TAXATION AS A TOOL OF FISCAL POLICY IN NIGERIA.
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TAXATION AS A TOOL OF FISCAL POLICY IN NIGERIA.
Chapter one
INTRODUCTION
2.0 BACKGROUND OF THE STUDY
Fiscal policy is the process by which a government changes its spending levels in order to monitor and impact a country’s economy. It is the sister technique of monetary policy in which a central bank influences a country’s money supply.
These two policies are utilised in various combinations to guide a country’s economic objectives. We’ll look at how fiscal policy works, how it needs to be monitored, and how its execution affects different people in an economy.
British economist John Maynard Keynes’ theories serve as the foundation for fiscal policy. Also known as Keynesian economics, this theory holds that governments can influence macroeconomic productivity levels by raising or lowering tax rates and public spending.
This influence, in turn, reduces inflation (which is typically considered healthy when it is between 2-3%), increases employment, and keeps the value of money stable. Ezejelue (2008)
The goal, however, is to strike a balance between these effects. For example, encouraging a stagnating economy raises the risk of inflation. This is because an increase in money supply followed by an increase in consumer demand can produce a decline in the value of money, implying that it will cost more money to buy something that has not changed in value.
Let’s imagine the economy has slowed. Unemployment is rising, consumer spending is falling, and firms are not generating money. Thus, a government decides to fuel the economy’s engine by lowering taxes, giving consumers more spending money, and boosting government spending in the form of purchasing market services (such as roads or schools).
By paying for such services, the government produces jobs and incomes, which are then pushed into the economy. Pumping money into the economy is also known as “pump priming”. Meanwhile, the overall jobless rate will shrink. Orojo (2009).
Consumer demand for products and services rises as the economy’s wealth grows and taxes fall. This in turn rekindles businesses and shifts the cycle from stagnant to active.
If there are no checks on this process, the increase in economic productivity can cross a very fine line, resulting in too much money in the market.
This surplus supply lowers the value of money while raising prices (due to increased demand for consumer goods). Consequently, inflation occurs. Stafford (2009).
As a result, fine-tuning the economy only through fiscal policy can be a difficult, if not impossible, way to achieve economic objectives. If not constantly managed, the distinction between a productive economy and one afflicted with inflation might become muddled.
When inflation is very high, the economy may need to slow down. In such cases, a government can utilise fiscal policy to raise taxes in order to drain money from the economy.
Fiscal policy could also require a reduction in government spending, reducing the amount of money in circulation. Of course, the long-term consequences of such a policy could include a slowing economy and increasing unemployment rates.
Nonetheless, the process continues as the government utilises fiscal policy to fine-tune expenditure and taxing levels with the purpose of balancing business cycles.
Unfortunately, the effects of any fiscal policy are not equal for everyone. Depending on the political orientations and interests of legislators, a tax cut may solely benefit the middle class, which is often the largest economic group. In times of economic downturn and growing taxation, this same demographic may be required to pay higher taxes than the wealthy upper class.
Similarly, when a government decides to change its spending, the policy may only effect a subset of the population. A decision to build a new bridge, for example, will provide hundreds of construction workers with new jobs and increased income.
A choice to spend money on developing a new space shuttle, on the other hand, benefits just a tiny, specialised group of professionals and does little to raise overall employment levels.
One of the most difficult decisions for politicians to make is how much government engagement in the economy is appropriate. Indeed, the government has interfered to varying degrees over time.
However, for the most part, it is agreed that a level of government engagement is vital to preserve a dynamic economy, on which the economic well-being of the population depends.
Taxation has existed in Nigeria for as long as there have been formed authorities, just like in every other nation. Lord Luggard first implemented a tax in Nigeria.
During the period, the tax collection authorities were responsible for providing information, supervising the collection of taxes, accounting for taxes collected, and paying such taxes into the district council’s fund. Taxation was intended to create funds for the government to fulfil its socioeconomic and political responsibilities to citizens.
Fiscal policies, on the other hand, are simply described as the government’s use of taxation, public borrowing, and public expenditure to increase per capita income, achieve income equality, reduce unemployment, and promote local technology.
Fiscal policy in developing countries is intended to accelerate the rate of capital formation in order to boost economic development.
knowing the role of fiscal policies entails knowing the government’s economic objectives and how fiscal policies are employed to attain those objectives. This is set against the backdrop of a somewhat well-developed financial system. In Nigeria, fiscal policies are employed to achieve some of the government’s economic goals.
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