TAX REVENUE AND ECONOMIC GROWTH NEXUS: EMPIRICAL EVIDENCE FROM THE NIGERIAN ECONOMY

Abstract

<p>This paper examined the relationship between tax revenue and economic growth in Nigeria over 1981–2019 period, with special focus on Companies Income Tax, Value Added Tax and Petroleum Profits Tax. The data were sourced from the National Bureau of Statistics (NBS) and the Federal Inland Revenue Service (FIRS). The study employed the Vector Error Correction Model (VECM) to establish the nature and strength of the relationship between taxation and economic growth. The Johansen test of cointegration reveals that there is at least one cointegrating equation in the long-run between the variables. Granger causality test found a causal relationship among Real GDP and the different tax components. The impulse response functions and the variance decomposition analysis uphold the findings that the impact of the shock in the indirect tax (VAT) and direct tax (CIT and PPT) on GDP growth does not die out over the specified period under consideration. Variance decomposition analysis found that the effect of the shock to the direct tax (CIT and PPT) on GDP growth tends to be low, whereas the effect of the shock to the indirect tax (VAT) on GDP growth tends to be significant to increase over the period. Therefore, this study recommended that in order to expand tax revenue, there should be a broad base tax strategy, focusing on all key areas of the tax system with measurable outcomes. Emphasis should be on simplification of the tax system and ease of implementation with priority given to quick wins and low hanging fruits, while more challenging aspects should be deferred until positive results are being recorded. The regulatory authorities charged with the responsibility of collecting tax should further be strengthened to enforce compliance by taxpayers, among other recommendations.</p><p> </p><p><strong>JEL: </strong>C1, H20, H21</p>