**3. Methodological approach**

#### **3.1. Review of the literature**

The relationship between taxation and economic growth has been widely studied. Some of these studies suggest that tax policies have positive and significant impact on the rate of growth of output, while others have observed that there is an inverse relationship between the two variables, that is, tax policies have a negative and significant impact on growth. Haq-Padda and Akram [25] examined the impact of tax policies on economic growth using data from Asian economies. They established that there is no empirical evidence that tax policies adopted by developing countries in Asia have a permanent effect on the rate of economic growth, a finding that is inconsistent with the endogenous class of growth models. The results of their study suggest that the relationship between aggregate output and the tax rate is best described by the neo-classical growth models because a higher tax rate permanently reduces the level of output but has no permanent effect on the output growth rate. Consequently, they recommended an optimal tax rate to finance the budgets, with debt instrument used in financing transitory expenditure while permanent expenditures are to be financed through taxes.

found out that the concrete tax rates that greatly affect economic growth are the top statutory company income tax (CIT) rates. From their estimation, they established that only the CIT rate had a significant negative impact on economic growth in all their regressions by controlling the endogeneity of tax measures while the personal income tax (PIT) rate and its progressivity did not significantly affect economic growth. The results of Lee and Gordon [30] are supported by the findings of Arnold [31] who established that the CIT and PIT rates reduce the economic performance of a country. Analogously, Padovano and Galli [32] argued that average tax rates lead to several biases and concluded that taxation has no impact on growth

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Poulson and Kaplan [33] explored the impact of tax policy on economic growth within the framework of an endogenous growth model using data from 1964 to 2004. In this model, differences in tax policy can lead to different paths of long-run equilibrium growth. They used regression analysis to estimate the impact of taxes on economic growth. Their analysis revealed that higher marginal tax rates had a negative impact on economic growth. Jibrin et al. [34] used ordinary least squares (OLS) method to examine the impact of Petroleum Profit Tax on Economic Development in Nigeria for the period 2000–2010. Their findings revealed that Petroleum Profit Tax has a positive and significant impact on Gross Domestic Product. The authors therefore, recommended that government should improve on the effectiveness and efficiency of the

administration and collection of taxes with a view to increasing government revenue.

and income redistribution.

Enokela [35] explored the relationship between VAT and economic growth of Nigeria using secondary data and multiple regressions. The results revealed that gross domestic product (GDP) is positive and statistically significant to value added tax; Government capital expenditure (GCE) is positive but insignificant to value added tax; and gross domestic product per capita (GDPPC) is negative and statistically significant to value added tax. The researcher recommended a zero tolerance for corruption to enable the revenue generated from VAT to be channelled to appropriate developmental projects. In a related strand of literature, Emmanuel [36] examined the effects of VAT on economic growth and total tax revenue in Nigeria using data covering the period 1994–2010. He formulated two hypotheses: that VAT does not have significant effects on GDP; and VAT does not have significant effects on total tax revenue. The results of the regression analysis show that VAT has significant effect on GDP; and also on total tax revenue. He therefore, encouraged government to sensitise the people to enable it increase the tax rate in order to increase its annual revenue for economic development. Relatedly, in a study by Wambai and Hanga, [37] titled '*Taxation and Social Development in Nigeria: Tackling Kano's Hidden Economy*', they found that the attitude of the government towards taxation need to change and recommended a tax system that concentrates on establishing simplicity, predictability and neutrality while Olusanya et al. [38] in investigating taxation as a fiscal policy instrument for income redistribution among Lagos state civil servants using Spearman's Rank Correlation coefficient found a positive relationship between tax as a fiscal policy instrument

Tosin and Abizadeh [39] studied economic growth and tax charges in OECD countries from 1980 to 1999; their study reveals that economic growth measured by GDP per capita has significant effect on tax mix of GDP per capita. The study recorded a decline in shares of payroll, goods and services and positive growth from personal and property taxes. At the regional

because of the possibility of high correlation with average fiscal spending.

In a cross-country analysis, Ramot and Ichihashi [26] used panel data from 65 countries covering the period 1970–2006 to examine the effects of tax structure on economic growth and income inequality and established that company income tax (CIT) rates have a negative impact both on economic growth and income inequality. They also established that personal income tax rate does not significantly affect economic growth and income inequality. The authors therefore, recommended that there is a need to develop a modest design into the tax system since countries which are able to mobilise tax resources through broad-based tax structures, coupled with efficient administration and enforcement of the tax system' are likely to enjoy faster growth rates than countries with narrow tax base and lower efficiency in tax administration. Also, governments should reduce tax evasion, which, they averred, occurs among the highest income group and has potential to distort horizontal and vertical equity in income redistribution. Finally, they recommended that very high earners or the highest income group should be subjected to high and rising marginal tax rates.

Ariyo [14] evaluated the productivity of the Nigerian tax system given the negative impact of persistent unsustainable fiscal deficits on the Nigerian economy for the period 1970–1990 to devise a reasonably accurate estimation of Nigeria's sustainable revenue profile. The results of the study showed a satisfactory level of productivity of the Nigerian tax system. The author therefore, recommended for an improvement of the tax information system to enhance the evaluation of the performance of the Nigerian tax system and facilitate adequate macroeconomic planning and implementation. Kneller et al. [27], taking account of the financing assumption associated with government budget constraints, studied the effect of the structure of taxation and public expenditure to the steady-state growth and established that non-distortionary taxation and productive expenditure enhance economic growth, a finding consistent with the Barro model [28].

Widmalm [29] in a study established that there exists a negative relationship between personal income tax, measured by average income tax, and economic growth, while corporate income tax does not correlate with growth at all. In their estimation, Lee and Gordon [30] found out that the concrete tax rates that greatly affect economic growth are the top statutory company income tax (CIT) rates. From their estimation, they established that only the CIT rate had a significant negative impact on economic growth in all their regressions by controlling the endogeneity of tax measures while the personal income tax (PIT) rate and its progressivity did not significantly affect economic growth. The results of Lee and Gordon [30] are supported by the findings of Arnold [31] who established that the CIT and PIT rates reduce the economic performance of a country. Analogously, Padovano and Galli [32] argued that average tax rates lead to several biases and concluded that taxation has no impact on growth because of the possibility of high correlation with average fiscal spending.

**3. Methodological approach**

should be subjected to high and rising marginal tax rates.

The relationship between taxation and economic growth has been widely studied. Some of these studies suggest that tax policies have positive and significant impact on the rate of growth of output, while others have observed that there is an inverse relationship between the two variables, that is, tax policies have a negative and significant impact on growth. Haq-Padda and Akram [25] examined the impact of tax policies on economic growth using data from Asian economies. They established that there is no empirical evidence that tax policies adopted by developing countries in Asia have a permanent effect on the rate of economic growth, a finding that is inconsistent with the endogenous class of growth models. The results of their study suggest that the relationship between aggregate output and the tax rate is best described by the neo-classical growth models because a higher tax rate permanently reduces the level of output but has no permanent effect on the output growth rate. Consequently, they recommended an optimal tax rate to finance the budgets, with debt instrument used in financing transitory expenditure while permanent expenditures are to be financed through taxes. In a cross-country analysis, Ramot and Ichihashi [26] used panel data from 65 countries covering the period 1970–2006 to examine the effects of tax structure on economic growth and income inequality and established that company income tax (CIT) rates have a negative impact both on economic growth and income inequality. They also established that personal income tax rate does not significantly affect economic growth and income inequality. The authors therefore, recommended that there is a need to develop a modest design into the tax system since countries which are able to mobilise tax resources through broad-based tax structures, coupled with efficient administration and enforcement of the tax system' are likely to enjoy faster growth rates than countries with narrow tax base and lower efficiency in tax administration. Also, governments should reduce tax evasion, which, they averred, occurs among the highest income group and has potential to distort horizontal and vertical equity in income redistribution. Finally, they recommended that very high earners or the highest income group

Ariyo [14] evaluated the productivity of the Nigerian tax system given the negative impact of persistent unsustainable fiscal deficits on the Nigerian economy for the period 1970–1990 to devise a reasonably accurate estimation of Nigeria's sustainable revenue profile. The results of the study showed a satisfactory level of productivity of the Nigerian tax system. The author therefore, recommended for an improvement of the tax information system to enhance the evaluation of the performance of the Nigerian tax system and facilitate adequate macroeconomic planning and implementation. Kneller et al. [27], taking account of the financing assumption associated with government budget constraints, studied the effect of the structure of taxation and public expenditure to the steady-state growth and established that non-distortionary taxation and productive

expenditure enhance economic growth, a finding consistent with the Barro model [28].

Widmalm [29] in a study established that there exists a negative relationship between personal income tax, measured by average income tax, and economic growth, while corporate income tax does not correlate with growth at all. In their estimation, Lee and Gordon [30]

**3.1. Review of the literature**

70 Taxes and Taxation Trends

Poulson and Kaplan [33] explored the impact of tax policy on economic growth within the framework of an endogenous growth model using data from 1964 to 2004. In this model, differences in tax policy can lead to different paths of long-run equilibrium growth. They used regression analysis to estimate the impact of taxes on economic growth. Their analysis revealed that higher marginal tax rates had a negative impact on economic growth. Jibrin et al. [34] used ordinary least squares (OLS) method to examine the impact of Petroleum Profit Tax on Economic Development in Nigeria for the period 2000–2010. Their findings revealed that Petroleum Profit Tax has a positive and significant impact on Gross Domestic Product. The authors therefore, recommended that government should improve on the effectiveness and efficiency of the administration and collection of taxes with a view to increasing government revenue.

Enokela [35] explored the relationship between VAT and economic growth of Nigeria using secondary data and multiple regressions. The results revealed that gross domestic product (GDP) is positive and statistically significant to value added tax; Government capital expenditure (GCE) is positive but insignificant to value added tax; and gross domestic product per capita (GDPPC) is negative and statistically significant to value added tax. The researcher recommended a zero tolerance for corruption to enable the revenue generated from VAT to be channelled to appropriate developmental projects. In a related strand of literature, Emmanuel [36] examined the effects of VAT on economic growth and total tax revenue in Nigeria using data covering the period 1994–2010. He formulated two hypotheses: that VAT does not have significant effects on GDP; and VAT does not have significant effects on total tax revenue. The results of the regression analysis show that VAT has significant effect on GDP; and also on total tax revenue. He therefore, encouraged government to sensitise the people to enable it increase the tax rate in order to increase its annual revenue for economic development. Relatedly, in a study by Wambai and Hanga, [37] titled '*Taxation and Social Development in Nigeria: Tackling Kano's Hidden Economy*', they found that the attitude of the government towards taxation need to change and recommended a tax system that concentrates on establishing simplicity, predictability and neutrality while Olusanya et al. [38] in investigating taxation as a fiscal policy instrument for income redistribution among Lagos state civil servants using Spearman's Rank Correlation coefficient found a positive relationship between tax as a fiscal policy instrument and income redistribution.

Tosin and Abizadeh [39] studied economic growth and tax charges in OECD countries from 1980 to 1999; their study reveals that economic growth measured by GDP per capita has significant effect on tax mix of GDP per capita. The study recorded a decline in shares of payroll, goods and services and positive growth from personal and property taxes. At the regional level, Chiumia and Simwaka, [40] analysed the effects of taxation in sub-Saharan Africa. They found that taxes levied on personal and corporate income reduces economic growth. From their study, one could be tempted to conclude that the tax structure is largely irrelevant in less developed economies, although we know from theory that embedded in an effective tax system are benefits for both the taxpayers and the government.

where: RGDPgr = Real Gross Domestic Product growth rate; CIT = Companies Income Tax; PPT = Petroleum Profit Tax; CED = Customs and Excise Duties; and U = Stochastic error term

The coefficients of all the explanatory variables are expected to be either positive or negative, depending on the peculiarity of the country's tax structures. The intercept term is expected, *a priori*, to be positive as tax variables are not the only contributors to the country's economic

We employed the ordinary least square (OLS) method of estimation based on the desirable properties it possesses and the relative simplicity of its application. We carried out unit root test at 5% level of significance to assess the stationarity of the time series data. Descriptive analysis was also carried out regarding tax trends and tax efforts in Nigeria, to determine the effectiveness of existing tax structures towards enhancing optimal and effective tax administration. Finally, we used descriptive analysis to evaluate relevant national and cross-country tax data, with a view to evaluating their inherent patterns and trends, and determining the implications of these patterns and trends for tax policies and administration in Nigeria.

The results were evaluated based on the following criteria: economic *a-priori* criterion, statistical criterion and econometric criterion. We carried out tests to check if the signs and magnitudes of the estimated parameters conform to what economic theory postulates. The

in the dependent variable, Real GDP growth rate, that can be explained by the explanatory variables explicitly captured in the model. We also used the F-test to test whether the explanatory variables included in the model are, jointly, significant or not in determining the level of economic growth while the T-Test was used to test the statistical significance of individual parameters of the regression model. To test autocorrelation, we adopted the Durbin Watson (D-W) statistic because of the absence of lagged dependent variables in the specified regression model while for Heteroscedasticity, we adopted the White's General Heteroscedasticity Test to ensure that the variance of the stochastic error term is constant. Our regression analysis relied heavily on secondary data published by the Central Bank of Nigeria (CBN), the National Bureau of Statistics (NBS), and Federal Inland Revenue Service (FIRS) covering the fiscal period 1986–2015 while data for descriptive analysis of tax trends in Nigeria, as well as cross country tax trends and performance among selected African countries, were sourced

To address the phenomenon of spurious regression usually associated with nonstationary time series data, we carried out the Augmented Dickey Fuller (ADF) unit root test at 5% level

), was estimated to capture the proportion of the total variation

Taxation and Economic Growth in a Resource-Rich Country: The Case of Nigeria

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while a0− a3

growth rates.

, are parameters of the model.

**3.3. Evaluation criteria and data sources**

from FIRS and the International Monetary Fund (IMF).

**4. Regression results and analysis of taxation trends**

coefficient of determination (R<sup>2</sup>

**4.1. Results and discussions**

#### **3.2. Model specification and estimation technique**

The model specified for this study is adopted from Appah [41], Okafor, [42], Ogbonna and Ebimobowei [43] and Nwakanma and Nnamdi, [19]. We used a multiple linear regression model to capture the relationship between taxation and economic growth in Nigeria for the period 1986–2015. Included in the model are; real gross domestic product growth rate (RGDPgr), as the dependent variable; and companies income tax (CIT) revenue, petroleum profit tax (PPT) revenue, as well as customs and excise duties (CED) revenue as the explanatory variables.8


The model was thus explicitly specified as:

$$\text{RGDPgr} = \mathbf{a}\_0 + \mathbf{a}\_1 \text{CT} + \mathbf{a}\_2 \text{PPT} + \mathbf{a}\_3 \text{CED} + \mathbf{U} \tag{1}$$

<sup>8</sup> VAT though an important source of government revenue was only introduced in 1994 and as such its inclusion would call for a major adjustment in the temporal scope of the study.

where: RGDPgr = Real Gross Domestic Product growth rate; CIT = Companies Income Tax; PPT = Petroleum Profit Tax; CED = Customs and Excise Duties; and U = Stochastic error term while a0− a3 , are parameters of the model.

The coefficients of all the explanatory variables are expected to be either positive or negative, depending on the peculiarity of the country's tax structures. The intercept term is expected, *a priori*, to be positive as tax variables are not the only contributors to the country's economic growth rates.

We employed the ordinary least square (OLS) method of estimation based on the desirable properties it possesses and the relative simplicity of its application. We carried out unit root test at 5% level of significance to assess the stationarity of the time series data. Descriptive analysis was also carried out regarding tax trends and tax efforts in Nigeria, to determine the effectiveness of existing tax structures towards enhancing optimal and effective tax administration. Finally, we used descriptive analysis to evaluate relevant national and cross-country tax data, with a view to evaluating their inherent patterns and trends, and determining the implications of these patterns and trends for tax policies and administration in Nigeria.
