nigeria over the past decade.
- Socio-economic factors such as corruption and inequality do not contribute significantly to tax evasion in Nigeria.
- Tax evasion does not significantly impact the Nigerian national budget.
Alternative Hypotheses(H1):
- There has been a significant increase in the prevalence of tax evasion in Nigeria over the past decade.
- Socio-economic factors such as corruption and inequality contribute significantly to tax evasion in Nigeria.
- Tax evasion significantly impacts the Nigerian national budget.
Significance of the Study
The significance of this study on tax evasion in Nigeria is multifaceted and holds critical implications for various stakeholders, including policymakers, tax authorities, researchers, and the broader society. Understanding the significance of this research is essential for recognizing its potential impact on fiscal policies, economic development, and governance.
Firstly, this study contributes significantly to the existing body of knowledge surrounding tax evasion in Nigeria. By delving into the intricate dynamics of tax evasion, the research aims to unearth nuanced insights into the contributing factors, trends, and consequences associated with this pervasive issue. This depth of understanding is crucial for building a comprehensive knowledge base that can inform future research endeavours and policy considerations.
Secondly, the findings of this study have practical implications for policymakers and tax authorities. Armed with a more profound understanding of the factors driving tax evasion, policymakers can design targeted and effective tax policies. The study’s insights may guide the development of reforms that address specific challenges in the Nigerian context, leading to a more robust and resilient tax system.
Moreover, the research outcomes are expected to inform evidence-based policy decisions. Policymakers can leverage the empirical evidence provided by the study to make informed choices regarding tax regulations, enforcement mechanisms, and resource allocation. This evidence-based approach enhances the likelihood of successful policy implementation and fosters the creation of a more transparent and accountable fiscal environment.
Furthermore, the significance extends to the societal and economic levels. By mitigating tax evasion, the government can enhance its revenue collection, which, in turn, supports the financing of essential public services. This includes investments in healthcare, education, infrastructure, and social welfare programs, contributing to an improved quality of life for citizens.
Scope of the Study (in past tense)
This study focuses on the period spanning the last decade (2014-2024) to analyze the trends in tax evasion in Nigeria. The geographical scope encompasses the entire country, considering both urban and rural areas. The research primarily examines individual and corporate tax evasion, exploring the sectors and demographics most affected.
Operational Definition of Terms
Tax Evasion: The illegal act of deliberately evading tax obligations, including underreporting income, hiding assets, or engaging in fraudulent schemes to avoid paying taxes.
National Budget: The financial plan outlining the government’s revenue and expenditure for a specific period, usually a fiscal year.
Revenue Shortfalls: The discrepancy between the expected and actual revenue collected by the government, resulting in a deficit in budgetary allocation.
Socio-economic Factors: External elements such as corruption, income inequality, and economic disparities influence tax evasion behaviour.
Policy Reforms: Changes and adjustments made by the government to existing tax laws and regulations to enhance revenue collection and combat tax evasion.
Enforcement Mechanisms: The strategies and tools employed by tax authorities to ensure compliance with tax laws, including audits, penalties, and legal actions.
Budgetary Deficits: The negative balance between government expenditures and revenues, indicating a shortfall in funds available for planned activities.
Developmental Goals: The long-term objectives set by the government to enhance economic, social, and infrastructural progress within the nation.
REFERENCES
- Kiabel, B. D., & Nwokah, N. G. (2021). Curbing Tax Evasion and Avoidance in Personal Income Tax Administration: A Study of the South-South States of Nigeria. European Journal of Economics, Finance and Administrative Sciences, 15.
- McKerchar, M. (2021). The Impact of Complexity Upon Tax Compliance: A Study of Australian Personal Taxpayers. ATRF Research Study, Sydney, 39.
- Mookherjee, D. (1997). Incentive Reforms in Developing Country Bureaucracies: Lessons from Tax Administration. Paper prepared for the Annual Bank Conference on Development Economics, Washington D.C.: World Bank.
- Nabb, K. (2017). Updated Government Revenue Dataset Provides New Insights into Developing Country Tax Collection Trends. [Online] Available at: https://www.ictd.ac/blog/updated-grd
- Newman, I., & Benz, C. R. (2020). Qualitative-quantitative research methodology: Exploring the interactive continuum. Southern Illinois University Press.
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