Taxation and Economic Performance: Direct and Indirect Tax Effects on Nigeria’s Output Growth
Keywords:
Economic Growth, Fiscal Policy, Taxation, ARDL, GDPAbstract
Purpose: Historically, Nigeria relied on oil revenue while neglecting taxation as a key source of public finance, leading to macroeconomic instability due to volatile oil prices. Despite numerous tax reforms aimed at improving compliance and reducing evasion, the country has experienced inconsistent output growth, including recessions in 2016 and 2020. This study analyzed the impact of direct and indirect taxes, focusing on company income tax (CIT), petroleum profit tax (PPT), value-added tax (VAT), and customs and excise duties on Nigeria’s output growth from 1994 to 2023.
Methodology: The research utilized the Autoregressive Distributed Lag (ARDL) method to examine both short- and long-term relationships between tax variables and output growth.
Result: In the short run, results indicated that all tax measures significantly influence output growth. However, none of the variables exhibit a significant long-run influence. Petroleum profit tax (PPT) has the highest average value but negatively correlates with output growth. Value-added tax (VAT) positively affects growth, while customs and excise duties have adverse effects. The Error Correction Model (ECM) confirms a long-run equilibrium relationship among variables, with a highly significant adjustment mechanism.
Novelty and contribution: This study adds to the body of knowledge by offering a thorough empirical examination of the tax system in Nigeria and its impact on output growth over a 30-year period, encompassing major economic recessions. It offers evidence-based policy recommendations for optimizing tax administration to foster sustainable economic growth.
Practical and social implications: The findings suggested that tax authorities should leverage CIT in the short run to stimulate economic activity. A review of PPT rates or the introduction of tax incentives in the petroleum sector could mitigate its negative growth effects. VAT expansion—either through rate increases or base broadening could enhance output growth, while reducing customs and excise duties may improve trade and industrial performance.
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This article is licensed under a Creative Commons Attribution 4.0 International License.
