**4.1. Results and discussions**

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 to ascertain the stationarity status of each individual time series data; the results of which are shown in **Table 1** below.

From **Table 1** below, the time series data for RGDPgr is stationary at level, implying that the time series data on Real Gross Domestic Product growth rate is integrated of order zero (0) while the annual time series data on CIT, CED and PPT are all stationary at first difference, implying that they are integrated of order one (1). The finding with respect to Companies Income Tax, Customs and Excise Duties and Petroleum Profit Tax substantiates the theoretical assertion that most economic time series are usually not stationary at level, but they attain stationarity after first differencing.

Based on the results shown in **Table 2** below, the estimated regression equation (Eq. (1)) becomes:

$$\text{RGDPgr} = 2.771101 + 0.0000326 \text{CED} - 0.00000926 \text{CTT} - 0.000850 \text{PPT} \tag{2}$$

The Adjusted R<sup>2</sup>

Adjusted R<sup>2</sup> 0.195645 D.W statistic 1.707596

Source: Authors' computation.

**Table 2.** Summary of regression results.

sion model has a poor fit. The low R<sup>2</sup>

ing the Nigerian tax administration system discussed Section 2.

economic growth in Nigeria during the period under review.

significant effect on economic growth in Nigeria.

from the estimated regression model shows that only about 20% (0.195645)

is an indication that the tax variables explicitly captured

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of the changes in Real Gross Domestic Product growth rate (RGDPgr) can be explained by the explanatory variables explicitly captured in the regression model, implying that the regres-

**Variable Coefficient Standard error T-statistic P-values** C 2.771101 0.888043 3.120460 0.0044 CED 3.26E-05 1.08E-05 3.013292 0.0057 CIT −9.26E-06 7.45E-06 −1.242312 0.2252 PPT −0.000850 0.001434 −0.592753 0.5585

F-statistic 3.351249 0.034229

in the regression model have not significantly influenced the total change in Real GDP growth rate in Nigeria. This poor tax performance as a driver of economic growth can be attributed to the economy's heavy reliance on commodity export (crude oil) as a major driver of economic growth and the perpetually low tax to GDP ratio as a result of the plethora of challenges fac-

Based on the students' T-test for each of the parameters in the model, the coefficient Customs and Excise Duties is statistically significant at 5% level of significance, while the coefficients of Companies Income Tax and Petroleum Profit Tax are not statistically significant at 5% level of significance. This implies that Customs and Excise Duties do have significant impact on the growth rate of Real Gross Domestic Product (RGDPgr), while Companies Income Tax (CIT) and Petroleum Profit Tax (PPT) have not contributed significantly towards stimulating

We also employed the F-Statistic (ANOVA) to establish the overall significance of the regression at the 5% significance level. The results show that the equation or model employed is statistically significant with P- value of 0.034229 and F = 3.351249, implying that the relationship between the growth rate of Real Gross Domestic Product and all the explanatory variables explicitly captured in the regression model is statistically significant at 5% level of significance. Thus, even though some of the individual coefficients of some of explanatory variables are not statistically significant, they are, jointly, statistically significant. That is, during the period under review, all the tax variables explicitly captured in the regression equation jointly exerted

Lastly, we evaluated the results based on econometric criteria. The estimated Durbin Watson statistic (D-W = 1.707596) shows that the regression model is devoid of first order serial correlation. Also, the White's test of heteroscedasticity was carried out to ensure that

From the estimated regression results, the intercept term is positive (2.771101), implying that the growth rate of the Nigerian economy retains a positive value when all the explanatory variables explicitly captured in the regression model are held constant; that is, economic growth rate is dependent on other variables other the explanatory variables captured in the model. The signs of the coefficients of explanatory variables explicitly captured in the regression model conform to the *a-priori* expectations as the impact of tax variables on growth can either be positive or negative, depending on the internal dynamics of the economy as well as the incidence of the various categories of taxes. The coefficient of customs and excise duties is positive while the coefficients of Companies Income Tax (CIT) and Petroleum Profit Tax (PPT) are negative. The estimated regression results show that, a unit change in Customs and Excise Duties will result in an average change in Real Gross Domestic Product growth rate of 0.0000326 units, holding all other explanatory variables in the regression model constant while the coefficient of Companies Income Tax implies that a unit change in Companies Income Tax will result in an average change in Real Gross Domestic Product growth rate of −0.00000926 units, holding all other explanatory variables in the regression model constant. Similarly, the coefficient of Petroleum Profit Tax implies that a unit change in Petroleum Profit Tax will result in an average change in Real Gross Domestic Product growth rate of −0.000850 units, holding all other explanatory variables in the regression model constant.


**Table 1.** ADF unit root test results.


**Table 2.** Summary of regression results.

to ascertain the stationarity status of each individual time series data; the results of which are

From **Table 1** below, the time series data for RGDPgr is stationary at level, implying that the time series data on Real Gross Domestic Product growth rate is integrated of order zero (0) while the annual time series data on CIT, CED and PPT are all stationary at first difference, implying that they are integrated of order one (1). The finding with respect to Companies Income Tax, Customs and Excise Duties and Petroleum Profit Tax substantiates the theoretical assertion that most economic time series are usually not stationary at level, but they attain

Based on the results shown in **Table 2** below, the estimated regression equation (Eq. (1))

RGDPgr = 2.771101 + 0.0000326CED − 0.00000926CIT − 0.000850PPT (2)

From the estimated regression results, the intercept term is positive (2.771101), implying that the growth rate of the Nigerian economy retains a positive value when all the explanatory variables explicitly captured in the regression model are held constant; that is, economic growth rate is dependent on other variables other the explanatory variables captured in the model. The signs of the coefficients of explanatory variables explicitly captured in the regression model conform to the *a-priori* expectations as the impact of tax variables on growth can either be positive or negative, depending on the internal dynamics of the economy as well as the incidence of the various categories of taxes. The coefficient of customs and excise duties is positive while the coefficients of Companies Income Tax (CIT) and Petroleum Profit Tax (PPT) are negative. The estimated regression results show that, a unit change in Customs and Excise Duties will result in an average change in Real Gross Domestic Product growth rate of 0.0000326 units, holding all other explanatory variables in the regression model constant while the coefficient of Companies Income Tax implies that a unit change in Companies Income Tax will result in an average change in Real Gross Domestic Product growth rate of −0.00000926 units, holding all other explanatory variables in the regression model constant. Similarly, the coefficient of Petroleum Profit Tax implies that a unit change in Petroleum Profit Tax will result in an average change in Real Gross Domestic Product growth rate of −0.000850 units, holding all other explanatory variables in the regression model constant.

**Variables ADF statistic Order of integration**

RGDPgr −4.103592 I(0) CIT −3.262681 I(1) CED −4.473805 I(1) PPT −3.102251 I(1)

Source: Authors' computation.

**Table 1.** ADF unit root test results.

shown in **Table 1** below.

74 Taxes and Taxation Trends

becomes:

stationarity after first differencing.

The Adjusted R<sup>2</sup> from the estimated regression model shows that only about 20% (0.195645) of the changes in Real Gross Domestic Product growth rate (RGDPgr) can be explained by the explanatory variables explicitly captured in the regression model, implying that the regression model has a poor fit. The low R<sup>2</sup> is an indication that the tax variables explicitly captured in the regression model have not significantly influenced the total change in Real GDP growth rate in Nigeria. This poor tax performance as a driver of economic growth can be attributed to the economy's heavy reliance on commodity export (crude oil) as a major driver of economic growth and the perpetually low tax to GDP ratio as a result of the plethora of challenges facing the Nigerian tax administration system discussed Section 2.

Based on the students' T-test for each of the parameters in the model, the coefficient Customs and Excise Duties is statistically significant at 5% level of significance, while the coefficients of Companies Income Tax and Petroleum Profit Tax are not statistically significant at 5% level of significance. This implies that Customs and Excise Duties do have significant impact on the growth rate of Real Gross Domestic Product (RGDPgr), while Companies Income Tax (CIT) and Petroleum Profit Tax (PPT) have not contributed significantly towards stimulating economic growth in Nigeria during the period under review.

We also employed the F-Statistic (ANOVA) to establish the overall significance of the regression at the 5% significance level. The results show that the equation or model employed is statistically significant with P- value of 0.034229 and F = 3.351249, implying that the relationship between the growth rate of Real Gross Domestic Product and all the explanatory variables explicitly captured in the regression model is statistically significant at 5% level of significance. Thus, even though some of the individual coefficients of some of explanatory variables are not statistically significant, they are, jointly, statistically significant. That is, during the period under review, all the tax variables explicitly captured in the regression equation jointly exerted significant effect on economic growth in Nigeria.

Lastly, we evaluated the results based on econometric criteria. The estimated Durbin Watson statistic (D-W = 1.707596) shows that the regression model is devoid of first order serial correlation. Also, the White's test of heteroscedasticity was carried out to ensure that the variance of the error term is constant. Since the calculated value of the test statistic is 5.147783, which is lower than the 5% critical value of 7.81 (P-value = 0.525004), the null hypothesis that the model is devoid of first order serial correlation is accepted; the disturbances of the regression model are homoscedastic.

#### **4.2. Analysis of tax trends in Nigeria and selected African countries**

The dynamics of taxation and economic growth in Nigeria should be understood not just from the perspective of the tax revenues discussed in the preceding section, but also from an analysis and discussion of other aspects of Nigeria's tax revenue and the broader tax system, some of which may not easily lend themselves to econometric analysis.

**Figures 3** and **4** below present recent trends in oil and non-oil tax revenues, as well as the share of oil and non-oil tax revenue as a percentage of total government revenues.

As shown in the **Figure 3**, there has been a steady decline in oil tax revenue in Nigeria from 2011 to 2016. It is noteworthy to mention that oil tax revenue remained higher than the nonoil tax revenue from 2011 to 2014 which marked the beginning of the huge slump in oil prices in the global market. From 2014 however, non-oil tax revenues, though generally declining, albeit at a slower pace, began to outperform oil revenues. It follows therefore, that oil revenue as a percentage of total revenues has been on the decline in the recent past. The converse holds true for non-oil revenues as shown in **Figure 4** below.

From **Figures 3** and **4**, it is apparent that there is a need to pay more attention to other critical sectors of the economy, beyond oil, from which revenue can be generated in order attain fiscal stability and engender macroeconomic stability. An important question thus arises: since taxation is an important fiscal policy instrument for domestic resource mobilisation and economic growth, is Nigeria' tax effort optimal for the desired impact on economic growth? In an attempt to address this policy question, we reviewed comparative tax efforts in Nigeria and selected African countries, focussing on the tax to GDP ratios, over the period 2003–2011.

From **Figure 5** above, it is apparent that, historically, Nigeria lags other African countries in terms of the tax to GDP ratio, that is, tax effort. Over the 2003–2011 period, the average tax revenue as a percentage of GDP for Nigeria was 2.93%, with the corresponding figures for Egypt, Ghana, Kenya, South Africa and Algeria being 14.62, 15.89, 16.10, 25.48 and 35.04%, respectively. Algeria's tax effort, that is, tax to GDP ratio, is 12 times Nigeria's tax effort, while South Africa's tax effort is approximately 10 times that of Nigeria. Nigeria tax efforts is less than

one fifth that of neighbouring Ghana. The low tax to GDP ratio can be attributed to structural defects associated with overreliance on oil revenue as the main source of government revenue and the consequent neglect of other critical sectors of the economy. This low performance of the non-oil tax revenue has great potential of creating substantial macroeconomic instability and consequently, negatively impacting growth and development owing to the volatility associated with oil prices and the critical role of public expenditures in stimulating economic activities. Nigeria's low performance in terms of tax revenue as a percentage of GDP also points to the existence of unexploited 'fiscal space' or untapped potential for tax revenue mobilisation.

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**Figure 5.** Tax revenue (% of GDP) for selected African countries (2003–2011). Source: IMF.

In this Chapter we have examined the relationship between taxation and economic growth in Nigeria over the 1986–2015 period, with special focus on Companies Income Tax, Customs

**5. Conclusions and policy recommendations**

**Figure 4.** Oil and non-oil revenue as percentage of Total revenue (2011–2016).

**Figure 3.** Oil and non-oil revenue—recent trends. Authors' computation from Federal Inland Revenue Service (FIRS) figures.

Taxation and Economic Growth in a Resource-Rich Country: The Case of Nigeria http://dx.doi.org/10.5772/intechopen.74381 77

**Figure 4.** Oil and non-oil revenue as percentage of Total revenue (2011–2016).

the variance of the error term is constant. Since the calculated value of the test statistic is 5.147783, which is lower than the 5% critical value of 7.81 (P-value = 0.525004), the null hypothesis that the model is devoid of first order serial correlation is accepted; the distur-

The dynamics of taxation and economic growth in Nigeria should be understood not just from the perspective of the tax revenues discussed in the preceding section, but also from an analysis and discussion of other aspects of Nigeria's tax revenue and the broader tax system,

**Figures 3** and **4** below present recent trends in oil and non-oil tax revenues, as well as the

As shown in the **Figure 3**, there has been a steady decline in oil tax revenue in Nigeria from 2011 to 2016. It is noteworthy to mention that oil tax revenue remained higher than the nonoil tax revenue from 2011 to 2014 which marked the beginning of the huge slump in oil prices in the global market. From 2014 however, non-oil tax revenues, though generally declining, albeit at a slower pace, began to outperform oil revenues. It follows therefore, that oil revenue as a percentage of total revenues has been on the decline in the recent past. The converse holds

From **Figures 3** and **4**, it is apparent that there is a need to pay more attention to other critical sectors of the economy, beyond oil, from which revenue can be generated in order attain fiscal stability and engender macroeconomic stability. An important question thus arises: since taxation is an important fiscal policy instrument for domestic resource mobilisation and economic growth, is Nigeria' tax effort optimal for the desired impact on economic growth? In an attempt to address this policy question, we reviewed comparative tax efforts in Nigeria and selected African countries, focussing on the tax to GDP ratios, over the period 2003–2011. From **Figure 5** above, it is apparent that, historically, Nigeria lags other African countries in terms of the tax to GDP ratio, that is, tax effort. Over the 2003–2011 period, the average tax revenue as a percentage of GDP for Nigeria was 2.93%, with the corresponding figures for Egypt, Ghana, Kenya, South Africa and Algeria being 14.62, 15.89, 16.10, 25.48 and 35.04%, respectively. Algeria's tax effort, that is, tax to GDP ratio, is 12 times Nigeria's tax effort, while South Africa's tax effort is approximately 10 times that of Nigeria. Nigeria tax efforts is less than

**Figure 3.** Oil and non-oil revenue—recent trends. Authors' computation from Federal Inland Revenue Service (FIRS) figures.

share of oil and non-oil tax revenue as a percentage of total government revenues.

bances of the regression model are homoscedastic.

76 Taxes and Taxation Trends

true for non-oil revenues as shown in **Figure 4** below.

**4.2. Analysis of tax trends in Nigeria and selected African countries**

some of which may not easily lend themselves to econometric analysis.

**Figure 5.** Tax revenue (% of GDP) for selected African countries (2003–2011). Source: IMF.

one fifth that of neighbouring Ghana. The low tax to GDP ratio can be attributed to structural defects associated with overreliance on oil revenue as the main source of government revenue and the consequent neglect of other critical sectors of the economy. This low performance of the non-oil tax revenue has great potential of creating substantial macroeconomic instability and consequently, negatively impacting growth and development owing to the volatility associated with oil prices and the critical role of public expenditures in stimulating economic activities. Nigeria's low performance in terms of tax revenue as a percentage of GDP also points to the existence of unexploited 'fiscal space' or untapped potential for tax revenue mobilisation.

#### **5. Conclusions and policy recommendations**

In this Chapter we have examined the relationship between taxation and economic growth in Nigeria over the 1986–2015 period, with special focus on Companies Income Tax, Customs and Excise Duties, and Petroleum Profit Tax. Empirical results reveal that taxation had a significant impact on Real GDP growth rates in Nigeria during the period under review. However, the proportion of tax contribution to the growth rate of the Nigerian economy falls short of the optimal level in terms of the volume of economic activities and total value of output, as well as the country's potential for revenue generation. This finding is instructive for both policy and decision making as far as the enhancement of Nigeria's taxation structures and domestic resource mobilisation are concerned. Also, cross-country comparisons of Nigeria's tax performance with the tax performance of selected African countries reveals that the county lags other African countries with respect to tax effort, that is, tax revenue as a percentage of GDP. Hence, policy measures that improve tax revenues as well as taxation capacity should be put in place to generate more revenues to positively stimulate economic growth. It hoped that ongoing tax policy and institutional reforms, as well as strategies aimed at diversifying and shifting the economy from over-reliance on the oil and gas sector, will not only elevate the relative position of non-oil tax revenues, but also improve the overall tax effort so that taxation can become an important instrument of fiscal policy, thereby ensuring macroeconomic stability and steady economic growth.

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In more specific terms, the Government of Nigeria should institute an appropriate tax system which emphasises the broadening of the tax base and in some cases, reviewing upwards the tax rates to enhance the contribution of taxation towards economic growth and development. In this respect, the tax administrative system in Nigeria should be strengthened to address some of the challenges presently clogging the wheel of progress as far tax administration is concerned. Furthermore, voluntary compliance should be encouraged through continuous taxpayers' education and the institutionalisation of a functional tax administrative system. It is also recommended that the tax execution agencies should forge good relationship with the professional associations involved in tax matters to elicit their support in reducing tax malpractices and other forms of fiscal corruption. In addition, regulatory authorities charged with the responsibility of collecting tax should further be strengthened to enforce compliance by taxpayers. There should be enhanced accountability and transparency from government regarding the management of revenue derived from taxation in terms of provision of public goods and services as this will enhance tax compliance among the tax payers. Lastly, as part of the broader economic diversification programme, tax revenue mobilisation should be used as a policy instrument to shift from the historical overreliance on oil revenues to non-oil revenues which are less volatile and are thus critical for the country's macroeconomic stability.
