Value Added Tax, Governance and Economic Growth in a Democratic Era

Abstract

Economic growth can be seen as an effect of both taxation and different strategies of governance applied to enhance the national macroeconomic environment. Taxes and governance are determining factors in the evolution of socio-economic life, influencing also economic growth. This paper aimed to identify the relationship between value-added tax, governance and economic growth of Nigeria using the Autoregressive Distributed Lag (ARDL). Based on the annual data from Nigeria, the Granger causality test was applied to identify the cause-and-effect mechanism of the variables. The results revealed that value-added tax enhances economic growth but this could be hampered by bad governance. In terms of the Granger causality test, VAT and governance indices collectively influenced real gross domestic product (measure of economic growth) and the combination of real gross domestic product and governance indices influenced value-added tax. Recommendations were made that the government should make sure that money raised through VAT is properly utilized for infrastructure improvements that are obvious for taxpayers to see and appreciate, including strengthening the collection apparatus, closing loopholes, and making room for a more efficient VAT system.