Causal Relationship Between Economic Growth and Government Tax Revenue: A Case of Nigeria (1970-2021)

Abstract

This paper aims at elucidating the mystery surrounding the belief that, high and vibrant economic activities and economic growth are a prima-facie and a leading indicator for high tax revenue as a source of income for the Federal government in Nigeria. The effects of economic growth on government tax revenue are therefore empirically investigated from 1970-2021. The short-run and long-run relationships between the economic growth in Nigeria and its tax revenue are thus explored in this study. Although, theoretical and empirical reports found that there is a causal relationship between economic growth and tax revenue; this study thus further investigated this relationship by applying Johansen's cointegration test, autoregressive distributed lag (ARDL), and Vector Error Correction Model (VECM) to establish the short and long-run relationships that may exist between economic growth and government tax revenue. However, the findings of this study clearly showed that there is an independent relationship between economic growth and government tax revenue with a 76% speed of adjustment. Thus, there is a unidirectional relationship between economic growth and total government tax revenue with a 74.76% speed of adjustment in the short run to reach an equilibrium level in the long run. This implies that there is fiscal independence between economic growth and tax revenue. The empirical analysis also provides evidence of a long-run equilibrium relationship. Based on the findings that GDP, exchange rate, and production capacity strongly and positively affect the performance of tax revenue in Nigeria. The study recommends among others that appropriate fiscal policies be put in place to moderate the fluctuations in exchange rates of the Naira against other foreign currencies and that the government should support innovative activities by youths through the creation of innovative labs. This would help to create more job opportunities for the youths and also encourage public and private partnerships between the state governments and private investors to improve the economic activities of the country, which will in turn bring about increased tax revenue. Keywords: Economic Growth, Tax Revenue, Tax Policy, GDP,