Topic: Companies Income Tax Influences the growth of an Economy

Group Members
1. Ojaomo Ademola Olugbenga 20/0531
2. Okpala Chiamaka Laura 19/1977
According to Institute of Chartered Accountant of Nigeria (ICAN) companies’
income tax refers to the taxes levied on the profit of incorporated entities or
companies. The companies’ income tax is a significant source of revenue for the
government, which is then utilized for various public expenditures and
developmental projects.

Economic growth refers to the increase in a country’s production of goods and

services over time. It’s often measured by indicators like Gross Domestic Product
(Dwivedi 2019). Economic growth is a necessary prerequisite for economic
development. This is the reason why Nigeria’s growth continuously takes a large
proportion share in the policy thrust of the federal government development
objectives. Sustainable economic growth, as noted by Nyoni & Bonga (2017)
mainly depends on a nation’s ability to invest and make efficient and productive
use of the resources at its disposal.

The following are ways company’s income tax has influences the growth of an
economy:

1. Encourages Investment
One-way company’s income tax encourages investment is through the
provision of incentives and exemptions. When companies are subject to
income tax, it creates a financial incentive for them to reinvest their profits
back to the business. By providing the incentives, government aim to create
a favorable investment climate and attract both domestic and foreign
investors.
According to Joseph E. Stiglitz (2021) company’s income tax policies can
also indirectly encourage investment by promoting stability and
 predictability in the business environment. By tracing corporate profits,
government generate revenue that can be used to fund public
infrastructure project, education, and healthcare. For example,
governments may offer tax credits or deductions for investment in certain
industries encouraging companies to direct their resource towards those
areas.
Mihir A. Desai in his book “The wisdom of Finance”, Desai argues that a
well-designed tax system can play a role in encouraging investment by
providing a stable fiscal environment. He suggests that a moderate and
predictable tax regime can foster long term investment and economic
development.
Micheal Devereux (2020) explored the impact of corporate taxation on
investment decision. In his research, Devereux emphasizes that the design
of companies income tax, including factors such as tax rate, allowances and
incentive can shape investment behavior. He suggests that a tax system
that balances revenue needs with investment encouragement can
contribute to economic growth.

2. Promotes economic stability

Companies income tax helps fund government initiatives and public
services that are essential for societal wellbeing. This includes
infrastructure development, education, healthcare and social welfare
programs. By collecting tax revenue from companies, government can
invest in these areas, which in turn enhances the overall quality of life and
promotes social and economic development.
 By implementing progressive tax systems where higher income companies
are taxed higher rates, governments can redistribute wealth and promote a
more equitable distribution of resources. This can help bridge the wealth
gap and ensure that economic growth benefits a wider segment of
population.
John Maynard Keynes argues that during economic downturns,
government can use tax revenue from companies to implement counter
cyclical fiscal policies.
Mervyn king (2018) emphasized the importance of responsible corporate
behavior. He suggest that companies income tax can be used as a tool to
incentivize companies to engage in socially responsible practices, such as
investing in sustainable development and supporting local communities.
These actions contribute to the overall growth and well-being of society.

3. Fosters job creation

Companies income tax create job opportunities and influence the growth of
the economy such that when companies pay income tax, it helps fund
government initiatives and public services, such as infrastructure
development, education and healthcare. The infrastructure create an
environment that support business growth and attract more companies to
operate within the economy.
Thomas Piketty, in his influential work “Capital in the twenty first century”
(2013) highlights the role of progressive taxation including company’s
income tax in addressing wealth concentration. He argues that a more
equitable distribution of resource can lead to increased investment in
 human capital, innovation and productivity ultimately driving job creation
and economic growth.
Joseph Stiglitz, in his book “The price of inequality” (2012), stiglitz
emphasizes the importance of a fair and progressive tax system in
promoting economic growth and reducing inequality. He argues that
company’s income tax, when properly designed and implemented can help
redistribute wealth and resource leading to a more inclusive and dynamic
economy.
Furthermore, income tax revenue can be used to invest in education and
skills development programs. By improving training opportunities, the
workforce becomes more skilled and competitive. This in turn attracts
business that require a well-educated workforce leading to job creation and
economic growth.

4. Encourages entrepreneurship
Companies income tax fund infrastructure development, such as building
roads, bridges and utilities improve transportation and connectivity making
it easier for entreprenurs to access market, suppliers and customers. It also
menhances the overall business climate attracting more entreprenurs to
start their ventures.
By improving the quality of education and providing training opportunities,
government can equip aspiring entrepreneurs with the knowledge and skill
needed to succeed in their ventures. This in turn fosters innovation,
creativity and productivity during economic growth.
 According to William Gentry (2012), when income tax rates are structured
in a way that provides incentive for investment, it encourages entrepreneur
to start and expand their businesses. Lower tax rates on business income
can free up resources for entrepreneurs to reinvest in their ventures,
enhancing growth and innovation.
Robert Carroll (2015) emphasizes the role of income tax in promoting
entrepreneurship through the concept of “tax neutrality”. When income
tax policies are neutral and treat all businesses equally, it creates a level
playing field for entrepreneurs. This fairness encourages individuals to to
pursue entrepreneurial opportunities, knowing that they won’t face
excessive tax burdens compared to larger corporations.
5. Attracts foreign investment
When a country offers lower tax rate for companies, it becomes more
appealing for foreign investors. They see the potential for higher return on
their investment due to reduced tax burdens. A well regulated company’s
income tax system with clear rules and transparency provides a stable
investment environment. Foreign investors value predictability and want to
ensure their investment won’t be subject to sudden tax policy changes or
unexpected tax liabilities. Companies income tax also allows foreign
investors to repatriate their profits back to their home countries with
minimal tax implications. This flexibility encourages investors to bring their
capital into their country knowing that they can easily transfer their
earnings when needed.

6. Enhances fiscal discipline

Income tax is a significant source of revenue for governments. By imposing
taxes on companies, government can generate funds to finance public
services and infrastructure development. This revenue helps maintain fiscal
discipline by ensuring that the government has the necessary resource to
meet its financial obligation.
By taxing companies, government can collect funds that can be used to
support social welfare program, education, healthcare and other initiatives
aimed at reducing income inequality.

Conclusion
Worldwide, corporate income tax is a significant source of money for both
developed and developing countries. Given the substantial amount of
money the Nigerian federal government receives from the oil industry, they
haven’t given much thought to how to stop tax fraud and avoidance that
has an impact on revenue creation. There is a lack of accountability in the
filling of returns, and Nigerian taxpayer’s civic duty to pay taxes is not well
understood by the general people. The tax industry and tax authorities in
particular are not immune to corruption that has impacted the fabric of the
country. Back duty auditing is a poor and ineffective control method for
detecting non-disclosure of complete accounting records and other
malpractices. Due to lax oversight, tax payer noncompliance with rules and
regulations is deeply ingrained in the system. The Nigerian firm income tax
structure requires a general tax reform.

Recommendation
Adopting the following suggestions would improve the effectiveness of
Nigeria’s corporation income tax and its contribution to the economic
growth:
1. Entire execution of the 2003 tax reform program. Introduced in 2004,
the integrated tax office (ITO) ought to be sufficiently computerized by
skilled and knowledgeable personnel. The corruption problem will be
resolved once the infrastructure including adequate compensation and
personnel incentive is in place. If companies operating are fully captured
in the integrated system, the issue of non-disclosure of income and
expenditure will be eradicated.
2. There should be feedback from the taxpayers to improve operating
efficiency.
3. Government should create tax appeal panel in each state of federation
so that tax payers can file petition and complaints on issues relating to
tax matters.
4. Government should make efficient use of tax revenue for economic
development of the nation, provide infrastructural facilities that will
improve the welfare of the general public.
5. The Economic Financial Crime Commission (EFCC) should be strengthen
so that part of its role should include prosecution of tax evaders and tax
avoiders