An Analysis of Tax Revenue – Economic Growth Nexus in Nigeria; A Vector Autoregressive Approach

Abstract

This study examines the relationship between tax revenue and economic growth in Nigeria for the period 1994-2020. We explore the linkages between availability of higher resource revenue and lower taxation effort of other revenue categories and the effects of these on growth. The Ordinary Least Square (OLS) estimation technique was employed in estimating the specified model. Also, descriptive analysis was carried out regarding tax trends and tax efforts in Nigeria to determine the effectiveness of existing tax structures. Furthermore, stationarity test, cointegration and the VECM were adopted forthwith. Empirical results reveal that taxation has a significant effect on economic growth in Nigeria. However, the proportion of tax contribution to the growth rate falls short of the optimal level in terms of the volume of economic activities and value of total output. Nigeria also lags other African countries with respect to tax effort and as such has a huge untapped potential for enhanced revenue mobilization. We recommend therefore, that the government should institute an appropriate tax system with an emphasis on broadening the tax base and in some cases, reviewing upwards the tax rates in order to increase the tax effort as well as ensure optimal contribution of taxation towards economic growth and development.