Assessment of the Long-Run Equilibrium Relationship between Tax Revenue and Economic Growth in Nigeria: 1986 to 2012

Abstract

Taxation is a major source of revenue to many governments, an instrument for regulating economic and social policies, and a tool for enhancing economic growth. In Nigeria, total revenue structure portrays the dominance of revenue from the petroleum sector over tax revenue with adverse economic consequences. This study therefore examines the dynamic causal relationship between tax revenue components and economic growth in Nigeria. The objective is to provide justification for policy adjustments necessary for broadening the narrow revenue base of the government and enhancing economic growth using time series data on different types of Taxes and RGDP from 1986 to 2012. Bounds testing technique was used in analyzing the data. The results indicate that total tax revenue has a significant effect on economic growth; explaining about73.4% of the total variation in RGDP. CIT, EDT and OTR were each found to have significant influence on economic growth; sustaining long-run equilibrium relationships with RGDP. No significant causal relationships were shown to exist between PPT, VAT, and economic growth. We therefore conclude that there exist a long-run equilibrium relationship between aggregate tax revenue and economic growth, and recommend that government should encourage and sustain strong fiscal responsibility and transparency in governance to promote voluntary compliance to tax payment, fight corruption, and minimize waste in the use of tax revenue through appropriate legislative adjustments and financial discipline in governance.