EFFECTS AND IMPLICATIONS OF TAXATION ON ENTREPRENEURSHIP AND INNOVATION
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EFFECTS AND IMPLICATIONS OF TAXATION ON ENTREPRENEURSHIP AND INNOVATION
Chapter one
1.6 Introduction
In theory, taxes, such as personal income tax, capital gains tax, and corporate income tax, typically leave individual entrepreneurs with less discretionary resources to reinvest in their own enterprises. It is commonly assumed that the higher the tax rate, the more capital is taken from the entrepreneur and placed in the hands of the government.
Every firm has two fundamental objectives: profitability and solvency. Profitability refers to a company’s ability to generate profits, whereas solvency refers to a company’s ability to meet its numerous financial responsibilities, including debt repayment when due.
However, achieving these goals necessitates efficient resource management, particularly efficient liability management, which falls under the area of taxation.
As a result, the context for this research is one that aims to establish the different unexplored linkages and correlations between the notion of taxes, its execution, and its effects on entrepreneurship.
This chapter discusses the study’s history, problem statement, scope of the study, study objectives, hypothesis statement, study significance, scope of the study, study limits, and references.
1.7 Background of the Study
The vast bulk of the world’s economy is built around entrepreneurship. According to a research conducted by the Federal Office of Statistics, entrepreneurship accounts for 80% of the Nigerian economy.
Although entrepreneurs frequently operate small and medium-sized businesses, the entrepreneurship sector remains the most important sector in the economy because, when all individual effects are combined, they outperform those of larger organisations and multinationals.
The social and economic benefits of entrepreneurship should not be underestimated. According to Nzotta (2006), entrepreneurship is a source of job creation, competition, economic dynamism, and innovation
all of which promote the entrepreneurial spirit and the spread of skills. Entrepreneurship also allows for greater wealth distribution because it has a larger geographical reach than large corporations.
Entrepreneurship has long been a source of job creation and empowerment for Nigerians, accounting for approximately half of all jobs in the country. Entrepreneurship has clearly improved the level of living for many individuals, particularly those in poor countries.
Unfortunately, while this sector has been a major stimulant for socioeconomic development, it has become clear that the vast majority of our national stakeholders have failed to recognise its critical role in the nation’s long-term socioeconomic development.
This distorted perspective leads to inappropriate meddling in entrepreneurial operations by many societal players, particularly government authorities. Predominantly, this sector has seen many unfavourable interventions and actions from various Ministries, Departments, and Agencies (MDAs) of governments (at all three levels), which consider the imposition of various taxes and levies on businesses as a chance to produce income for the government.
Innovation and entrepreneurship play critical roles in sustaining economic growth and improving living standards by lowering product prices, which is made possible by achieving cost efficiencies in production/marketing processes and leveraging economies of scale; this, in turn, enables revenue increases and higher wages.
Entrepreneurship frequently leads to the development of new industrial processes, fresh service delivery methods, and innovative company models. There are numerous aspects involved in bringing an idea to market and successfully executing it
but we know shockingly little about the role of government, particularly taxation, in recruiting or encouraging entrepreneurs and fostering or suppressing indigenous innovation.
Taxation is one of the primary sources of revenue for a government. Taxation is typically utilised to achieve a variety of goals and complete a government’s numerous commitments. The tax structure or set of tax policies in effect in a given economy at any given time is known to represent that economy’s future aspirations.
Nigeria, like many other developing countries, has a range of taxes that corporations, businesses, and self-employed individuals must pay. These include consumption taxes such as VAT, corporate income tax, capital gains tax, personal income tax, petroleum profit tax, and so on.
A well-functioning internal revenue system, primarily comprised of tax systems, structures, and regulations, is required for strong, long-term, and inclusive economic growth. However, the revenue systems in most developing nations, including Nigeria, have fundamental problems.
The design and structure of a tax system are guided by a number of ideas, many of which are conflicting. One of the fundamental concepts guiding the selection of any tax structure or policy is that it should stimulate growth, or at the very least, impede growth as little as possible.
Because innovation has been shown to be an important engine of long-term growth and development, and because innovation frequently occurs in environments conducive to entrepreneurship, a successful implementation of that principle necessitates consideration of the impact of the tax system or structure on entrepreneurship.
In Nigeria, for example, with the reality of ever-decreasing crude oil revenue, it is more important than ever for the government to seek for other realistic, although sustainable, sources of money.
Unfortunately, Nigeria’s tax system has been essentially defective for decades, with successive governments facing and grappling with similar issues in terms of tax policies, effective policy implementation, efficient tax administration, and collection.
Nigeria, as an import-dependent and primarily trade-driven country, has enormous potential if and only if her tax system and tax institutions are structured in such a way that they maximise the tax revenue generation capacity of her commerce-based economy while not impeding or negatively impacting entrepreneurial drive.
Tax administration in Nigeria is a hydra-headed monster that frequently manifests in numerous folds, allowing taxpayers to be fleeced multiple times by government Ministries, Departments, and Agencies (MDAs).
The high level of compliance costs have substantial ramifications for Nigerian firms by lowering incentives to expand output, resulting in higher product prices and distorting factor incomes, as enterprises base their investment decisions on long-term capital returns.
Taxation decreases capital stock size and inhibits productivity-enhancing investment. This eventually leads to a reduced return on human resources and less incentive to develop.
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