Abstract
In this chapter, we examine the relationship between taxation and economic growth in a resource rich country, using Nigeria as a case study. We explore the linkages between availability of higher resource revenue and lower taxation effort of other revenue categories and the effects of these on growth. Ordinary least square (OLS) estimation technique is employed in estimating the specified model. Also, descriptive analysis is carried out regarding tax trends and tax efforts in Nigeria to determine the effectiveness of existing tax structures, as well to as examine relevant national and cross-country data. Empirical results reveal that taxation has a significant impact on Real GDP growth rates. However, the proportion of tax contribution to the growth rate falls short of the optimal level in terms of the volume of economic activities and value of total output. Nigeria also lags other African countries with respect to tax effort and as such has a huge untapped potential for enhanced revenue mobilisation. We recommend therefore, that the Government should institute an appropriate tax system with an emphasis on broadening the tax base and in some cases, reviewing upwards the tax rates in order to increase the tax effort as well as ensure optimal contribution of taxation towards economic growth and development.
Highlights
Taxation–theoretical underpinnings The differing views of the effects of taxation of growth notwithstanding, important conceptual questions arise with respect to the optimal level of taxation for a defined objective function - whether growth or revenue generation; how taxation burden should be allocated among tax payers; the extent of state involvement in taxation; and how tax revenues should be allocated among various public goods and services
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
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
Summary
Taxation is an important fiscal policy instrument at the disposal of governments to mobilise revenue and promote economic growth and development. Governments use tax revenue to carry out their traditional functions such as the provision of public goods and services; maintenance of law and order; defence against external aggression; and regulation of trade and business to ensure social and economic maintenance [1]. Solow [6], was the first to examine how taxation affects growth He argued that steady state growth is not affected by tax policy; that is, tax policy, regardless of distortion, has no impact on long term economic growth rates, even if it reduces the level of economic output in the long term. On his part [7], argued that the different uses of total government expenditure affect growth differently and a similar argument applies to the way tax revenue is raised. They suggested that tax structure can change over time to maximise the economic growth
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