Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.4, No.19, 2013 176 Taxation And National Development Prince C. Nwakanma (Ph.D.) University of Port Harcourt, Nigeria E-mail: nwakanma5@yahoo.com Kelechi C. Nnamdi (Corresponding Author) University of Port Harcourt, Nigeria E-mail: donkc2004@yahoo.com ABSTRACT The main objective of this paper is to investigate taxation and national development using a small macro econometric model estimated for 1970-2010. Based on the least squares methodology, we specified a lin-log model of Human Development Index as a proxy for national development. An important finding was that taxation has a very positive impact on national development of Nigeria, especially in its socio-economic contribution since the 1970’s. The findings show that Petroleum Profit Tax, Company Income Tax and Excise Tax respectively exhibit a positive relationship with the level of national development. Also, a negative relationship exists between corporate tax and Human Development Index. The Johansen and Juselius (1988) maximum likelihood procedure shows that a long-run relationship exists among the variables. We recommend a developed federal fiscal system that could guarantee the full potential of taxation in achieving developmental targets. 1. Introduction Taxation is of tremendous importance to national development. Taxes are normally the vehicles for driving developmental projects and are imperative to actualization of the current Millennium Development Goals (MDGs) in Nigeria. It is therefore correct to state that the national development can be affected by fiscal policy instrument of taxation. Perhaps, that is why Ajie et al (2008) defined taxation as the transfer of resources from the private to the public sector in order to accomplish some of the nation’s economic and social goals. Thus, the NEEDS (2004) document in its tax reform agenda stated that taxation and fiscal policy generally will be pro-poor, and used as an instrument for reducing high income disparities, as well as provide incentives for investment and productivity growth. Although, Adelman (1999) confirms that reformed tax systems must also place greater reliance on direct rather than indirect, trade-related taxes, otherwise, the needs of tax collection will conflict with the needs to ultimately foster internationally competitive domestic industries. However, literature abound on economic factors which impinge on the national development of Nigeria, they include unequal distribution of resources (revenue), poverty, inflationary pressure, high population growth, low human development, corruption, social injustice, political instability, ethno-religious crisis, unemployment, lack of basic infrastructure, uncompetitive private sector and other developmental challenges. Controversies have raged among financial analysts and policymakers as to why fiscal policy instrument of taxation is not efficient, and what other viable tax policies that could be implemented to ensure achievement of desired national development of Nigeria. In the course of this unending argument so far, certain issues and questions have been raised about the impact of taxation on development in Nigeria: Are there any significant effects of taxation on national development in Nigeria? In this paper, we adopt the Lord Meghnad Desai and Nobel Laureate Amartya Sen development measure as incorporated by the United Nations Development Programme (UNDP) - the Human Development Index (HDI) to measure national development because it is broad and encompasses socio-economic indicators, such as per capita income, infant mortality, adult literacy, access to clean portable water, life expectancy at birth etc.,. The HDI is a composite index to measure national development, because it is a simple average of the Life expectancy Index, Education Index and adjusted GDP per capita (PPP$) index. In essence, taxation is a means to an end, and the end is national development. 2. Literature Review Svensson and Fisman (2000) posit that corruption retards development even more than taxation does. Thus, they found that both the rate of taxation and the rate of bribery are negatively correlated with firm growth. They revealed that a one percentage point increase in the bribery rate is associated with a three percentage point reduction in firm growth.