ABSTRACT

The study examined the Effectiveness of Taxation as an Instrument for the Control of Money in
Circulation. Taxation which is an instrument used by the government to levy/charge individuals and
corporation(group of individuals, created by law) directly or indirectly as a source of getting money
for the maintenance of the state, maintaining economy growth, building aggregate investment.

The problem of the study is that people see taxation as a tool for the exploitation of the ordinary
man by the government and has generated a great deal of thought among tax payers some of who
argue that the government rid them of investment and consumption income.

The main objectives of the study are to examine important role of taxation in an economy, to
evaluate the various type and classes of taxation, to identify the major problems of taxation, and to
determine the impact of taxation on money in circulation.

The main source of data for the study is secondary data. The instrument used for data collection
include data on Petroleum Profit Tax(PPT) and Company Income Taxation(CIT), paid by quoted
companies in Nigeria.

The study found that the chief source of revenue for most industrialized countries is the income
tax.

The income tax is levied on both individual/personal income and corporation profit.

The work concludes that taxation is an instrument used by government authorities to regulate and
collect sums of money from both natural and legal persons for the benefit of the whole citizens. On
the other hand,taxes reduces a taxpayers wealth(money) and this causes the individuals to re-
arrange his/her economic statue.

The study recommends that more generalized rates should be enforced to reduce tax avoidance.
With the reduction of tax rate,this will reduce the tax burden on few individual and firms.

The study suggests that further work be carried out on this particular topic.

CHAPTER ONE:1

1.0 INTRODUCTION
1.1. BACKGROUND OF THE STUDY

Taxation which is a major source of public revenue has been variously defined to include an
obligatory transfer of money from the taxpayers(citizen) to a public authority(government).

Other definition of taxation include a non-punishment,but yet compulsory levy imposed by

government on the property and income of individuals and corporations.

According to Ajakaiye (1999), a tax is a form of levy imposed by the state in people(individuals and
firm), corporate bodies or on goods and services.

Government action in tax collection is however justifiable in the sense that the government
performs at least the following functions for the well-being or betterment and welfare of the citizens:

• Provision of social amenities(such as water, electricity, good road)etc

• Ensuring easy access to health care sector

• Prevention of external aggression e.g protection of the country boarders

• Maintaining public infrastructure/facilities

• Organizing and executing state project etc.

Ajayi (2002),notes that taxation is an instrument of fiscal policy by the government. In this regard,
taxation may be defined as an instrument through which government achieves it's desire goals by the
variation of taxes in it's fiscal policy.

In other word, taxation can be defined as an instrument used by the government to levy individuals
and corporations directly or indirectly as a source of getting money for the maintenance of the state.

As an instrument of fiscal policy, the government uses taxation to check the quantity of money in
circulation. Apart from using the imposition of tax to cover it's expenditure,the government also uses
it to reduce inflation and stimulate economic growth (Anyanwuocha 2001).

Further more, taxation can be said to be a means of transferring resources and income(money)
from the private sector in order to achieve or accomplish some of the nation's economic and social
goals, control money in circulation,the result of which will lead to a higher standard of living.

1.2. STATEMENT OF PROBLEM

Taxation which is one of the major source of revenue for all government comes back to the
taxpayers in form of social amenities. The payment of tax has generated a great deal of general
thought among tax payers,some of who argues that the government rid them of investment and
consumption income.
 Patriots regards taxation as an impossible tool of nationhood without the provision of social
amenities and national survival can hardly be achieved.

There is another view that taxation lowers the investment capacity and growth of corporate
entities,if the company's profit before tax is compared to the after tax profit which are available
either for distribution as dividends to shareholders or reinvested for the expansion or growth of the
company.

The argument is based on the fact that since the company has no assessable profit,the percentage
payment on turnover,gross profit,net asset and share capital is in appropriate.

Most countries economics(especially third world like Nigeria) are faced with either shortage or
surplus fund in circulation especially during deflational and inflational periods.

Inflation which refers to a persistent rise in the level of price or fall in the value of money, deflation
which means persistent fall in the general level of price or rise in the value of money are the two
conditions that are very essentials that affect the well-being of the economy.

However,if an economy like that if Nigeria is going through a period of inflation,the government
can make budget surplus by increasing taxes among taxpayers.

During inflation periods,those who suffer must are fixed income earners e.g pensioners,salary
earners, landlord etc. and creditors stand to loose because of the continuous loss of value of money
and as such lending is discouraged.

1.3 OBJECTIVES OF THE STUDY

The main objectives of this research is to evaluate the Effectiveness of Taxation in Controlling
Money in Circulation. This tends to suggest that there are other sub objectives of this study which
includes the following:

• To determine and to use tax system to breach the vicious circle of poverty in our country(Nigeria)

• To examine the importance of taxation in an economy and the control of money in circulation

• To evaluate the various types and classes of taxation

• To access the impact of Total Tax collected(TTC) on Average Money in Circulation(AMC)

1.4. RESEARCH QUESTION

In order to achieve the objective highlighted above,the following research questions were
formulated as follows::

• How to use tax system to breach the vicious circle of poverty in the country

• What are the importance of taxation on control of money in circulation

 • What are the various types and classes of taxation

• What are the impact of Total Tax Collected (TTC) on Average Money in Circulation (AMC)

1.5 SIGNIFICANCE OF THE STUDY

The study is important because it will create awareness of the important and effectiveness of
taxation in Controlling money in circulation.

The outcome of the study will enlighten cooperate firms and individual on the numerous role
played by Federal Government in the areas of maintaining stability and steady growth, provision of
law and order, reducing inflation, controlling high cost of living and the maintenance of peaceful
atmosphere by way of all depends on huge outlay of funds/money.

1.6. SCOPE OF THE STUDY

The topic, Effectiveness of Taxation as an Instrument for the Control of Money in Circulation should
been expected to cover Nigeria (I e , Thirty six(36) States and the FCT), organization or company
paying tax,but decided to focus on the State Board of Internal Revenue,Owode Egba, Ogun State.

1.7. LIMITATIONS OF THE STUDY

More detailed research on this topic would have been carried out but due to financial handicap,
distance(landmass) and the attitude of the respondent,most of them were either not available or
incorrectly completed the questionnaire given to them.

The behavior of humans who reacted to this study are different because some are willing to give
the needed information, while others were reluctant because they felt that they have no financial
benefits.

1.8. DEFINITION OF TERMS

Some technical terms which features in this work are defined to enhance letter understanding of
the research work.

These are:

• Taxation: This is the act of imposing tax

• Tax: This is a compulsory levy paid by citizens according to their income, value of goods etc. to the
government

• Taxpayers: These are peoples, companies or organization who pay tax

 • Vicious circle: This is a situation in which one problem leads to another, which then makes the first
one worse or, it is a situation in which the solution to one problem create a chain of problem,each
making it more difficult to solve the original one.

• Inflation: This is the persistent rise in the level of price

• Company Income Tax(CIT): It is a levy imposed on the profit of business organization or corporate
bodies

• Petroleum Profit Tax(PPT): This is a direct tax levy annually for each accounting period of 12
months by oil companies

• Total Tax collected(TTC): This is the addition of Company Income Tax and Petroleum Profit Tax
over a given period of time

• Average Money in Circulation(AMC): This is the sum of Total Tax Collected as divided by the
number of years involved,that is the sample size

• Money: This is any object generally accepted as a medium of exchange and serves for settlement
of debt

CHAPTER TWO:2

2.0. REVIEW OF RELATED LITERATURE

2.1. OVERVIEW OF TAXATION

The Golden Home and High School Encyclopedia defined taxation as the action of a government to
collect compulsory payment to meet the cost of services provided to the citizens. There are other
non-tax sources of revenue as borrowing and foreign investment,but the greatest sources of
government income is taxation. To meet the costs of operation, government must levy various kinds
of taxes.

According to Odinge (2003:42),the chief source of revenue for most industrialized countries is the
income tax.

The income tax is levied on both individual/personal income and corporative profit. It is the job of
the tax assessor to determine the rate per the purpose of taxation on a progressive or develop
basics. This is higher rate for higher incomes.

Taxation method in the capitalist country (where individuals own and control the means of
production), is not the same as the communist country m(where state or government own and
control the means of production). This is because they have different economics and ways of paying
for social amenities.

In Nigeria,tax is levied by the tax authority of the Federal Government of Income Tax Management
Act 1961(ITMA) and subsequent amendment including the finance (miscellaneous provisions) decree
1987. The income tax year is known as the year of assessment (Ajakiaye,1999:28).

There are two relevant tax authority in Nigeria which includes the Board of Internal Revenue (BIR)
and the Federal Board of Inland Revenue (FBIR). The Board of Internal Revenue is responsible to the
State in which it is based. It deals with personal income tax matters and other forms of taxes like
sales tax, entertainment tax even capital transfer tax.

The Federal Board of Internal Revenue takes charge of Federal tax matter. It is only concerned with
company tax and petroleum profit tax.

According to Odusola (2003:16),since the establishment of taxation,a member of income tax acts and
decree have government the administration of income tax in Nigeria. This is the Income Tax
Management Act of 1961(ITMA) which deals with the assessment of all taxable persons and this
forms the basis on which the state Board Of Inland Revenue operates.

Government taxes the company's earnings and also make the stockholders ay personal income taxes
on the dividend received from the company,they advise that there should be out of company tax rate
in alternatively the dividend receives should some kind of tax credit for the taxes their company have
paid.

On the other hand,there are few who argue that company earnings should be taxed heavily,with the
bigger companies taxed at progressively higher rates. These people believe that if government collect
large/huge sum of money from the companies that it will be unnecessary to tax the individuals
heavily too.

According to these critics,heavy companies taxation will remedy the situation of heavy double
taxation AMAECHINA(2000:53)

2.2. DEVELOPMENT OF TAXATION IN NIGERIA

 Levies which could be regarded as taxes have been in existence in most part of the country much
earlier than the colonial period. Before the amalgamation 1914 by Lord Lougard,and before the
annexation of Lagos on 6th of August,1861 by a British forces under commander George Glover,the
native authorities and old Oyo, Benin,Sokoto and others have been levying taxes on their people for
the administrative and securities of their empties.

Apart from cash contribution which were compulsory, people were made to contribute a kind of
putting efforts to construct palaces,other public buildings and roads for their various kingdom.

Taxes were also paid on commodities like yam, tubers and other cash crops. Sanctions were
designed against defaulters (failure to fulfill an obligation) to ensure compliance.

However, the creation of the colony and protectorate of Southern Nigeria in 1906 by the colonial
masters enhanced social life of the inhabitants as job opportunities were created for them.

According to Ajakiaye (1999:27), prosperous trade in spirit development from which taxes were
collected in the form of import duties and custom duties was made. This is different from direct taxes
levied on personal income of inhabitants by local authority.

Therefore,as early as 1906,those form of modern taxation had been introduced in Southern Nigeria.
In the North, during this period,less reliance was placed on import duties as the inhabitants were not
rich as those in the Southern Nigeria and they could not import spirit and alcohol for consumption.

However,the native authority tax laws were already in full force and taxes were already levied on
personal income.

In addition,the Northern authorities collected duties from non-northern traders from their hinter
land(land immediately next to)who were also levied for tax on salt brought into the North. According
to Adebayo(1969:27), non-northern traders in the North were also to obtain license. The Southern
government also paid annually to the Northern Nigeria the share of revenue/income from import
duties attributable to them as they did not have direct link without the outside world on which to
collect import duties. The direct taxes ordinance was enacted in 1940 which stipulated(required as a
condition)the taxation on personal income for both North and South.

Direct taxation laws had been in existence in the North before the amalgamation in 1946.

Richards constitution established the regional councils which had powers to debate issues and pass
resolutions and advise the central legislative council which had power to make laws.

Sidney Philipson , financial secretary to the Nigeria Government was appointed to study and
recommend a fiscal system and revenue formula for Nigeria. Part of the assignment was the shifting
of the authorities to collect export duties,import duties and excise duties to the Federal Government
Authority while the regional authority was responsible for revenue from license, mining rate and so
on.

In 1939, Southern Nigeria was split into Eastern and Western region thereby allowing for separate
application of tax ordinance in the Western and Eastern region.
The mid-western region in August 1963 has been applying and interpreting it's tax laws. All these
existed until the Federal Government made tax in such a way that all region should pay common
taxes.

2.3 THE IMPORTANCE OF TAXATION

The importance of taxation can be best demonstrated by the excitement it generates both to
taxpayer's and the authorities in the three tiers of Government,the:

• The Local Government,

• The State and the;

•Federal Government

According to Okpe (1999:41),most tax payers however see taxpayer's however see tax as another
tool for the exploitation of the ordinance man by the government to feather their nest but the
Patriots regard taxation as a very vital machinery of nationhood without which the provisions of
social amenities by the state cannot be possible. Hence,the tax collected from all sources comes back
to the taxpayer's in form of social amenities provided for them.

Taxation is an all prevailing subject which affects the lives of nearly everybody and no major
accountancy legal problem can be satisfactorily solved without consideration of it's tax aspect.

Benjamin Franklin,a state man and a philosopher observed that in this world, "nothing is certain but
death and taxes".

Tax is also used to allocate resources for the production of social goods. Social goods are goods
whose benefits are not limited to the particular consumer who purchases it as in the case of private
goods. Though tax funds can be allocated or denied for the production of certain private goods.
These corrections are done through tax policies (policy means rule that guide and govern the thinking
of goals realization),Ola (1997:41)

Other forms of tax are used to alleviate the social burden of poverty on the poor. It may be achieved
by a tax transfer scheme which progressively taxes high income in order to provide some form of
subsidy to the low income earners. Under this,the rate of taxation increases with income. Thus,the
higher the income,the higher the percentage paid as tax.

The Nigeria taxation policy heavily taxed such luxury items as satellite dishes, Mercedes Benz cars
etc. Simultaneously,the import duties of Mass transit cars or spare parts for buses used for mass
transportation attract little or no tax in a bid to help the poor; according to Anyaawuocha (2001:48).

Taxation is also an instrument for the stabilization of the economy. This is done by directing taxation
policy towards achieving a socially acceptable rate of economic growth, maintaining a stable price
level ,and achieving full employment.
2.4. INTRODUCTION OF MONEY IN THE SYSTEM

Originally man was self-sufficient because he provided all the physiological needs such as food,
clothing and shelter for himself and for the members of his family and as such,there was no need for
money in the system. Hence,in a subsistence economy,there was no need for exchange.

In the Barter economy,there was exchange of goods for goods. In the system,no individual could
produce all that he needed.

The implications of this was the existence of surplus output and for exchange to take place ,there
was double coincidence of wants. The barter system had many disadvantages and difficulties. Money
was later introduced into the economic system and all the inherent problem in the barter economy
were eliminated because various things have been used as money. Any change in the subject used as
money were silver and gold.

Lewis (1984:42) gave a description on how gold was used as a medium of exchange. He wrote that
in the beginning there was gold and since there was only so much gold in the world, supply was
limited because people carried gold around and the value merely depended on the value of their
gold.

But gold was cumbersome to carry about even though it was better than most other money. It was
also dangerous to move around in quantities as it had a habit of not being where it was left before
you went back for it,due to its value. As a result of this, people began to leave their gold with the
goldsmith,who had necessary security arrangements to look after it.

Naturally,the goldsmiths gave receipt for gold deposited with them and owners often found it more
convenient to use these receipt to pay their bills rather than reclaiming their gold.

Clearly,these receipt were money since everybody had confidence in their value. Ultimately, some
of the goldsmiths stepped suiting and concentrated on the business of finance. They bank and their
receipts were called "Bank Note" (Lewis 1984:41)

I may at this point define what exactly money is, Lipsey has this to say about money. Traditionally in
economics, money has been defined as any generally accepted medium of exchange, anything that
will be accepted by virtually everyone in exchange for goods and services (Lipsey 1979:578).
Alternatively, money can be defined as anything which is generally accepted in a given society or
locality as a means of exchange and also serves for settlement of debt (Orjih 1976:1)

2.5 TYPES AND FUNCTIONS OF MONEY

2.5.1 COINS

A coin is nothing more than a definite amount of metal,it's weight and finances being guaranteed by
the official stamp of the issuing authority. In other words,this is a piece of metal or combination of
metals which is moulded into definite size,shape , weight,colour and fineness. Coins were the most
convenient for of money used,but there was always the danger that the issuing authority might make
them of less weight than they were reputed to be.
 Merchant in those days looked upon coins simply as a convenient means of handling quantities of
the previous metals and that were not to be deceived by such unscrupulous behavior(disregard),for
whenever the issuing authority resorted to debasement(practice of lowering the value of coins),the
value of the coins fails.

2.5.2. LEGAL TENDER

Legal tender money is that which the people accept as means of payment and in discharge of debt
because it has the authority of the government. Such money is accepted and compulsory by the
people. All money issued by the Central Bank of a Country e.g CBN(Central Bank of
Nigeria=Naira"N"),are legal tender in that country.

It is also called Fist Money. The most commonly used means of payments,the cheque is not legal
tender nor a bill of exchange, postal orders or money order because they are short-term.

2.5.3. CONVERTIBLE AND INCONVERTIBLE

Convertible money is that which is internationally acceptable as a means of exchange and for
settlement of indebtedness. If a bank note can be exchange on demand for gold or silver coins, it is
said to be convertible.

Inconvertible paper is the final stage in the development of bank note so long as it cannot be used
to purchase what people want to buy,it is not necessary for the medium of exchange to be valuable
itself.

2.5.4. BANK DEPOSIT SUBJECT TO WITHDRAWAL BY CHEQUE

These are deposit made by bank customer in their various accounts. The deposits are made in the
savings account, current deposit accounts and the fixed deposits accounts.

The cheques as a means of payment is most widely used in Britain and the United States. The use of
cheque is however rapidly expanding now in most countries. In order to obtain the right to draw a
cheque,it is necessary to open a current account at a bank.

2.5.5. OTHER TYPES OF MONEY

Other types of money includes:

• PURE MONEY

This is a class of money that is made up of combination of bank note,coins and bank deposits.

• FIDUCIARY ISSUES
 They are money that are issued and are not backed up or supported by gold or other wealth of the
nation. There are issued based on trust and confidence which people have on government ability to
redeem the money.

• QUASI OR NEAR MONEY

These refers to those asset that can be easily converted to cash e.g gold certificate , certificate of
deposit ,

2.6. FUNCTION OF MONEY

The importance of money lies in the functions which they are capable of performing in the
economic. They are:

• MEDIUM OF EXCHANGE

This is the primary function of money because its facilitates the exchange of goods and services
because people exchange the goods and services they produce for money and than use the money to
buy other goods and services they want . This also enabled man to overcome the problem of double
coincidence of associated with trade by barter or barter economy.

• STORE OF VALUE

Valuable items that are not very durable cannot stand the test of time especially when they are
used as means of exchange. Under the barter system, article of trade are easily perishable and
cannot be stored for future use or purpose.

• MEANS OF DEFERRED PAYMENT

Money serves as standard of future payment because it makes it possible for people to enter into
contract, such as lending, borrowing and enjoyment of fixed amount of money payable at s future
date. Money has made taking and repayment of loans very simple. The exchange rate problem
makes this impossible under the barter system.

• UNIT OF ACCOUNTS

Money serves as the unit of account in terms of which the value of goods and services are measured
and recorded in monetary units in the balance sheet or balance of payments etc

• MONEY GIVES BARGAINING POWER

The buyer/holder of money is free to bargain with as many seller as possible if he wants to buy
some products. This is because he is assured that all sellers will be ready to accept money from
him/her in exchange for their products. Soo therefore, he or she buys from the seller who is ready or
willing to sell at his own convenient price(cheapest price).

• THE MOST LIQUID ASSET

Individuals and business units hold part of their wealth in the form of cash.
• MONEY AS INFLUENCE ON PRICE

In a free market economy, money through the price affect and determines the allocation of goods
and services. The economic market system is where supply and demand dictate prices,
production,and distribution of goods and services. The economic questions what,how and for whom
are answered by money and price mechanism or rate.

2.7. CHARACTERISTICS OF MONEY

For anything to perform the functions of money effectively,it must possess the following attribution
or qualities.

• GENERAL ACCEPTABILITY

It must be acceptable by all economic agents in the country in which it is used as payment for goods
and services and in settling debts.

• DIVISIBILITY

It should be available or divided into smaller units to make transactions of various amount.

• DURABILITY

It should be able to last for a long time without losing its value. This is the reason why high quality
papers are used to print or mint paper currency and precious metals are used in minting coins.

• PORTABILITY

Money should be convenient to carry about for easy transfer to other people during transaction.

• HOMOGENEITY

It refers to the absence of money illusion (fake)

• RELATIVE SCARCITY

It must be unique,not something that can be found easily anyway.

2.8. DEFINITION OF TAX

The word 'tax' connote many definition varies with each individual taxpayer. In order to appreciate
what the word suggest, it will be necessary to consider the views of some writers.

Though tax had been defined in many ways by different authors but in real sense,the different
definition suggest the same thing.

According to JOHN C. WINFREY,"Tax is regarded as a compulsory charge imposed by public authority

(Federal, State and Local Government)" for the general purpose of government. It is a levy regularly
imposed and regarded as contribution to the general pool from which most government
expenditures.

According to A. L. BUHARI (1993),defined tax as"a compulsory contribution from individuals and/or
business organization for the purpose of financial government expenditures". According
to him, government of almost every country engages in number of activities which requires the
expenditures of funds. In order for government to be able to undertake most of these activities, it
raises fund through taxation.

The views of AGYEI is also worthy of note. He consider taxation to mean "the transfer of resources
from the private sector to the public sector in order to accomplish some of a nation's economic and
social goals".

2.8.1. NATURE OF TAX

Tax are characterized by the following attributes

• Taxes are withdrawn from households and firms without a guarantee that services are meant to be
available to the payer. However in a democratic society, the government owes a social duty to
provide the payers with essential amenities.

• The payment of tax is not a voluntary decisions. It is an obligation imposed on all taxable bodies
(individuals and firms) by the government.

• The government simply consider what is appropriate in the circumstances and imposes this on the
people. However, situation exists where representative of the payers may be consulted before fixing
the amount payable to tax.

• Tax is not punitive(punishment). Even though the payment of taxes embodies an element of
compulsion,it is not a means of punishing the payers.

2.9. QUALITIES OF A GOOD TAX SYSTEM

A good tax system is expected to exhibit some attributes and amongst such attributes includes:

• FLEXIBILITY

A good tax system should be flexible so that the amount payable as tax can be adjusted (increase or
decrease) according to the requirements of the government.

• PRODUCTIVE

The tax structure should facilitates the act of stabilization and growth objectives. In other words,
any good tax system should always aim at having effect on the general economy,well being of
society.

• CERTAINTY
 The reason behind this principle is that tax which each individual is bound to pay ought to be certain
and not arbitrary(self decision). This means that tax payers must know the amount he should pay as
tax, the time to pay,the manner or means for payment and where to pay.

• CONVENIENCE

Taxes should be levied in such a way that the taxpayer will not find it difficult or unsuitable.

2.9.1. USING TAX SYSTEM TO BREACH VICIOUS CIRCLE OF POVERTY IN NIGERIA

A well-designed tax system can break the vicious circle of poverty in Nigeria by generating revenue
to fund essentials social services, investing in infrastructure etc. This can be achieved through
combination of reforms including simplifying tax compliance.

There are different ways of using tax system to breach vicious circle,there are :

• GENERATING REVENUE FOR SOCIAL SERVICES

Tax revenue is crucial for funding public services like education, health care, and social welfare
programs,which are essential for lifting people out of poverty.

• INVESTMENT IN INFRASTRUCTURE

Infrastructure development such as roads, electricity and telecommunication can boast

productivity, create jobs(job opportunities/employment) and reduces poverty by improving access to
essential services.

• ADDRESSING TAX EVASION

Tax system strengthen enforcement and reduces tax evasion can increase the government ability to
collect revenue and invest in poverty reduction program.

Therefore,tax system refers to the set of principles and policies government uses to collect revenue
from individuals and businesses.

2.10. ANALYSIS OF VARIOUS TYPES OF TAXES AND THEIR CLASSIFICATION

According to EZEANYAGU (1992:30), a useful means of grouping taxes by economist is according to

whether they are progressive, proportional or regressive and these are the system of tax.

• Progressive taxes are those which are so designed that the high income earners (rich) pay more tax
than the lower income earners (poor).

• Under Proportional taxes,all tax payers pay the same percentage irrespective of the level of
income.

• A tax is said to be Regressive when tax rate decreases and income increases.
 Alternatively,taxes can be grouped into two main classes.

There are Direct and Indirect taxes

• DIRECT TAXES

These are taxes levied directly on income of individuals and business firms by the government.

Direct taxes in Nigeria are as follows :

• Personal income tax

• Company tax

• Petroleum profit tax

• Capital gains tax

• Capital transfer tax

• PERSONAL INCOME TAX

This is the tax levied on the income of individuals. The law governing the administration of this tax
in Nigeria provided in the Income Tax Management Act (ITMA) 1961 and the Personal Income Tax Act
(PITA) 1961. The deduction of tax in Personal Income Tax is achieved by means of the Pay-As-You-
Earn (PAYE) system.

• COMPANY TAX

This is a levy imposed on the profits of business organization or corporate bodies. Company income
tax is administered by the Federal Board Of Inland Revenue(FBIR). Before a company is assessed on
the amount of tax payable, the company must keep proper books of account and the board reserves
the right to direct a company to maintain proper records for the purpose of inconvenience tax
assessment,and such accounting records are sent to the board including the returns for the periods.
And it prepares an assessment list showing among other things,the names and the address of the
company,the amount of total profits of the company,the amount of the tax payable.

• PETROLEUM PROFIT TAX

This is special type of tax which was introduced in Nigeria in1959,the tax had become an important
source of government revenue because of the special position which petroleum occupies in the
Nigeria economy.
 This tax is imposed and levied on only oil companies. In Nigeria, petroleum profit tax is governed by
Petroleum Profit Tax Act 1959 as amended (up to 1979)

• CAPITAL GAINS TAX

A capital gains tax as the name implies ,is a tax resulting from the sale of capital assets and it is
imposed on both individuals and companies.

OLA (1995:38) declares that in Nigeria, capital gains tax is regulated by the Capital Gains Tax Act
1967 as amended by the Finance Miscellaneous (Taxations provisions) Act 1972.

• CAPITAL TRANSFER TAX

When a person dies, government usually imposes a tax on his estate,if any , before the estate could
be taken over by relative or those eligible. In such,taxes may even be paid when the transfer is made
prior to the death of the person transferring the property, Capital Transfer was introduced into
Nigeria in 1979.

ADVANTAGES OF DIRECT TAXES

• Tax payers are certain of how to pay and where to pay tax.

• It is s simple and convenient to pay

• Direct taxes are cheap and easy to collect as a good example is the PAYE (Pay-As-You-Earn) system.

DISADVANTAGES OF DIRECT TAXES

• It leads to tax evasion by filling wrong tax returns. And this is done to reduce the amount of tax to
be paid

• It discourages production in companies after deducting tax from the profit.

• It is not imposed on all not like the indirect taxes.

INDIRECT TAXES

These are taxes levied on goods and services and it's a tax that the burden of which is not expected
to fall upon the person's who actually pays it. Custom duties,Excise duties (now abolished),
Entertainment tax, Sales tax, Purchase tax are all notable examples of indirect tax.

Below are detailed discussion on them :

• CUSTOM DUTIES

Custom duties are usually subdivided into; Import and Export duties.

° IMPORT DUTIES
 Import duties sometimes called tariffs are taxes levied on goods imported into a country.

An import duty has the effect of increasing the price of such commodities in the importing country.

° EXPORT DUTIES

Export duties are tax levied on goods produced for exports. The tax yields revenue for the
government but less to loss of foreign exchange earning.

• PURCHASE TAX

Purchase tax is imposed on selected goods such as beer, cigarettes, motor vehicle among others.
The imposition of purchase tax in Nigeria became operatives as from 1st April,1978.

• EXERCISE DUTIES

These are levied on goods manufactured without the country whether for export or for local
consumption;such goods include cigarettes,beer,matches , cement.

• ENTERTAINMENT TAX

This tax applies to situation where member of the public pay some fees to enjoy some form of
entertainment. Ticket for admission into the venue of the entertainment are printed by a
government agency and sold to proprietor of such places. Activities taxed in this respect include
cinema or films shows, exhibitions, football matches etc.

• SALES TAX

Sales tax is levied in the sales of commodities either at the retail or wholesale level and is
dependent on the types of and quality of goods sold.

ADVANTAGES OF INDIRECT TAX

• Indirect taxes are fairly easy to collect

• Indirect tax can be used by the government t9 discourages the consumption of certain goods for
instance, increasing the rate of tax on tobacco or alcohol will lead to rise in their price and thus, less
demand for them by consumer.
 DISADVANTAGES OF INDIRECT TAX

• It may leads to inflation,when tax is imposed on goods and services,it will leads to increase in price.

• It affects the level of production, increase in price as a result of increase in tax will affects demand
for goods. When demands fall, production will fall.

2.11. PROBLEMS OF TAXATION

This sector will consider the various problems encountered by the taxpayer's and tax official
(authorities).

• EVASION AND AVOIDANCE

Evasion is an illegal act (otherwise a criminal offence), avoidance is not. Not paying tax and filling
wrong amount has increased the quantity of money in circulation in the hands of tax payers because
their income is reduced on tax.

• POVERTY

Poverty also acts as an inhibiting (hinderance) factors to tax collection efforts. A good number of
taxpayer's are so poor that they hardly have enough to spare as tax.

• INEFFICIENCY OF TAX ADMINISTRATION

This is an even more serious constraints to effective taxation. In the word of ARTHUR LEWI (1996) "If
tax administration is effective, tax even from self employed persons in Nigeria will double without an
increase in the rate".

• IGNORANCE

Lack of awareness of the part of tax payers is also a barrier. Many taxpayers,the uneducated ones in
particular do not know much about the essence of tax, how the tax operates,how much to pay and
where such payments are made, this contribute to their low level of compliance.

• LACK OF WORKING FACILITIES (EQUIPMENT)

In many tax offices,there are no equipment that can be used to speed up tax collection. Due to lack
of such devices as computer,the processing of returns and other documents are done my manual
method which brings about delays and the likelihood of errors. This adversely affects the quantity of
money the government could get through tax.

2.12. EFFECTIVENESS OF TAXATION AS AN INSTRUMENT FOR THE CONTROL OF MONEY IN

CIRCULATION.

2.12.1. TO CHECK INFLATION

 LIPSEY (1999:46),note that taxation can be used to center inflation. Inflation is the persistent rise in
the price of goods and services and fall in the value of money over time.

This is a period when there is too much money in circulation. This result to a continuous and
persistent fall in the value of money, hence, the purchasing power(i.e what money can buy)
decreases.

The government might decide to check the inflationary trends by increasing taxes levied and
reducing government expenditures.

Inflation is not ideal for a developing economy. Increase in tax helps to check inflation and reduces
the quantity of money in circulation.

2.12.2. TO CHECK DEFLATION

Deflation refers to the continuous and persistent fall in the general price and a rise in the value of
money. Taxation are normally reduced during deflationary periods so that less money will be spent
as tax,thus the quantity of money in circulation will be controlled. Taxes should not be allowed to be
high during deflationary period since it can only help to aggravate/worsen the condition. Decrease in
tax helps to check deflation and increases the quantity of money in circulation.

2.12.3. PERSONAL INCOME TAX

This kind of tax is levied on the Income of the individual. After all taxes have been deducted from an
individuals gross income,what remains is call Disposable Income"".

The disposable income becomes the take-home income for an individuals which such tax payer is
free to spend on goods and services.

An increase in tax reduces the take-home package of an individual,hence reduce money in

circulation. On the other hand,a reduction in tax will push up the disposable income.

• CORPORATION TAX

This is tax levied on the profits of companies are given allowance for capital expenditure before
calculating profits. Higher corporation profits tax,will reduce the quantity of money in circulation in
the hand of the corporations.

2.13. AGENCIES OF TAX ADMINISTRATIONS IN NIGERIA AND THEIR TAX COLLECTED.

The main bodies recognized by law as the tax authorities in Nigeria are the Federal Board Of Inland
Revenue (FBIR), State Board Of Internal Revenue (SBIR), Joint Tax Board (JTB), and Local Government
Revenue Committee, also have their levy collected.
 A list of taxes and levies for collection by the three tiers of government has been approved by the
Joint Tax Board (JTB) as follows:

• TAXES COLLECTIBLE BY THE FEDERAL GOVERNMENT

° Companies Income Tax

° Petroleum Profit Tax

° Value Added Tax

° Capital Gains Tax - Abuja residents and corporate bodies

° Stamp Duty involving a corporate entity

° Personal Income Tax in respect of;

° Armed Forces Personnel

° Residents of Abuja FCT

• TAXES/LEVIES COLLECTED BY STATE GOVERNMENT

° Personal Income Tax

° Pay-As-You-Earn (PAYE)

° Direct taxation (self assessment)

° Withholding tax (individuals only)

° Capital Gain Tax

° Stamp Duties on instrument

° Pools betting, Lotteries,and Casino Tax

° Road Taxes

° Business Premises Registration (Corporate Affairs Commission) CAC

° Right of Occupancy of land e.g C of O

• TAXES/LEVIES COLLECTED BY LOCAL GOVERNMENT

° Shops and Kiosks Rate

° On and off Liquor License (Alcohol)

° Slaughter Slab Fees

 ° Marriage, Birth and Death Registration Fees

° Tenement Rate (Development Property)

° Customary Burial Ground Permit Fee

° Religious Place Establishment Permits

° Street Naming Registration Fee(Excluding State Capital)

° Sign Board Permit Fee

° Radio and Tv License Fee

2.14. TAXATION EFFECT ON CONSUMPTION, SAVINGS AND INVESTMENT.

According to NWABAH (1995:65),when the government levies higher tax on the income of
persons/individuals,the result is a reduction in the individuals disposable income (said to be leftovers
after the deduction of tax in income),the result is a reduction in the individuals level of consumption.

An individual will be forced to consume a little in other to save more to make reasonable
investment. Conversely,when there is reduced income tax,such individuals will be forced to consume
more (since he has more money at disposal) and save less thereby making minimal investment.

This is because the tendency to consume increases with more money at disposal given a reduced
tax rate.

Here are the definition of Consumption, Savings and Investment

• CONSUMPTION

This refers to the use of goods and services by individuals and households to fulfill their needs and
wants.

• SAVINGS

This refers to the portion of income kept,that is not spent on current consumption but is set aside
for future use/purpose,or unforeseen circumstances/unexpected events.

• INVESTMENT

This refers to the expenditure on capital goods with the aim and objectives of generating future
income.

2.14.1. EFFECT OF TAXATION ON SAVINGS

Taxation can significantly impact savings particularly in the context of investment returns, reducing
disposable income and the after-tax returns.
 How taxes can discourage savings

• Income taxes - high income tax can reduce disposable income,make it difficult for individuals to
save.

• Indirect rate - change in interest rate can affect savings,as higher rates of tax,the lower rate of
savings and this may discourages savings.

2.14.2. EFFECTS OF TAXATION ON CONSUMPTION

Taxation, particularly consumption taxes like Sales Tax or Value Added Tax (VAT),on significantly
impact consumption patterns. Higher taxes especially on goods and services,lead to increased price
on commodities.

How taxes can discourage Consumption

• Increase in price of commodities(goods and services)- consumption taxes like VAT are levied on
goods and services,which in turn can raise price of commodity for consumers.

• Reduced demand - the price increasement can lead to a decrease in consumer

demand(purchase/buying) for those goods and services

• Consumers may choose to reduce their spending on the taxed commodities or switch to less
expensive commodities.

2.14.3. EFFECT OF TAXATION ON INVESTMENT

Taxation can significantly impact investment decisions and outcomes.

How taxes can discourage investment

• Reduced returns - Taxes on investment income (e g dividends) decrease overall returns on

investment.

• Tax policies affects the investment levels and allocation

2.15. THE INCIDENCE OF TAXATION AS IT AFFECTS MONEY IN CIRCULATION

AJAYI (2002:30) note that once a tax is shifted,there is a final or ultimate placement of the tax
burden and the final placement of the burden is what is known as the incidence of tax.

The incidence of a tax refers to how the real burden of a tax is distributed among persons in a
country.

In other words,if the incidence of tax is so pressing on the individual,it will lower the quantity of
money in his hands.
 In the case of direct tax e.g income tax,the incidence or the burden is always on the person who
receives the income. The income tax cannot be passed to another person,other than the person who
receives the income since the amount of income received is being reduced by the fall of amount in
tax.

The income tax is high ,it means that the individual has to pay greater percentage of hue income as
tax. This is attributable to Personal Income Tax, Company/Corporate Tax and depending on the
direction of tax and given government objective,the quantity of money in the hands of individual or
companies is being affected.

AMAECHINA (2000:64) note that when the tax is of indirect in nature e.g Sales tax, Purchase tax,the
burden will either fall on the buyer or seller or maybe shared between them depending on the
particular commodity demanded. The truth is when a commodity is taxed,what the seller will do is to
increase the level of price on that particular commodity,and the buyer will buy it without knowing
that he/she has hereby beared the burden of such tax.

In this case,more money will be spent by the buyer are tax and they reduces the total amount of
money at his disposal (leftovers after deducting tax).

2.16. IMPORTANCE OF TAXATION ON CONTROL OF MONEY IN CIRCULATION.

Taxation plays a crucial role in controlling money by influencing the economy's spending,
investment and overall economic activity.

By collecting taxes, government can reduce excess spending,to check inflation pressures,and ensure
the availability of funding for public services and infrastructure.

Here are the importance of taxation in controlling money.

• MANAGING INFLATION

Taxation can help curb inflation by reducing the amount of money available for spending. If the
government increases taxes,it can reduce the amount of money circulating in the economy,
potentially slowing down inflation.

• ECONOMIC STABILITY

Taxation can help to create more stable economic environment helping it to stabilize during
fluctuations.

• MONETARY POLICY COMPLEMENTARY

Tax policies can be used to influence money supply and interest rate. For future example,if the
Central Bank wants to reduce the money supply to combat inflation,it can work with the government
to increase taxes to further reduce spending.

• REDUCES BUDGET DEFICITS AND BORROWING

 Tax helps the government finance it's activities without excessive borrowing. Reducing borrowing
helps avoid injecting more money into the economy, which would other wise increase the money
supply and worsen inflation.

2.17. USEFULNESS OF TAX IDENTIFICATION NUMBER (TIN) ON TAXATION IN NIGERIA.

In Nigeria,a Tax Identification Number (TIN) is a unique number issued by the Federal Inland
Revenue Service (FIRS) or State Board Of Internal Revenue (SBIR) to identify individuals and
businesses for tax purposes.

It is mandatory and compulsory for anyone earning or generating income in Nigeria, including those
who are employed or those who owns business,to obtain a Tax Identification Number (TIN) before
filling their tax or payment.

• USEFULNESS OF TIN IN NIGERIA

They are different uses of Tax Identification Number in Nigeria. These are:

° To identify taxpayer.

° Helps in tracking their financial activities.

° Prevent tax evasion/avoidance and fraud.

° Facilitates access to Tax Clearance Certificate like having access to government tenders, getting
loans from financial institutions etc.

° Business registration and operations like the Corporate Affairs Commission (CAC) automatically
assigns a TIN upon business registration.

2.18. SOFTWARE USED FOR TAX COLLECTION IN ORGANIZATION.

Software refers to the set of instructions, guidelines,data or programs used to operate some specific
electronic device like computer, laptop etc. and execute specific tasks.

There are different software used in tax collection.

There are:

• SAGE

This is a popular accounting software used by businesses of all sizes to manage their finances
including taxation. It simplifies tasks like invoicing,expense tracking,and tax calculations, helping
businesses stay complaint and make informed financial decisions.

• QUICK BOOK
 This is commonly used for managing various financial aspects of a business, including tax-related
tasks, though it's not specifically designed as a dedicated tax collection system.

It helps in automating tasks like sales tax calculations, invoice generation , and expense
tracking,which are essential for tax management.

This particular software helps businesses manage taxes, including Value Added Tax (VAT) and
Corporate taxes,with features like automated tax calculations and fillings.

• TAX PAYER MANAGEMENT PORTAL

This is a platform developed by the Federal Inland Revenue Service (FIRS) for tax compliance,
registration and payment of tax by firms, individuals,or corporate bodies.

• TAX PRO MAX

This is one of the tax management portal developed by the Federal Inland Revenue Service (FIRS).
The goal of tax pro max is to simplify the tax system and encourage compliance.

This software gives room and allows tax payers to:

° File tax returns

° Make tax payment

° Manage tax compliance

The tax pro max aims to simplify tax processes,improve efficiency,and enhance revenue collection.

• TURBO TAX

This software is used to prepare tax. It is designed to help individuals and businesses in the
following ways:

° Prepare and fill tax returns

° Calculate tax liabilities

• TALLY

This is an accounting software used globally,it's not specifically designed for tax collection,but rather
for managing a company's financial records, including payroll and taxes.

This particular software helps with tax calculation and managing financial data related to taxes.

2.19. SUMMARY OF LITERATURE REVIEW

This section summarizes the review of related literature used in the study. The works of other
scholars, researchers,authors and students that relates to the Effectiveness of Taxation as an
instrument for the control of money in circulation is summarized in this section of the research work.
 The review of related literature found that tax is"a compulsory contribution from r and/or business
organizations for the purpose of financing government expenditures".

In Nigeria,tax is levied by the tax authority under the Federal Government Income Tax Management
Act (ITMA) 1961. Government taxes the company's earnings and also make the stockholders pay
personal income taxes on the dividends received from the company.

A good tax system is one that is productive,economical,have equality and also flexible so that the
amount payable as tax can be adjusted(increase or decrease) according to the requiring the
government.

A useful means of grouping taxes by economist is according to whether they are progressive,
proportional or regressive.

Direct taxes,in very broad terms are those taxes levied directly on an individuals and businesses
firms. Direct taxes in Nigeria includes Personal Income Tax, Company Tax, Petroleum Profit Tax,
Capital Gains Tax.

And the Indirect taxes on the other hand,are levied on goods and services. Indirect taxes in Nigeria
includes Custom Duties,Excise Duties (now abolished), Entertainment Tax, Sales Tax, Purchase tax
etc.

CHAPTER THREE:3

3.0. RESEARCH METHODOLOGY

3.1. INTRODUCTION

The aim of this chapter is to discuss and design a descriptive survey research carried out. The design
helps in collecting, analysing,and interpretation data from a selected sample to understand the
Effectiveness of Taxation as a Tool or an Instrument for Controlling Money in Circulation.

The chapter contains source of data , instrument used for data collection, problem encountered,
presentation of data and method of data analysis used

3.2. AREA OF THE STUDY

The study is carried out at the State Board Of Internal Revenue, Owode Egba, Ogun State.
 The Board is responsible for the collection and administration of taxes in the area, including
Personal Income Tax (PIT), Business Premises Levy, Company Income Tax,and other forms of state
taxes.

Owode Egba was chosen as the study area/case study , because it represents a fast- growing
commercial center where taxation plays a significant role in regulating financial activities and money
flow within the local economy.

3.3. POPULATION OF THE STUDY

The population of this study comprises of:

• Staff of the State Board Of Internal Revenue, Owode Egba

• Registered tax payers (Individuals and companies)

• Others, accountant, auditors,and business owners.

These groups were chosen and selected because they are directly involved in or affected by the
implementation and administration of taxation policies

3.4. SAMPLE SIZE AND SAMPLING TECHNIQUES

From this population,a sample size of 200 respondents will be selected as the sample size for the
study.

The breakdown is as follows:

• 50 Staff members of the State Board Of Internal Revenue, Owode Egba, Ogun State.

• 150 Taxpayer's and business owners within Owode Egba, Ogun State.

The simple random sampling technique will be used to select respondents to ensure fairness and
minimize bias. This method also allows every member of the population an equal opportunity to be
chosen for the study.

3.5. SOURCES OF DATA

The data for this study will be gathered from Two (2) main sources:

• PRIMARY DATA

Information will be gathered and obtained directly from respondents through the administration of
structured questionnaires and oral interview

• SECONDARY DATA
 These includes data from textbooks, journals,reports, govern publications,and previous research
works related to taxation and monetary control.

3.6. RESEARCH INSTRUMENT

The main instrument for data collection is the structured questionnaires,which will be/which was
designed to obtain information relevant to the research objectives.

The questionnaires will be divided into two sections:

• SECTION A:

Contains questions on respondents demographic information

• SECTION B:

Focuses on questions relating to the Effectiveness of Taxation as a tool for the controlling money in
circulation.

The questionnaires will be based on a free-point likert scale,ranging from Strongly Agree(5) to
Strongly Disagree (1).

3.7. METHOD OF DATA COLLECTION

The questionnaires were personally distributed to the selected respondents at the State Board Of
Internal Revenue (SBIR) and other designated places within Owode Egba.

Also,short interview (oral communication with respondents)was also conducted to supplement

questionnaire responses though the interviews conducted to seven(7) respondents who responded
well to the questions asked,but other did not because they thought they have no financial
benefit,Soo they ignored.

The approach of questionnaire and interview will ensure a high response rate and the collection of
accurate data.

3.8. METHOD OF DATA ANALYSIS

Data collected was analysed using descriptive descriptive statistical tools such as frequency
distribution tables, percentages,and mean scores to summarize responses.

3.8.1. DESCRIPTIVE STATISTICAL TOOLS

Descriptive statistical tools are used to organize, summarize,and present the raw data collected
from respondents in a meaningful way.

In this study, descriptive statistics was used and employed to analyze the responses obtained from
the staff of the State Board Of Internal Revenue, Owode Egba, registered taxpayer,and business
owners.
 The descriptive statistical tools that was used includes:

• FREQUENCY DISTRIBUTION:

This will be used to show how often each response occurs for the different items in the
questionnaire.

For example,it will display the number of respondents who "Strongly

Agree","Agree","Undecided","Disagree",or "Strongly Disagree" with each statement on taxation and
money control.

• PERCENTAGE (%):

Percentage will be calculated to show the proportion of respondents giving particular responses.
This helps in making comparisons between different categories (e g, Male vs Female respondents,
taxpayer vs tax official).

• MEAN (AVERAGE):

The mean score will be computed for likert-scale questions (e.g; Statement measuring Effectiveness,
compliance,and challenges) to determine the general tendency or average opinion of respondents.

MEAN= summation (F) divided by (N)

• TABLES AND CHARTS:

Results from the frequency and percentage analysed was presented using tables to make
interpretation clearer and more visual