The Impact of Personal Income Tax on State Governments Revenue and Economic Stability


People in both the formal and informal sectors of the economy pay personal income taxes. Persons in the formal and informal sectors pay as they earn (PAYE), but people in the formal and informal sectors are directly evaluated based on the money they generate through entrepreneurial activity (Direct Assessment). The goal of this study is to assess the role of personal income tax in Nigerian state governments’ revenue sources. The data for the study came from previously published secondary sources. The study indicated that the amount of money generated domestically was much less than the amount of money needed to fulfill the total expenditure profiles of the states. State revenues are growing increasingly dependent on federation funds, according to research. In light of the current low oil prices on the international market, it is recommended that countries look inward and come up with inventive ways to increase their domestically generated sources of revenue.
Internally generated income taxation of individuals, Produced by the company’s own resources income derived from within the company, Profits made in-house. Profits made in-house.


Taxation is a tool that may be used to regulate the economy. In times of inflation or deflation, it can be used to control the quantity of money in circulation, for example, by taxing specific businesses. Import taxes on goods and services can be raised to achieve this. Application and production of certain goods and services can also be monitored through the use of taxes (Agbetunde, 2010). What we call taxes are levies that the government places on the income, capital, or consumption of a certain individual or group of individuals (Mustapha, 2010). Paying taxes is not a choice activity, as demonstrated by these few examples. Any individual or business subject to tax is required by law to do so.


Rather than being assessed as a tax, indirect tax is included in a product’s selling price rather than as a separate payment paid by the final consumer before the goods are delivered to the final consumer (ICAN, 2006). PIT is a sort of direct tax that refers to any taxes or levies placed on an individual’s earnings, wages, profits and gratuities, as well as interest and dividends earned from corporations. Direct assessment taxes and Pay As You Earn (PAYE) are two forms of income taxes (Mohammed, 2007).

Earnings of persons who are working are taxed on a graduated basis under the PAYE system. In most cases, the tax is deducted at the source by the employer and then sent to the proper tax authorities. Individuals who earn money through self-employment face a second sort of income tax, known as direct assessment tax. Earnings from a business, a job or a vacation are included in this tax rate. It is only after the person has accumulated and reported his or her gross income that this tax is due.

Tax payers, tax officials, and the government all have responsibilities in a tax system. In this way, tax administration, policy, and law make up an efficient tax system (Olaofe, 2008).

The federation’s principal source of funding has been dwindling recently, thus all three levels of government have been forced to look inside.

Taxes may be used as a tool for managing the economy. When inflation or deflation is occurring, tax can be used to limit or raise the amount of money in circulation, since industries can be more readily safeguarded by tax. Import tariffs can be raised to achieve this goal. It is also possible to monitor the use and production of specific products or services by using taxation (Agbetunde, 2010). All in all, tax is seen by many as a government mandated levy that is placed on the income, capital, or consumption of its subjects (Mustapha, 2010). It is clear from these few reasons that paying taxes is not something one chooses to do. To the contrary, it is a requirement for all taxpaying people and entities alike.


On the other hand, indirect taxes are imposed on goods before they reach the ultimate consumer and are paid by them as part of the selling price of the product, not as taxes, but as part of the selling price of the item (ICAN, 2006). As part of direct taxation, PIT refers to taxes or levies on the income, wages, profit and gratuities of people as well as on the interest and dividends from corporations that accrue to them. Pay As You Earn (PAYE) and direct assessment tax are the two types of this tax (Mohammed, 2007).


People who earn money via their jobs are subject to PAYE taxation, which is calculated on a graded basis. Employers often deduct the tax at source and send the funds to the appropriate tax authorities. In the second category of taxes, direct assessment tax, an individual’s income from self-employment is taxed. The revenue from trade, business, profession, or vacation is included in this tax category. Individuals must pay this tax after they have collected their gross income and filed a tax return.


In a tax system, responsibility is assigned to three key entities: the tax payers whose obligation is payment of the assessed taxes promptly and correctly, tax authorities which ensure the collection of taxes for the government and the government whose duty is the imposition of taxes to finance the activities that ultimately benefit the citizens. In this way, tax administration, policy, and legislation are three essential components of a successful tax system (Olaofe, 2008).

In light of the recent decline in oil income, which is the primary source of the federation’s account, all three levels of government must seek within for solutions.

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