Inflation Rate and Tax Revenue Performance: A Time Series Assessment of Nigeria’s Four Decades Experience

Abstract

There have been hyper inflationary trends in Nigeria going side by side with efforts of government to jack up its revenue generation. The broad objective of this study is to investigate the relationship between inflation rate and tax revenue in Nigeria in the past four decades. The study adopted a quantitative approach to the analysis of the impact of inflation on tax revenue performance in Nigeria using time series secondary data on Tax revenues, inflation rate, Foreign Direct Investment and Real Exchange, generated between 1981 and 2022, from the National Bureau of Statistics (NBS) and the Central Bank of Nigeria. Descriptive Statistics and Linear regression was carried out to establish the relationship between Inflation and tax revenue. The regression output was obtained using STATA, which is commonly used for time series data. The Laffer Curve Theory, which explains the theoretical relationship between the tax rate and government revenue obtained via taxing provided the theoretical framework on which the findings of this study leans on. The results of the study showed that there is a significant and positive relationship between inflation and Company Income Tax (CIT) in Nigeria; and between inflation and Petroleum Profit Tax (PPT) in Nigeria. However, the results of the study showed no significant relationship between inflation and Value-Added Tax (VAT) in Nigeria. From the findings, the study recommends that policymakers and tax authorities should take into consideration the impact of inflation when designing and implementing tax policies on CIT and PPT. Also, the lack of significant relationship between inflation and VAT suggests that policymakers and tax authorities should focus on other factors that affect VAT such as the level of economic activity, tax administration, and tax incentives.