IMPACT OF INFLATION ON THE TAXATION OF CAPITAL GAIN (2000-2015)

CHAPTER ONE

INTRODUCTION

Background to the study

Taxation is a compulsory levy imposed by the government on the incomes of taxpayers in a geographical territory in order to defray the expenses of governance. This implies that anybody that generates income must compulsorily pay taxes. There are different types of taxation. These include the personal income tax, companies income tax, petroleum profit tax, value added tax and the capital gains tax. Recently, the issue of taxation on capital gains in the Nigerian capital market has come to the fore (Makin, 2010). Government, from time to time, has the responsibility of reviewing the tax position as a component of the subsisting fiscal policy for the purpose of meeting given objectives considering the level of inflation in the country (Hummel, 2007).

Taxation of capital gainsmeans a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property (Glahn, 1996). Not all countries implement taxation of capital gains and most have different rates of taxation for individuals and corporations.

Regarding capital gains, an example of a popular and liquid asset, national and state legislation often has a large array of fiscal obligations that must be respected. Taxes are charged by the state over the transactions, dividends and capital gains on the stock market. However, these fiscal obligations may vary from jurisdiction to jurisdiction. Although, taxation on capital gains are a tax on the profit obtained from a disposal or exchange of certain kinds of assets. In Nigeria, taxation on capital gain is 10% of the profits from the sale of the qualifying assets. It is recognized in law under the Capital Gains Tax Act. Generally, Tax is a financial issue and its payment is a civil duty. It is the imposition of a financial burden for the government on individual firm and companies. In general based, the word tax means any contribution imposed by the government upon individual and companies for the use of government to provide facilities or services as rendered by the state. It is not a voluntary payment or donation but an enforced contribution made on the pronouncement or directive of legislative authorities (Herderson, 1999). Taxation is also greatly influenced by inflation.

Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time (Barro, 1992). When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time. The opposite of inflation is deflation.

Inflation affects economies in various positive and negative ways. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future (Barro, 1992). Positive effects include reducing the real burden of public and private debt, keeping nominal interest rates above zero so that central banks can adjust interest rates to stabilize the economy, and reducing unemployment due to nominal wage rigidityInflation distorts all aspects of the taxation of personal income but isparticularly harsh on the taxation of capital gains. When corporate stockor any other asset is sold, current law requires that a capital gains tax bepaid on the entire difference between the selling price and the originalcost even though much of that nominal gain only offsets a general rise inthe prices of consumer goods and services. Taxing nominal gains in thisway very substantially increases the effective tax rate on real price-adjustedcapital gains. Indeed, many individuals pay a substantial capitalgains tax even though, when adjustment is made for the change in theprice level, they actually receive less from their sale than they hadoriginally paid.

Statement of the problem

Several research works has been described as arguments from a very narrow position based on the fact that it prays for government policy on tax to facilitate reduction in taxation on capital gains because of the inflation in some countries of the world including Nigeria. High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation. Uncertainty about the future purchasing power of money discourages investment and saving. Inflation can also impose hidden tax increases, for instance, an increase in the taxation of capital gain. It is therefore the purpose of this study to examine the various impacts of inflation on the taxation of capital gains with a view of proffering suggestions for appropriate policy initiatives.

Objectives of the study

The following are the objectives of this study:

To examine the trends in taxation of capital gains between 2000 and 2015. To examine the impact of inflation on taxation between 2000 and 2015. To examine the impact of inflation on taxation of capital gains between 2000 and 2015.

Research hypothesis

There is no significant difference in the trends of capital gains taxation between 2000 and 2015 There is no significant relationship between inflation and taxation between 2000 and 2015 There is no significant relationship between inflation and taxation of capital gains between 2000 and 2015

Significance of the study

The following are the significance of this study:

Findings from this study will provide a comprehensive framework and guide for stakeholders in business sector as regards impact of inflation on the taxation of capital gains. It will also reveal the trends in taxation and how inflation has distorted the process. This research will be a contribution to the body of literature in the area of memorandum of understanding MOU as an instrument in maintaining relationship between a company and the host communities, thereby constituting the empirical literature for future research in the subject area.

Scope and delimitation of the study

This study is delimited to the impact of inflation on the taxation of capital gains in Nigeria between 2000 and 2015. It will also cover the trends in inflation and its effects on taxation within the years under study.

Definition of terms

Inflation: a general increase in prices and fall in the purchasing value of money

Fiscal policy: is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy

Tax: a compulsory contribution to state revenue, levied by the government on workers' income and business profits or added to the cost of some goods, services, and transactions.

Bond: a debt investment in which an investor loans money to an entity

Stocks: the capital raised by a business or corporation through the issue and subscription of shares

Capital gain: a profit from the sale of property or of an investment

References

Barro, R.J. (1997). Macroeconomics. Cambridge, Mass: MIT Press. p. 895.ISBN 0-262-02436-5.

Henderson, D.R. (1999). "Does Growth Cause Inflation?".Cato Policy Report. 21 (6 September 18, 2012)./2011/01/02/business/20110102-metrics-graphic.html "In Investing, It’s When You Start And When You Finish"], New York Times, January 2, 2012

Hummel, J.R. (2007) "Death and Taxes, Including Inflation: the Public versus Economists" (January 2007).[1] p. 56

Makin J. (2010)."Bernanke Battles U.S. Deflation Threat" (PDF).AEI.

Richard von Glahn (1996). Fountain of Fortune: Money and Monetary Policy in China, 1000–1700. University of California Press. p. 48.