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Effect of Taxation on Economic Growth of Nigeria (1994-2014)
Article in "Imperial Journal of Interdisciplinary Research (IJIR) · January 2017
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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-3, Issue-4, 2017
ISSN: 2454-1362, [Link]
Effect of Taxation on Economic Growth
of Nigeria (1994-2014)
Akaa Samuel Terzungwe1 & Criscent Ike Eya2
1
Department of Management Sciences College of Science & Management Sciences
Kwararafa University Wukari, Taraba State Nigeria
2
Smart Consult, Makurdi Benue State
Abstract: This study investigated the effect of are the governments all of whom have experienced
taxation on economic growth of Nigeria using unusual reduction in their share of the national
secondary data that essentially relates to nominal revenue from the federation account (Ajakaiye,
Gross Domestic Product, Personal Income Tax, 2000). Despite the numerous sources of revenue
Company Income tax, petroleum profit tax and Value available to the various tiers of government as
Added tax. This data covered a period of 20 years specified in the Nigerian 1999 Constitution, since the
from 1994- 2014 and was collected from the Central 1970s till now, over 80% of the annual revenue of the
Bank of Nigeria (CBN) Statistical Bulletin, Federal three tiers of government come from petroleum. The
Inland Revenue Service (FIRS), Office of the need for the tiers of governments to generate
Accountant General of the Federation, and other adequate revenue from internal sources has,
relevant government agencies. The data collected therefore, become a matter of extreme urgency and
were analysed using relevant econometric models importance (Cheibub, 1998).
such as Augmented Dickey Fuller Test, Johansen Co-
integration test and error correction model. The The management of any nation is usually
result showed all the variables were stationary at the responsibility of the government. Governments
first difference and co-integrated. In other words, the are responsible for the maintenance of law and order
variables are all integrated of order one [1(1)]. The as well as ensuring the welfare of their Citizens. This
result also showed that there is a long run positive is done mainly through the provision of goods and
relationship between company income tax and services to satisfy the needs and wants of the citizens
petroleum profit tax while value added tax and (Soyode, 2006). However to be able to meet these
personal income was negatively related to economic various needs, it becomes necessary for any
growth. The sign of the error correction term was government to raise revenue through several sources.
found to have the expected negative sign after One of the most convenient and exclusive avenues
estimation and the coefficient informed us of the rate available for raising funds is through the imposition
at which it corrected the previous period of taxes. The question that has largely remained
disequilibrium of the system. Error Correction unresolved in Nigeria is what government uses taxes
Models (ECMs) directly estimate the speed at which to achieve in terms of impact on economic growth.
the dependent variable (Y) returns to equilibrium The first need of any modern government is
after a change in the independent variable X. The to generate enough revenue which is indeed the
negative sign (-0.817240) of the error term implies breath of its nostril. Thus taxation is by far the most
that the system corrected its previous disequilibrium significant source of revenue for the government
period due to negative shocks in one period at an (Ojo, 2003). The funds raised from taxation are
adjustment speed of 81.72 percent annually. In other intended to be used in financing the provision of
words, the short run dynamics represented by the goods and services to satisfy the needs of the citizens
coefficient of the error correction estimates shows (Yamane, 2002).
how the research variables adjust at equilibrium to
correct for any short run defect in the system. Economic growth is viewed as an increase
in the amount of goods and services produced by the
Keyword: Taxation, economic growth, Nigeria economy over time. A major problem which needs to
be resolved is whether a relationship exists between
tax raised in an economy and economic growth. The
1.0 INTRODUCTION main objective of this study is to assess the impact of
Background to the Study taxation on economic growth in Nigeria. The specific
The increasing cost of running government objectives are to examine; the impact of Value
coupled with dwindling revenue has left various tiers Added Tax on economic growth, the impact of
of governments in Nigeria to formulating strategies company income tax on economic growth, the impact
in order to improve their revenue base. Hardest hit
Imperial Journal of Interdisciplinary Research (IJIR) Page 1275
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Vol-3, Issue-4, 2017
ISSN: 2454-1362, [Link]
of Petroleum Profit Tax on economic growth and the Secondly, taxation can be used as a tool
impact of Education Tax on economic growth. aimed at improving the performance of the national
economy by such means as altering the balance
2.0 REVIEW OF RELATED LITERATURE between current consumption and capital investment.
Taxation For instance, a man who would otherwise use the
Anyanfo (1996) defines the principles of whole of his purchasing power for current
taxation to mean the appropriate criteria to be applied consumption may, by taxation, be forced to
in the development and evaluation of the tax handover part of it to the government and then
structure. Such principles are essentially an decide to use some of it to increase his own capital
application of some concepts derived from welfare investment. In doing so, the government has altered
economists. In order to achieve the broader the decompositions of real resources although not
objectives of social justice, the tax system of a necessarily by the amount that the purely financial
country should be based on sound principles. information suggests. However, it is extremely
Anyanwu (2000) defines taxation as the compulsory difficult to isolate taxation as a casual factor in any
transfer or payment (or occasionally of goods and economic variation because so many other factors are
services) from private individuals, institutions or not at work and are inextricably interwoven.
groups to the government. The main purpose of tax is
The economic and taxation policies adopted
to raise revenue to meet government expenditure and
by the government should be economical and rates of
to redistribute wealth and management of the
taxes should be low, so as to increase peoples
economy (Ola, 2001).
investment, provide employment opportunity,
Nzotta (2007) clearly identifies four key
increase the standard of living and encourage
issues which must be understood for taxation to play
economic development. It must also be admitted that
its functions in the society. First, a tax is a
government may damage the economy by taxation
compulsory contribution made by the citizens to the
policies which produce the wrong redistribution of
government and this contribution is for general
resources. However, attempts have been made to
common use. Secondly, a tax imposes a general
analyze the effect of particular taxes in real terms, by
obligation on the tax payer. Thirdly, there is a
theoretical reasoning which takes accounting change
presumption that the contribution to the public
into consideration. One of the disadvantage of this, is
revenue made by the tax payer may not be equivalent
that such attempts are dependent on the consumption
to the benefits received. Finally, a tax is not imposed
records and assumptions may not be sufficiently
on a citizen by the government because it has
realistic, especially the greater complexity in
rendered specific services to him or his family. Thus,
theoretical exercise. It may well be that it is
it is evident that a good tax structure plays a multiple
misleading to assume that all other factors will
role in the process of economic development of any
remain unchanged, in so far as taxation policy may
nation which Nigeria is not an exception (Appah,
be effective only when linked with consistent policy.
2010).
Forms of Direct Taxes:
Objectives and Importance of Taxation Personal Income Tax: It is a tax levied on an
Tanzi (1999), states that taxation is essential individual earned income during a certain period of
in financial matters and its objectives includes time usually a year. In Nigeria and other developing
influencing the disposition and availability of real countries, personal income tax constitutes a little
resources. The primary purpose of taxation is to percentage of total government revenue. This form of
enable the government to command the real taxes is usually known as PAYE (pay as you earn). In
resources it requires to perform certain functions on assessing personal income tax, certain allowances are
behalf of the inhabitants of the country as a whole. granted in respects of family circumstances.
The need of national defence for instance, requires Company Income Tax: It is levied on the net profit
that the government shall be able to control resources of companies. One of the main advantages of a
of labour and capital (including land) sufficient to company tax is that, it is easier comparatively to
supply and operate the weapons that are deemed collect. This is due to the fact that companies are
necessary for this purpose. Therefore, the real cost of clearly identifiable and they keep accurate accounts
defence is the output that those resources would on which they are taxed. In Nigeria, where there is a
produce if used for other purposes , but the cost can federal system of government, allowances are
be measured in practice only by the transfer of granted for expenditure on the capital equipment for
purchasing power from individuals to the plant and machinery and initial expenditure on mines
government as represented by the financial payments and plantations.
made to that effect. It will be shown later that there is Expenditure Tax: This is a tax levied on that part of
no need for equation between the tax paid by an a person’s income which he actually spends with
individual and loss in purchasing power in real terms.
Imperial Journal of Interdisciplinary Research (IJIR) Page 1276
Imperial Journal of Interdisciplinary Research (IJIR)
Vol-3, Issue-4, 2017
ISSN: 2454-1362, [Link]
allowance being made for savings since this tax is working practices, recruitment, pay, condition of
levied after savings have been deducted. This type of employment.
tax is not common in Nigeria. National Resources: Recent empirical research by
Capital Tax: This is another type of direct tax which Jeffrey Sachs and Andrew Warner in Natural
is imposed on capital assets on the properties of the resource Abundance and Economic Growth has
deceased and increments on the value of capital uncovered a strong and robust cross country
assets and on land (sees the Capital Gains Tax Act of relationship between economic growth and the
1967 and capital transfer tax of 1979). abundance of , or dependence on, natural resources
dependence seem to influence growth.
Economic Growth First, countries that are rich in natural
Dwivedi (2004) states that, economic growth is a resources experience boom and busts, not only due to
sustained increase in per capita national output or net commodity price fluctuations in world markets but
national product over a long period of time. It implies also due to resource discoveries that typically create
that the rate on increase in total output must be intermittent upswings in export earnings that cause
greater than the rate of population growth. Another the national currency to appreciate in real terms to
quantification of economic growth is that national the detriment of other export industries. This
output should be composed of such goods and phenomenon is known as the "Dutch disease".
services which satisfy the maximum want of the Secondly, in less extreme cases, the struggle for huge
maximum number of people. Economic growth can resources rents may lead to a concentration of
be determined by four important determinants economic and political power in the hands of elites
namely, human resources, national resources, capital that, once in power, use the rent to placate their
formation and technological development. political supporters and thus secure their hold on
Economic growth is the increase in the power, with stunted or weakened democracy and
amount of the goods and services produced by an slow growth as result.
economy over time. It is conventionally measured as Capital Formation: Capital Formation is concept
the percent rate of increase in real gross domestic used in macro economics, national account and
product. Growth is usually calculated in real terms, financial economics. It is a specific statistical concept
i.e. inflation-adjusted terms, in order to net out the used in national accounts statistics, econometric and
effect of inflation on the price of the goods and macroeconomics. It refers to a measure of the net
services produced. 'Economic growth' or 'economic additions to the (physical) capital stock of a country
growth theory' typically refers to growth of potential (or an economic sector) in an accounting interval, or,
output, i.e., production at 'full employment,' which is a measure of the amount by which the total physical
caused by growth in aggregate demand or observed capital stock increased during an accounting period.
output (Nzotta, 2007).
In a much broader or vaguer sense, the term "capital
Increases in productivity are a major factor formation" has in more recent times been used in
responsible for per capita economic growth, financial economics to refer to savings drives, setting
especially since the mid-19th century. Most of the up financial institutions, fiscal measures, public
economic situation in the 20th century was due to borrowing, development of capital markets,
reduced inputs of labour, materials, energy, and land privatization of financial institutions and
per unit of economic output. development of secondary markets.
Three important determinants of Economic Theoretical Framework
growth Benefit received theory
Human Resources (HR): Human Resources officers This theory proceeds on the assumption that there is
develop advice on and implement policies relating to basically an exchange relationship between tax-
the effective use of personnel within an organization. payers and the state. The state provides certain goods
Their aim is to ensure that the organization employs and services to the members of the society and they
the right balance of staff in terms of skills and contribute to the cost of these supplies in proportion
experience, and that training and development to the benefits received (Bhartia, 2009). This is in
opportunity are available to employees to enhance line with Anyanfo (1996) assertion that taxes should
their performance and achievement the employer's be allocated on the basis of benefits received from
government expenditure. This theory is important to
business aims.
the study because it helps the government to realize
Human Resources officers are involved in a their responsibility of providing infrastructural
range of activities require by organizations, whatever facilities such as road, electricity, pipe borne water
the size or type of business. These cover area such as; and school.
Imperial Journal of Interdisciplinary Research (IJIR) Page 1277
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Vol-3, Issue-4, 2017
ISSN: 2454-1362, [Link]
Empirical Review and avoidance are the major hindrances to revenue
Several empirical studies have been conducted on the generation.
impact of taxes on economic growth. Engen and
Owolabi and Okwu (2011) empirically
Skinner (1996) in their study of taxation and evaluated the contribution of VAT to the
economic growth of U.S. economy, used evidence development of Lagos state economy. Development
from micro level studies of labour supply, investment aspects considered included infrastructural
demand, and productivity growth. Their result development, environmental management, education
suggests modest effects on the order of 0.2 to 0.3
sector development, youth and social development,
percentage points' differences in growth rates in agricultural sector development, health sector
response to a major reform. They stated that such development and transportation sector development.
small effects can have a large cumulative impact on Their result showed that VAT revenue contributed
living standards. positively to the development of the respective
Tosun and Abizadeh (2005) in their study of sectors. However, the positive contribution was
economic growth of tax changes in Organization for statistically significant only in agricultural sector
Economic Cooperation and Development (OECD) development.
countries from 1980 to 1999, show that growth
measured by GDP per capita has a significant effect 3.0 RESEARCH METHODOLOGY
on the tax mix of GDP per capita. The study reveals 3.1 Research Design
that while the shares of personal and property taxes An ex-post-facto research design was
have responded positively on economic growth, adopted for this study. The ex-post-facto (or casual
shares of the payroll/goods and services taxes have comparative) research design attempts to explore
shown a relative decline. causes that affect relationship where causes already
Ergete, Ferede and Bev Dahlby (2006) exist and looks backwards to explain why. Ex-post-
facto research design involves ascertaining the
examine the impact of the Canadian provincial
governments’ tax rates on economic growth using impact of past factor(s) on the present happenings or
panel data covering the period 1977–2006. They event. The ex-post-facto research design is a quasi-
discussed that a higher provincial statutory corporate experimental study examining how independent
income tax rate is associated with lower private variables, present prior to the study, affect dependent
investment and slower economic growth. They variables.
suggest that a 1 percentage point cut in the corporate
The Ex-post facto research design is
tax rate is related to a 0.1–0.2 percentage point
considered most appropriate for this study because it
increase in the annual growth rate. It resulted that
is not possible to directly manipulate or control any
switching from a retail sales tax to a sales tax that is
of the independent variables. This is because the
harmonized with the federal value-added sales tax
events have already taken place and therefore the
boosts provincial investment and growth. research is been conducted after-the-fact.
Onaolapo, Abdul-Rahamoh, Fasina and
Adegbite (2013) examine the effect of petroleum Model Specification
profit tax (PPT) on Nigeria economy, found to have The objective here is to estimate the deterministic
significant effects on the Economics Growth with the relationship between the variables in line with
Adjusted R2 of 86.3%. Following the outcome of this theoretical postulations. The implicit and the explicit
study, it is therefore concluded that the abundance of form of the model regression model is specified as
petroleum and its associated income has been follows:
The implicit form of the model is shown below:
beneficial to the Nigerian economy for the period
1970 to 2010. Income from a nation’s natural GDP= f (PIT, CIT, PPT, VAT)
resource has a positive influence on economic In explicit form, the model can be re-stated in the
following way:
growth.
GDP= b0 + b1PIT t-1 + b2CIT t-1 + b3PPT t-1 + b4VAT t-
Adegbie and Fakile (2011) worked on 1 + U t-1
company income tax and Nigeria's economic Where
development. They used the GDP to capture the GDP = Gross Domestic Product
Nigerian economy and Petroleum Profit Tax (PPT), PIT = Personal Income Tax
Company Income Tax (CIT), Customs and Excise CIT = Companies Income Tax
Duties and VAT to measure Company Income Tax. PPT = Petroleum Profit Tax
Their findings revealed that there is a significant VAT = Value Added Tax
relationship between company income tax and Ut = Error (stochastic) term that covers other sources
Nigerian economic development and that tax evasion of tax revenue not covered here.
Imperial Journal of Interdisciplinary Research (IJIR) Page 1278
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Vol-3, Issue-4, 2017
ISSN: 2454-1362, [Link]
b0 = Regression intercept
b1, b2, b3, b4 =Regression coefficient
A priori expectation of the models is:
Apriori expectations
(𝑿 ) = Personal Income Tax; a priori expectation is
positive
(𝑿 ) = Companies Income Tax; a priori expectation
is positive
(𝑿 ) = Petroleum Profit Tax; a priori expectation is
positive
(𝑿 ) = Value Added Tax; a priori expectation is
positive
Hence, this is further shown here:
b1>0, b2>0, b3 > 0, b4 > 0
Data Analysis techniques
The secondary data was analyzed using econometric
methods. The stationarity of the data was analyzed
using Augmented Dickey Fully test (ADF), the long-
run relationship was examined using Johansen co- The graph above shows the trend of the
integration while the short-run dynamics was variables of the study against year from the study
analyzed using the error correction mechanism. The period of 1994 - 2014. The gross domestic product
hypotheses in this study were tested using the showed a gradual rise from the start point of 1994
component of long-run regression dynamics of the and rose steadily throughout the study period of 1994
vector error correction model to 2014 indicating the various contributions of the
taxes to economic growth proxied by the gross
4.0 RESULTS AND DISCUSSION domestic product.
CIT -8.159737 -3.029970 I (1)
Testing for Unit Root (ADF-Test) PPT -0.744913 -3.081002 I (1)
Table 1: Augmented Dickey-Fuller Test (ADF)
VAT -5.809686 -3.029970 I (1)
at Levels
Variables ADF 5% Critical Order of Source: E-views 7.0 Result Output, 2017
Value Integration
GDP -1.877868 -3.020686 I (0) The ADF test at first difference above
PIT -5.643353 -3.020686 I (1) shows that all the variables GDP, PIT, CIT, PPT
and VAT are all now integrated of order one [I(1)].
CIT -2.428897 -3.029970 I (0)
This also implies that the null hypothesis of non
PPT -5.233023 -3.065585 I (1) stationarity of the variables is now rejected for all
VAT -1.413629 -3.040391 I (0) the variables.
Source: E-views 7.0 Result Output, 2017 Johansen co-integration test
The result of the unit root test using ADF This establishes whether there is a long
shows that only GDP, company Income Tax (CIT) run co-integrating relationship among the variables.
and Value Added Tax (VAT) were stationary at Co integration analysis helps to identify long- run
level, while Personal Income Tax (PIT) and economic relationships between two or more
Petroleum Profit Tax (PPT) were not stationary at variables and to avoid the risk of spurious
levels. GDP, CIT & VAT are integrated of order [I regression. The unrestricted co-integration Rank
(0)] while PIT and PPT is integrated of order one [I Test (Trace) and the unrestricted Co-integration
(1)]. This implies that the null hypothesis of non- Rank Test (Maximum Eigen value) statistics results
stationary for all the variables is rejected for PIT & of the Johansen Co-integration test are presented in
PPT. Hence we will proceed to further difference the following tables:
the data at first difference.
Table 2: Augmented Dickey-Fuller Test (ADF) Table 3: Unrestricted Co-integration Rank Test
at first difference
(Trace)
Variables ADF 5% Order of
Critical Integration Date: 06/01/17 Time: 22:37
Value
GDP -3.622375 -3.029970 I (1) Sample (adjusted): 1996 2014
PIT -5.777518 -3.029970 I (1) Included observations: 19 after adjustments
Imperial Journal of Interdisciplinary Research (IJIR) Page 1279
Imperial Journal of Interdisciplinary Research (IJIR)
Vol-3, Issue-4, 2017
ISSN: 2454-1362, [Link]
The result of the trace and maximum
Trend assumption: Linear deterministic trend
Eigen value test shows that there are two co-
Series: GDP PIT CIT PPT VAT integrating equation in the system. This is indicated
by the number of cointegrating equation found in
Lags interval (in first differences): 1 to 1
the system (*). This implies that the null hypothesis
of no co-integration is rejected for all the variables
of the study. This further means that at 0.05 level
Unrestricted Cointegration Rank Test (Trace) of significance, they exists a long run relationship
among the variables, as the result, trace statistics,
and the maximum Eigen values converges to
Hypothesized Trace 0.05 2.822406 in the table 4 and 5 respectively.
Critical
No. of CE(s) Eigenvalue Statistic Value Prob.**
Estimation of long run and short run
relationship
None * 0.916806 105.1429 69.81889 0.0000 The long run relationship between Gross
At most 1 * 0.833476 57.89787 47.85613 0.0043 Domestic Product (GDP) and other variables of the
study can be obtained by normalizing the estimates
At most 2 0.493436 23.83815 29.79707 0.2074 of the unconstrained co-integrating vector on the
At most 3 0.346876 10.91617 15.49471 0.2167 GDP. The parameters (i.e long run elasticities) of
the co-integrating vector for the long run GDP is
At most 4 0.138041 2.822406 3.841466 0.0930 presented in the equation in table 6 below. The
long-run estimate can be obtained from vector error
Trace test indicates 2 cointegrating eqn(s) at the 0.05 correction estimates as it contains both the long run
level and short run equations.
* denotes rejection of the hypothesis at the 0.05 level Table 5: Vector Error Correction Estimates
**MacKinnon-Haug-Michelis (1999) p- Date: 06/01/17 Time: 22:39
values Sample (adjusted): 1995 2014
Included observations: 18 after adjustments
Standard errors in ( ) & t-statistics in [ ]
Cointegrating Eq: CointEq1
Table 4: Unrestricted Co-integration Rank Test
GDP(-1) 1.000000
(Maximum Eigen value)
Unrestricted Cointegration Rank Test (Maximum
Eigenvalue) PIT(-1) -0.687670
(0.2069)
Max- [0.7853]
Hypothesized Eigen 0.05
Critical
No. of CE(s) Eigenvalue Statistic Value Prob.** CIT(-1) 0.765141
(0.06829)
[-16.7879]
None * 0.916806 47.24506 33.87687 0.0007
At most 1 0.833476 34.05971 27.58434 0.0064 PPT(-1) 0.551652
At most 2 0.493436 12.92198 21.13162 0.4594 (0.11836)
[1.02084]
At most 3 0.346876 8.093765 14.26460 0.3693
At most 4 0.138041 2.822406 3.841466 0.0930 VAT(-1) -0.474531
(0.01836)
Max-eigenvalue test indicates 2 cointegrating eqn(s) at [1.02084]
the 0.05 level
C -0.8907675
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-
values Source: E-views 7.0 Result Output, 2017
GDPt-1 = -0.8907675 -0.687670PITt-1 + 0.765141CITt-1 +
Source: E-views 7.0 Result Output, 2017 0.551652PPTt-1 -0.474531VATt-1
Imperial Journal of Interdisciplinary Research (IJIR) Page 1280
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S(bi): [0.2069] [0.06829] [0.11836] Hypotheses Testing using the long-run equation
[0.01836] Decision Rule: Using Standard error test to test the
hypothesis, we have the following decision rule. S
The long-run relationship between the (bi) >1/2bi we accept the null hypothesis, that is, we
dependent variable and the independent variables accept that the estimate bi is not statistically
shows that in the long run, there is a negative significant at the 5% level of significance.
relationship between Personal Income Tax (PIT) S (bi) <1/2bi we reject the null hypothesis, in other
and Economic growth proxied by the Gross words, that is, we accept that the estimateb1 is
Domestic Product (GDP). This is not in line with statistically significant at the 5% level of
our economic and theoretical a priori expectation. significance.
This means that in the long run, a unit increase in
personal income tax will cause a corresponding Therefore, using the standard error test, S
decrease in Gross Domestic Product (GDP) by (b1) >1/2b1 above, 0.2069 > - 0.3438. Thus, we
68.8%. accept the null hypothesis. That is, we accept that
the estimate b1 is not statistically significant at the
The normalized co-integrating equation 5% level of significance. This implies that Personal
shows that a positive long run association exists Income Tax (PIT) has a significant impact on
between Company Income Tax (CIT) and Gross economic growth. Government should explore all
Domestic Product (GDP). This is in line with our possible ways in which they could ensure effective
economic and theoretical a priori expectation. The mobilization and collection of personal income tax
result shows that in the long run, a unit increase in as it has been shown to impact significantly on
company income tax will cause a corresponding economic growth proxied by the gross domestic
increase in Gross Domestic Product (GDP) by product if it is judiciously implemented.
76.5%. This means that in the long run, a
coordinated company income tax will bring about Therefore, using the standard error test, S
76.5% improvements on the country's growth (b2) <1/2b2 above, 0.06829 > 0.38257. Thus, we
indicator. reject the null hypothesis. That is, we accept that
the estimate b2 is statistically significant at the 5%
The normalized co-integrating equation level of significance. This implies that Company
shows a positive long-run relationship between Income Tax (CIT) has significant effect on
Petroleum Profit Tax (PPT) and Gross Domestic economic growth in the long-run in the economy.
Product (GDP), and the relationship is in line with In other words, the tax levied to companies by the
our economic a priori expectation. This means that government does not have any significant impact
a unit increases in Petroleum Profit Tax (PPT) will on Economic Growth.
result to a corresponding increase in the Gross
Domestic Product (GDP) by 55.2%. This result is Therefore, using the standard error test, S
in line with known fact and a priori expectation in (b3) <1/2b3 above, 0.11836 < 0.27583. Thus, we
Nigeria. Petroleum is the main source of revenue reject the null hypothesis. That is, we accept that
by the government and this revenue is obtained the estimate b3 is statistically significant at the 5%
through tax and royalties. It is not surprising that level of significance. This implies that Petroleum
Petroleum Profit Tax should have a positive and Profit Tax (PPT) has a significant impact on
high impact on the economic growth. economic growth. This result is in line with
Onalapo, Abdul-Rahamoh, and Fasina (2012) and
Also, the normalized co-integrating Adegbie and Fakile (2011) who also found a
equation shows a negative long-run relationship positive impact of Petroleum Profit Tax on
between Value Added Tax (VAT) and Gross economic growth. Petroleum forms the major
Domestic Product (GDP) and the relationship is not export earnings for government, an effective
in line with our a priori expectation. This means petroleum profit tax if well utilized will have a
that a unit increases in the VAT will increase Gross significant effect on economic growth.
Domestic Product (GDP) by 47.5%.
Therefore, using the standard error test, S (b4)
The coefficient of determination R2 for the <1/2b4 above, 0.01836 > - 0.23727. Thus, we
study is 0.896 or 89.6% in Appendix v. This accept the null hypothesis. That is, we accept that
indicates that 98.6% of the variations in the model the estimate b4 is not statistically significant at the
can be explained by the explanatory variables of 5% level of significance. This implies that Value
the model while 1.4% can be attributed to Added Tax (VAT) has a significant impact on
unexplained variation captured by the stochastic economic growth. This is in line with Enger &
term. Skinner (1996) which indicate a positive impact on
economy. Nigeria has a very viable private and
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public sector; an effective value added tax if well shown a significant impact on the economic growth
implemented will have a significant impact on in the long run. The positive impact of all the taxes
economic growth. (Value-added Tax, Company income tax,
The Error Correction Model Petroleum profit tax and Personal Income tax) on
ECM: economic growth in the long run implies that when
GDPt 0.23115 0.475163PIT ut 1 0.269688CITct 1 all these taxes are properly harnessed it will bring
( 0.25) ( 0.60) ( 0.10) about the much needed growth that will improve
0.383623PPT ct 1 0.328061VAT yt 1 0.817240 Et 1 the growth of all sectors of the Nigerian economy.
( 0.23) ( 0.30) ( 0.24)
The estimated coefficients of CIT and VAT have Recommendations
the expected positive sign while PIT and PPT are 1. Since Personal income tax had a negative effect
negatively related to economic growth proxied by on economic growth during the period under study,
the Gross Domestic Product (GDP). The Et-1 in the policies should be geared towards improvement of
model result above is an error correction term that Personal income tax and a new way of providing
guides the variables (PIT, CIT, PPT, VAT) of the flexible personal income tax should be adopted by
system to restore equilibrium or correct the government so as to ensure that this tax
disequilibrium. The sign of the error correction significantly improves economic growth.
term was found to have the expected negative sign 2. Value added tax also had a negative effect on
after estimation and the coefficient informed us of economic growth in our study. Government should
the rate at which it corrected the previous period intensify her effort in the collection of value added
disequilibrium of the system. Error Correction tax as they seem to be no seriousness on the part of
Models (ECMs) directly estimate the speed at government on the collection of this important tax
which the dependent variable (Y) returns to and disbursement of the said tax to the local
equilibrium after a change in the independent government as 85% of VAT revenue is supposed to
variable X. be handed over to the local government for
development purposes.
The negative sign (-0.817240) of the error 3. Company income tax made the highest
term implies that the system corrected its previous contribution to economic growth as shown by the
disequilibrium period due to negative shocks in one result of our study; as a result government should
period at an adjustment speed of 81.72 percent ensure that the fund obtained from this main stay of
annually. In other words, the short run dynamics the country's economy is used to diversify the
represented by the coefficient of the error economy away from a mono-product economy.
correction estimates shows how the research 4. Petroleum profit tax PPT should also be made to
variables adjust at equilibrium to correct for any contribute to the highest level on economic growth
short run defect in the system. in Nigeria
The coefficient of CIT_1 & VAT_1 has
the expected positive sign. This means that any
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