The Impact of Tax Reform on Federal Revenue Generation in Nigeria

Abstract

The main objective of this paper is to ascertain the impact of tax reforms on tax revenue generation in Nigeria. Specifically, an attempt will be made to verify the relationship between federally collected revenue and specific tax revenue generation sources. The study employed annual time series data spanning the years (1981-2011). The various income taxes were used as a proxy for tax reforms. By way of preliminary test, the Augmented Dickey fuller was employed to test for unit root. All the time series variables were non-stationary at levels but became stationary after first differencing. The Johansen’s co-integration test shows that long-run relationship exists between tax reform and federally collected revenue in Nigeria. The Granger causality shows that custom and excise Duties and value-added Tax granger causes federally collected revenue . The Partial Stock Adjustment Model shows that the various income taxes were statistically significant and have positive relationship with federally collected revenue. The coefficient of the Error correction model showed that 66.2940 percent of the deviation of federally collected revenue from its long-run equilibrium value can be reconciled yearly. On the whole, our study shows that tax reform by improving the tax system and reducing tax burden enhances the ability of the government to generate more revenue. The study proposed that VAT and CED provides good tax handle for the government to maximize its revenue. However, to maximize revenue from these taxes, their administration should be improved upon with effort directed towards reducing tax avoidance and evasion.