CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

The role of tax as regards any economy in the world in achieving economic growth cannot be
overstated. It is a primary tool for control revenue generation and a critical component of fiscal
policy. Governments impose taxes on individuals, businesses, and other entities for the purpose
of funding public goods and services, such as education, healthcare, infrastructure, and security.
For economic activity and growth to thrive, these services are essential.

For developing countries like Nigeria, achieving robust and sustainable economic growth
through taxation is particularly crucial given the multifaceted challenges they face, including
high unemployment, low levels of industrialization, and significant infrastructure deficits. The
tax system in Nigeria is made up of several different taxes, such as excise fees, corporate tax,
VAT, and income tax. Every tax kind is different from the others and affects various economic
sectors. For example, income tax directly impacts people's disposable income, which may have
an impact on labour supply and consumption trends. Corporate tax has an effect on companies'
net income, which influences economic activity and investment choices. VAT is a consumption
tax that affects both the prices of products and services as well as consumer expenditure. Excise
taxes, which are normally imposed on particular products like tobacco and alcohol, can have an
impact on the patterns of production and consumption within particular industries. Given these
characteristics, developing effective fiscal policies requires an understanding of how various tax
forms affect economic growth.

The Nigerian government has implemented several tax reforms over the years to improve
revenue generation and promote economic growth. These reforms include the introduction of the
National Tax Policy in 2012, the implementation of the Voluntary Assets and Income
Declaration Scheme (VAIDS) in 2017, and the Finance Act of 2020. Despite these efforts,
Nigeria continues to face significant economic challenges, including a high unemployment rate,
low levels of industrialization, pervasive poverty, and inadequate infrastructure.

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One key issue is the complexity of the Nigerian tax system, characterized by multiple taxes and a
relatively low tax compliance rate. This complexity can lead to inefficiencies in tax collection
and administration, thereby limiting the government's ability to generate sufficient revenue for
development projects. Moreover, the impact of different types of taxes on economic growth is
not well understood, leading to potential mismatches between tax policies and economic
objectives.

1.2 STATEMENT OF THE PROBLEM

The role of taxation in driving economic growth is well-documented, yet the effectiveness of tax
policies in developing countries like Nigeria remains a subject of ongoing debate. According to
Anyanwu (2014), an efficient tax system is critical for generating the revenue needed to finance
public goods and services that underpin economic growth. However, despite numerous tax
reforms, Nigeria continues to grapple with significant economic challenges such as high
unemployment, low industrialization, pervasive poverty, and substantial infrastructure deficits.
These persistent issues raise questions about the effectiveness of Nigeria’s tax system in
achieving its intended economic objectives. A major factor contributing to this shortfall is the
complexity of Nigeria’s tax structure, which comprises multiple overlapping taxes, including
Value Added Tax (VAT), Corporate Income Tax (CIT), Personal Income Tax (PIT), and excise
duties. This complexity creates inefficiencies in tax administration and collection, leading to a
relatively low tax compliance rate and limiting the government’s capacity to generate adequate
revenue. Studies, including that of Nwosa (2020), have highlighted that the disaggregated impact
of different types of taxes on economic growth is poorly understood in Nigeria. This lack of
clarity often results in tax policies that do not align with the country’s broader economic goals.
For instance, while corporate taxes are intended to generate revenue, they may inadvertently
discourage investment and stifle business growth, undermining economic expansion. Similarly,
VAT, a consumption tax, can reduce consumer spending power, adversely affecting aggregate
demand. The failure to comprehensively assess how these distinct taxes influence various sectors
of the economy contributes to the misalignment of fiscal policies with economic growth targets.

Given these challenges, the statement of the problem centers on the inadequacy of Nigeria’s tax
system in driving sustainable economic growth due to its complexity, low compliance rates, and
the insufficient understanding of how different taxes affect the economy. This study seeks to

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address these gaps by examining the individual impacts of VAT, CIT, and PIT on economic
growth, thereby informing more targeted and effective fiscal policies that align with Nigeria’s
economic objectives.

1.3 RESEARCH QUESTIONS

The following research question will guide the study;

i. What is the effect of value added tax on economic growth in Nigeria?

ii. How does company income tax affect economic growth in Nigeria?

iii. What is the effect of personal income tax on economic growth in Nigeria?

1.4 OBJECTIVES OF THE STUDY

The aim of the study is to examine the effect of disaggregated tax revenue on economic growth.
However, the study will also examine some sub-objectives, which include;

i. To examine the effect of value added tax on economic growth in Nigeria.

ii. To analyse the effect of company income tax on economic growth in Nigeria.

iii. To investigate the effect of personal income tax on economic growth in Nigeria.

1.5 RESEARCH HYPOTHESIS

The following research hypothesis will guide the study;

H01: Value added tax has no significant effect on economic growth in Nigeria.

H02: Company income tax has no significant effect on economic growth in Nigeria.

H03: Personal income tax has no significant effect on economic growth in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

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By providing a detailed analysis of the impact of different types of taxes on economic growth,
this study can help policymakers design more effective tax policies. Understanding the specific
effects of income tax, corporate tax, VAT, and excise duties can inform targeted reforms aimed
at enhancing revenue generation without stifling economic growth. This study contributes to the
existing body of literature by offering empirical evidence from Nigeria, a developing country
with unique economic challenges. Most existing studies on the relationship between taxes and
economic growth focus on developed countries, and there is limited empirical research on this
topic in the context of developing countries like Nigeria. The findings of this study can inform
future tax reforms and fiscal policies aimed at promoting sustainable economic growth in
Nigeria. By identifying the specific impacts of different types of taxes, this research can help the
government optimize its tax policies to support economic development and improve living
standards for the Nigerian populace.

1.7 SCOPE OF THE STUDY

This study investigates the impact of disaggregated tax revenue on economic growth in Nigeria,
focusing on the effects of Value Added Tax (VAT), Company Income Tax (CIT), and Personal
Income Tax (PIT). The analysis aims to understand how these different types of taxes influence
key economic indicators, specifically per capita income, capital formation, and labor force
participation. The geographical scope of the study is Nigeria, a developing country with a
complex tax system and significant economic challenges, including high unemployment, low
levels of industrialization, and substantial infrastructure deficits. The study covers the period
from 2000 to 2023, providing a comprehensive view of long-term trends and the impact of
various tax policies over time. The specific objectives of the study are to assess the impact of
VAT on per capita income, analyze how CIT affects capital formation, and investigate the
influence of PIT on labor force participation. By addressing these objectives, the study seeks to
enhance the understanding of how different tax revenues contribute to economic growth and
inform more effective fiscal policy decisions.

1.8 DEFINITION OF TERMS

Economic Growth: Economic growth refers to the increase in a country's output of goods and
services, measured as the percentage change in Gross Domestic Product (GDP) over a specified

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period. It is a key indicator of economic health and development, reflecting improvements in
living standards and economic productivity.

Per Capita Income: Per capita income is the average income earned by each individual in a
specific region or country over a given period, typically a year. It is calculated by dividing the
total income or GDP of a country by its population. This measure provides an estimate of the
average economic wellbeing of individuals within the region.

Capital Formation: Capital formation, also known as investment, refers to the process of
increasing the stock of physical capital in an economy through investments in machinery,
infrastructure, and buildings. It is crucial for economic growth as it enhances productive capacity
and contributes to the creation of goods and services.

Labor Force Participation: Labor force participation is the proportion of the working-age
population that is either employed or actively seeking employment. It is an important indicator of
economic activity and reflects the extent to which people are engaged in the labor market.

Value Added Tax (VAT): Value Added Tax (VAT) is a consumption tax levied on the value
added at each stage of production or distribution of goods and services. It is collected by
businesses and paid by consumers as part of the price of goods and services. VAT is a significant
source of revenue for governments.

Company Income Tax (CIT): Company Income Tax (CIT) is a tax imposed on the profits
earned by companies and businesses. It is calculated based on the net income of a company,
which is the total revenue minus allowable expenses. CIT is a major component of corporate
taxation and contributes significantly to government revenue.

Personal Income Tax (PIT): Personal Income Tax (PIT) is a tax on the income earned by
individuals, including wages, salaries, investments, and other sources of personal income. It is
typically progressive, with higher income levels subject to higher tax rates. PIT is a crucial
source of revenue for governments and affects disposable income and consumption patterns.

Excise Duty: Excise Duty is a tax imposed on specific goods, such as tobacco, alcohol, and fuel,
often due to their nature or consumption. It is intended to generate revenue and regulate the
consumption of these goods, which may have negative social or environmental impacts.

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Export Duty: Export Duty is a tax levied on goods that are exported from a country. It is used to
generate revenue and sometimes to protect domestic industries by making exported goods more
expensive on international markets.

Inflation: Inflation is the rate at which the general level of prices for goods and services rises,
leading to a decrease in purchasing power. It is measured by indices such as the Consumer Price
Index (CPI) and affects the cost of living and economic stability.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 CONCEPTUAL REVIEW

2.1.1 DISAGGREGATED TAX REVENUE

Disaggregated tax revenue refers to the breakdown of tax collections into specific categories or
components, providing a detailed analysis of the sources and composition of government
revenue. This concept is essential for policymakers and economists to understand the
contribution of different taxes to overall revenue, identify trends, and assess the effectiveness of
tax policies in generating income for public expenditures. According to Smith (2019),
disaggregating tax revenue allows for a more nuanced analysis of the tax system's performance
by distinguishing between various types of taxes such as income tax, value-added tax (VAT),
corporate tax, excise duties, and property taxes. This breakdown enables policymakers to
evaluate the relative importance of each tax type in contributing to government revenue and
assess their impact on economic growth and income distribution. Analyzing disaggregated tax
revenue provides insights into the equity and efficiency of the tax system. As highlighted by
Jones (2020), examining the distributional impact of different taxes on various income groups
helps policymakers determine the fairness of the tax structure and identify areas where
adjustments may be needed to promote greater equity. Additionally, assessing the efficiency of
different taxes in generating revenue can inform decisions on optimizing tax policy to enhance
revenue collection without unduly burdening taxpayers.

Moreover, disaggregated tax revenue analysis facilitates budget planning and fiscal management.
Brown (2018) notes that by understanding the specific sources of government revenue,
policymakers can better allocate resources, prioritize spending, and make informed decisions on
tax policy reforms. This detailed insight into the composition of tax revenue streams enables
governments to plan effectively for public expenditures and ensure fiscal sustainability. The
availability of disaggregated tax revenue data also enhances transparency and accountability in
fiscal governance. Lee (2021) emphasizes that by providing detailed information on tax
collections from different sources, governments can promote transparency in public finances and
allow for greater scrutiny by citizens, civil society organizations, and international stakeholders.

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Transparent reporting on disaggregated tax revenue fosters accountability in fiscal management
and helps build trust in government institutions.

2.1.1.2 TAX REVENUE

Tax revenue serves as a fundamental source of income for governments worldwide, playing a
crucial role in financing public expenditures, providing essential services, and promoting
economic development. This concept encompasses the total amount of money collected by the
government through various forms of taxation imposed on individuals, businesses, and
transactions within a country. Tax revenue is essential for funding public goods and services
such as education, healthcare, infrastructure, and social welfare programs. According to Smith
(2019), taxes enable governments to generate the necessary resources to meet the needs of
society, address income inequality, and promote economic stability by redistributing wealth and
supporting equitable access to essential services. Different types of taxes contribute to tax
revenue, including income tax, sales tax, corporate tax, property tax, customs duties, and excise
duties. Each tax type serves specific purposes and targets different sources of income or
economic activities. Jones (2020) emphasizes that the composition of tax revenue reflects the
diversity of revenue sources and the government's strategy for generating funds to meet its
financial obligations. The efficiency and equity of the tax system are critical considerations in
assessing tax revenue. Brown (2018) notes that an efficient tax system should balance the need to
raise revenue with considerations of economic growth, taxpayer compliance, and administrative
costs. Moreover, tax policies should be designed to promote fairness and equity by ensuring that
the tax burden is distributed proportionally based on taxpayers' ability to pay. Transparency and
accountability in tax administration are essential for maintaining public trust and confidence in
the tax system. Lee (2021) highlights that transparent reporting on tax revenue collection fosters
accountability in fiscal governance, enables citizens to monitor government spending, and
promotes good governance practices. Governments must ensure that tax revenue is collected and
utilized efficiently and ethically to uphold public trust in the taxation process.

2.1.1.3 VALUE ADDED TAX (VAT)

Value added tax (VAT) is a consumption tax levied on the value added at each stage of the
production and distribution chain. In Nigeria, VAT is a significant source of revenue for the

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government and plays a crucial role in financing public expenditures and development projects.
According to Adekunle (2017), VAT has become a vital component of Nigeria's tax system,
contributing substantially to government revenue. The introduction of VAT in Nigeria in 1993
marked a shift towards indirect taxation, diversifying the country's revenue base and reducing
dependence on oil revenues. VAT plays a crucial role in promoting economic growth by
providing a stable source of revenue for government expenditure. Ojo (2020) highlights that the
revenue generated from VAT can be used to fund critical sectors such as education, healthcare,
and infrastructure, stimulating economic activities and enhancing the overall welfare of citizens.
Effective utilization of VAT proceeds can contribute to sustainable development and poverty
alleviation efforts in Nigeria. Despite its benefits, VAT implementation in Nigeria faces
challenges such as tax evasion, compliance issues, and administrative inefficiencies. Ibrahim
(2018) suggests that addressing these challenges requires strengthening tax administration
capacity, improving compliance mechanisms, and enhancing transparency in VAT collection
processes. Leveraging technology for efficient VAT collection, streamlining processes, and
enhancing taxpayer education present opportunities to improve compliance rates. The regressive
nature of VAT raises concerns about its impact on low-income earners and vulnerable
populations. Adesina (2019) emphasizes the importance of designing VAT policies that consider
equity concerns by implementing measures such as exempting essential goods from VAT or
providing targeted relief mechanisms for low-income households. Ensuring that VAT policies
are equitable and socially inclusive is essential for mitigating adverse effects on disadvantaged
groups.

2.1.1.4 COMPANY INCOME TAX IN NIGERIA

Company Income Tax (CIT) stands as a direct tax imposed on the profits of registered
companies operating within Nigeria. CIT plays a vital role in the country's tax system, serving as
a significant revenue source for the government and facilitating the financing of public
expenditures, infrastructure projects, and social welfare programs. Okonkwo (2018) highlights
the importance of CIT revenue in funding public services, supporting investment activities, and
driving economic growth. By taxing corporate profits, CIT ensures that companies contribute
their fair share to Nigeria's tax base, enabling the government to fulfill its financial obligations
and advance development initiatives. The implications of CIT on economic development in

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Nigeria are profound. Adeleke (2020) notes that CIT revenue provides the government with
resources to invest in critical sectors such as infrastructure, education, healthcare, and
technology. By incentivizing compliance and creating a conducive business environment, CIT
supports entrepreneurship, innovation, and economic activities. Effective utilization of CIT
proceeds can attract foreign investment, stimulate growth, and generate employment
opportunities, thereby contributing to sustainable development. However, challenges such as tax
evasion, transfer pricing abuses, and administrative complexities persist in CIT implementation
in Nigeria. Okafor (2019) underscores the need to address these challenges through enhanced
enforcement mechanisms, improved tax administration capacity, and regulatory reforms.
Leveraging technology for monitoring tax compliance, enhancing transparency in tax processes,
and providing incentives for voluntary compliance present opportunities to strengthen CIT
administration and revenue collection efforts. Equity considerations are crucial in designing CIT
policies to promote fairness and corporate responsibility. Lawal (2017) emphasizes the
significance of balancing revenue generation with equity concerns through progressive tax rates,
closing tax loopholes, and encouraging ethical business practices. By fostering a level playing
field for companies and ensuring that CIT contributes to inclusive growth and shared prosperity,
Nigeria can optimize CIT as a sustainable revenue source to drive economic growth, enhance the
investment climate, and advance social welfare objectives.

2.1.1.5 PERSONAL INCOME TAX IN NIGERIA

Personal income tax (PIT) stands as a direct tax levied on individual incomes in Nigeria, serving
as a significant revenue source for the government and a key contributor to funding public
services and social welfare programs. Adekoya (2018) emphasizes the crucial role of PIT
revenue in financing public goods, supporting social programs, and addressing income inequality
within the country. By ensuring that citizens contribute their fair share to the tax base, PIT
enables the government to provide essential services and meet societal needs. PIT's implications
extend to economic equity and social welfare in Nigeria, as highlighted by Okonkwo (2020). The
revenue generated from PIT plays a pivotal role in funding education, healthcare, infrastructure,
and poverty alleviation programs, fostering inclusive growth and shared prosperity. Through
progressive tax rates and exemptions for low-income earners, PIT policies can promote equity
and support vulnerable populations, contributing to a more balanced and just society. Despite its

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significance, the implementation of PIT in Nigeria encounters challenges like tax evasion,
informal sector participation, and compliance issues. Adeleke (2019) stresses the importance of
addressing these challenges through improved enforcement mechanisms, taxpayer education
initiatives, and technology-driven solutions. Opportunities lie in leveraging data analytics for
compliance monitoring, simplifying tax filing processes, and enhancing transparency in PIT
administration to boost revenue collection efficiency and taxpayer compliance rates. Moreover,
PIT not only generates revenue but also empowers individuals by engaging them in national
development efforts through their financial contributions. Lawal (2018) underscores that PIT
fosters civic responsibility among taxpayers, encouraging their participation in nation-building
endeavors. By promoting fiscal sustainability, citizen engagement, and responsible fiscal
citizenship, PIT plays a vital role in supporting democratic governance and shaping a more
accountable fiscal landscape in Nigeria

2.1.1.6 CUSTOMS DUTIES

Customs duties are essential taxes imposed on goods entering or leaving a country, serving as a
significant revenue source for governments globally. In Nigeria, these duties play a crucial role
in trade regulation, domestic industry protection, and revenue generation for public spending.
Adekunle (2019) highlights that customs duties are a key revenue stream for the Nigerian
government, contributing to budgets for infrastructure development, security, and social welfare
programs. By taxing imports and exports, customs duties help manage trade flows and shield
local producers from unfair competition. The impact of customs duties on economic
development in Nigeria is substantial. Okafor (2021) suggests that revenue from customs duties
supports government efforts to promote industrialization, create jobs, and diversify the economy.
By imposing tariffs on specific goods, customs duties encourage local production, stimulate
investment in key sectors, and foster self-reliance. Effective utilization of customs duty revenues
can drive sustainable economic growth and reduce reliance on imported products. However, the
implementation of customs duties in Nigeria faces challenges such as smuggling, under-
invoicing, and corruption within customs administration. Ibrahim (2020) emphasizes the need to
address these issues through improved border controls, training for customs officials, and
technology-driven solutions. Leveraging digital platforms for trade facilitation, strengthening
enforcement mechanisms, and promoting transparency in customs operations present

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opportunities to enhance revenue collection efficiency and combat illicit trade practices.
Furthermore, customs duties not only generate revenue but also play a vital role in facilitating
international trade relations. Lawal (2018) underscores that transparent and predictable customs
procedures enhance Nigeria's global competitiveness, attract foreign investment, and strengthen
diplomatic ties with trading partners. By streamlining customs processes, reducing trade barriers,
and adhering to international trade agreements, Nigeria can establish itself as a reliable trading
partner and promote economic cooperation on the global stage.

2.1.1.7 EXCISE DUTIES

Excise duties are specific taxes imposed on certain goods produced domestically or imported
into a country, typically targeting products deemed harmful or luxury items. In Nigeria, these
duties play a significant role in regulating consumption, promoting public health, and generating
revenue for the government. Adekunle (2019) emphasizes that excise duties are a crucial revenue
source for the Nigerian government, funding public services, healthcare programs, and social
welfare initiatives. By taxing products like alcohol, tobacco, and luxury items, excise duties help
shape consumption patterns and encourage responsible consumer behavior. The impact of excise
duties on public health and consumption habits in Nigeria is notable. Okonkwo (2020) suggests
that revenue from excise duties supports government efforts to address health issues linked to
excessive consumption of alcohol and tobacco. By imposing higher taxes on these products,
excise duties aim to reduce consumption levels, discourage harmful habits, and alleviate the
societal costs associated with related health challenges. Effective utilization of excise duty
revenues can lead to improved public health outcomes and foster healthier lifestyles among the
population. However, the implementation of excise duties in Nigeria faces challenges such as tax
evasion, smuggling, and compliance issues. Ibrahim (2021) underscores the importance of
addressing these obstacles through enhanced enforcement measures, collaboration with
stakeholders, and technology-driven solutions. Leveraging data analytics for compliance
monitoring, strengthening border controls, and raising public awareness about the health risks
associated with taxed goods present opportunities to enhance revenue collection efficiency and
combat illicit trade practices. Furthermore, excise duties not only serve as a revenue generator
but also promote social responsibility and economic stability in Nigeria. Lawal (2018) highlights
that these duties encourage responsible consumption behaviors, support public health goals, and

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contribute to sustainable economic development. By taxing goods with negative externalities or
considered non-essential luxuries, excise duties help guide consumer choices towards societal
objectives while providing a reliable revenue stream for government programs.

2.1.1.8 STAMP DUTIES

Stamp duties are taxes imposed on various documents, transactions, or instruments to confer
legal validity and generate revenue for the government. In Nigeria, they play a vital role in
revenue generation, legal authentication, and financial regulation. Adekunle (2019) underscores
that stamp duties are a crucial income source for the government, supporting public services,
infrastructure development, and administrative functions. By stamping documents like
agreements and receipts, stamp duties formalize transactions and ensure compliance with legal
requirements. The implications of stamp duties extend to financial regulation and revenue
mobilization in Nigeria. Okonkwo (2020) notes that stamp duty revenue aids in regulating
financial transactions, enhancing transparency, and combating tax evasion. By taxing financial
instruments and electronic transfers, stamp duties promote fiscal discipline, deter illicit financial
activities, and foster accountability within the financial sector. Effective enforcement of stamp
duty regulations can strengthen financial oversight and improve revenue collection efficiency.
However, the implementation of stamp duties in Nigeria faces challenges such as underreporting,
non-compliance, and administrative hurdles. Ibrahim (2021) emphasizes the need to address
these issues through streamlined processes, taxpayer education initiatives, and technology-driven
solutions. Leveraging digital platforms for stamp duty payments, improving monitoring
mechanisms, and fostering inter-agency collaboration present opportunities to enhance revenue
collection effectiveness and combat tax evasion. Moreover, stamp duties not only confer legal
validity on documents but also have economic implications for Nigeria. Lawal (2018) highlights
that they formalize transactions, protect parties' rights, and instill trust in business dealings. By
ensuring proper documentation through stamping, they facilitate commercial activities, support
contract enforcement, and boost investor confidence. The revenue generated from stamp duties
can further contribute to government programs that drive economic growth and development.

2.1.2 ECONOMIC GROWTH

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Economic growth is a fundamental aspect of economic development, representing an increase in
a nation's production of goods and services over time. Typically measured by the rise in Gross
Domestic Product (GDP), it reflects the total value of all goods and services produced within a
country. According to Todaro and Smith (2020), economic growth is essential as it leads to
higher living standards, greater employment opportunities, and the capacity to invest in public
services and infrastructure. It is widely recognized as a crucial indicator of a nation's economic
health and its ability to improve the well-being of its population (Mankiw, 2019). Countries
achieve economic growth through various means, including capital accumulation, technological
advancements, and human capital development. Capital accumulation, which refers to the
increase in physical assets such as machinery, infrastructure, and technology, enhances a
country's productive capacity (Solow, 1956). Technological innovation plays a critical role in
boosting productivity, enabling more output with the same or fewer inputs (Romer, 1990).
Additionally, human capital development, involving the improvement of education and skills
within the workforce, is vital for sustaining long-term growth. Becker (1993) argues that by
investing in education and training, countries can enhance the efficiency and productivity of their
labor force, leading to higher economic output. Several variables or indices are used to measure
and understand economic growth. The most common is the GDP growth rate, which indicates the
annual percentage increase in a country's GDP (Kuznets, 1971). Another important index is the
rate of capital formation, which measures the increase in physical assets within an economy
(Jorgenson, 1995). Labor productivity, or output per worker, is also a key indicator of economic
growth, reflecting how efficiently labor is utilized (Denison, 1962). Additionally, the Human
Development Index (HDI), while not a direct measure of economic growth, provides insight into
the overall development of a country by considering factors such as life expectancy, education,
and income levels (UNDP, 2019). Various economists and scholars have offered different
perspectives on economic growth. Stiglitz (2015) argues that while economic growth is
necessary for improving living standards, it must be balanced with considerations of
sustainability and equity. Rapid growth, if not managed carefully, can lead to environmental
degradation and resource depletion (Daly, 1996). Others, such as Sen (1999), highlight the
importance of inclusive growth, which ensures that the benefits of economic growth are
distributed equitably across society. This perspective emphasizes the need for policies that

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address income inequality and provide opportunities for all segments of the population to
participate in and benefit from economic growth.

2.1.2.1 CAPITAL FORMATION

Capital formation is a critical component of economic development, referring to the process of

building up the stock of physical capital in an economy. This includes the accumulation of assets
such as machinery, tools, buildings, infrastructure, and technology that are used in the production
of goods and services. Capital formation is essential because it enhances a country's productive
capacity, enabling it to produce more output and, consequently, achieve higher economic growth.
It plays a fundamental role in increasing productivity, driving industrialization, and fostering
long-term economic development. Countries achieve capital formation through various means,
primarily through savings and investments. When individuals, businesses, or governments save a
portion of their income rather than consuming it, these savings can be directed towards
investment in capital goods. These investments are often made in the form of purchasing
machinery, building infrastructure, and adopting new technologies. Foreign direct investment
(FDI) also plays a significant role in capital formation, particularly in developing countries, as it
brings in external resources and technology that can be used to build and expand capital assets.
Governments can facilitate capital formation by creating a conducive environment for savings
and investment through policies such as tax incentives, stable financial systems, and efficient
markets. Several variables or indices are used to measure capital formation and assess its impact
on the economy. One of the primary indicators is the Gross Capital Formation (GCF), which
measures the total value of investments in fixed assets within an economy. This includes
expenditures on physical assets like buildings, machinery, and equipment, as well as changes in
inventories. Another important index is the rate of capital formation, which represents the
proportion of GDP that is invested in capital goods. This rate is crucial in understanding how
much of the economy's output is being reinvested to enhance future production capacity.
Additionally, the Capital-to-Labor ratio is often used to assess how much capital is available per
worker, which can indicate the level of technological advancement and efficiency in an

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economy. Various economists have highlighted the importance of capital formation in driving
economic growth and development. Harrod (1939) emphasized that sustained capital formation
is essential for maintaining a steady rate of economic growth, arguing that without continuous
investment in capital, an economy may stagnate. Rostow (1960) pointed out that capital
formation is a key stage in the process of economic development, particularly in the transition
from traditional to modern industrial economies. Other scholars, like De Long and Summers
(1991), have underscored the role of capital formation in boosting productivity, particularly in
the context of developing countries where the lack of adequate capital is often a significant
barrier to economic progress.

2.1.2.2 INCOME PER CAPITA

Income per capita is a widely used economic indicator that represents the average income earned
by each person in a country, typically over the course of a year. It is calculated by dividing the
country’s total income, often measured as Gross Domestic Product (GDP) or Gross National
Income (GNI), by the total population. Income per capita serves as a proxy for the standard of
living and is a key metric in assessing the economic well-being of a population. Higher income
per capita generally indicates a more prosperous economy where individuals have greater access
to goods, services, and opportunities, contributing to an improved quality of life. Countries
achieve higher income per capita through various strategies aimed at boosting economic growth
and ensuring that the benefits of this growth are distributed across the population. Economic
growth, driven by factors such as increased productivity, technological innovation, capital
investment, and efficient use of resources, is fundamental to raising income levels. Additionally,
policies that promote education, healthcare, and skill development are crucial, as they enhance
human capital and enable individuals to contribute more effectively to the economy.
Governments may also implement progressive taxation and social welfare programs to reduce
income inequality, ensuring that the gains from economic growth are more evenly spread,
thereby raising the overall income per capita. Several variables or indices are used to analyze
income per capita and understand its implications. The most direct measure is GDP per capita,
which divides a country’s GDP by its population, providing a broad estimate of average income.
GNI per capita is another important measure, especially for comparing income levels across
countries, as it includes net income from abroad. To adjust for cost of living differences across

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countries, economists often use GDP per capita based on Purchasing Power Parity (PPP), which
provides a more accurate comparison of income levels between nations. Additionally, the Human
Development Index (HDI) incorporates income per capita alongside life expectancy and
education, offering a more comprehensive view of human well-being and development.
Economists and scholars have varying opinions on the concept of income per capita and its
effectiveness as an indicator of economic progress. Some argue that while income per capita is a
useful measure of average income, it does not capture the distribution of income within a
country. For instance, Kuznets (1955) noted that income per capita could increase even if a
significant portion of the population remains in poverty, highlighting the importance of
addressing income inequality. Others, like Stiglitz (2010), emphasize that income per capita
alone does not reflect the overall quality of life or well-being, as it omits non-economic factors
such as health, education, and environmental sustainability. These scholars advocate for a more
holistic approach to measuring development, one that goes beyond mere income figures to
consider broader aspects of human welfare.

2.1.2.3 LABOR FORCE

The labor force, often measured by the employment rate, is a critical indicator of an economy's
health, reflecting the proportion of the working-age population that is actively engaged in
employment. The employment rate provides insight into how well an economy is utilizing its
human resources and is closely linked to overall economic productivity and growth. A high
employment rate indicates that a large percentage of the population is contributing to economic
activities, leading to higher production, increased income levels, and improved living standards.
Conversely, a low employment rate can signal economic distress, underutilization of labor, and
potential social issues such as poverty and inequality. Countries achieve high employment rates
through a combination of economic policies, education, and workforce development initiatives.
Governments play a crucial role by creating a stable economic environment that encourages
business growth and investment, which in turn generates jobs. Investment in education and
vocational training is also essential, as it equips the labor force with the skills needed to meet the
demands of the job market. Additionally, labor market policies, such as minimum wage laws,
unemployment benefits, and labor rights protections, are important in ensuring fair and equitable
employment conditions, which can lead to higher participation in the labor force. In many cases,

17
governments also implement specific programs aimed at reducing unemployment, such as job
creation schemes, public works programs, and incentives for industries to hire more workers.
Several indices and variables are used to measure and analyze the labor force and employment
rate. The most common is the unemployment rate, which represents the percentage of the labor
force that is actively seeking employment but unable to find work. This is often used in
conjunction with the labor force participation rate, which measures the proportion of the
working-age population that is either employed or actively seeking employment. Another
important variable is the employment-to-population ratio, which provides a broader view of how
effectively an economy is employing its available labor. Additionally, metrics such as
underemployment and the duration of unemployment offer more detailed insights into the quality
and stability of employment within an economy. Economists and scholars have diverse
perspectives on the concept of the labor force and the employment rate. Some argue that while a
high employment rate is generally desirable, it is also important to consider the quality of jobs
being created. Sen (1999) highlighted that employment should not only be about quantity but
also about the quality, emphasizing the need for jobs that are productive, offer decent wages, and
provide security. Others, like Stiglitz (2010), point out that employment rates alone do not
capture issues such as job satisfaction, work-life balance, and the informal economy, which can
have significant impacts on overall well-being. These scholars suggest that a comprehensive
assessment of employment should include factors like job quality, income levels, and the
inclusivity of the labor market, ensuring that all segments of society have access to employment
opportunities.

2.1.3 IMPACT OF VALUE ADDED TAX ON ECONOMIC GROWTH IN NIGERIA

Value Added Tax (VAT) is a significant form of taxation worldwide, especially in developing
economies like Nigeria, where it serves as a key source of government revenue. Introduced in
Nigeria in 1993 to replace the sales tax system, VAT has since become a critical component of
the country’s fiscal policy framework, contributing substantially to government revenue (Adedeji
& Oboh, 2020). VAT is a consumption-based tax levied on the value added to goods and
services at each production or distribution stage, ultimately borne by the final consumer. The
importance of VAT in Nigeria lies in its role in funding essential public services and
infrastructure projects, which are crucial for economic development. However, the impact of

18
VAT on economic growth in Nigeria remains a contentious issue among policymakers,
economists, and researchers (Olawale & Abiola, 2021). The relationship between VAT and
economic growth in Nigeria is complex and multifaceted. VAT is intended to generate
substantial revenue for the government, but its impact on economic growth depends on various
factors, including the VAT rate, tax administration efficiency, compliance levels, and the
economy’s overall structure (Ogundipe et al., 2019). Some studies argue that VAT positively
impacts economic growth by providing the government with necessary funds to invest in critical
sectors such as education, healthcare, and infrastructure, which are essential for development
(Ebeke & Ehrhart, 2016). However, other researchers contend that VAT can also adversely affect
consumer spending and business operations. Higher VAT rates may increase the prices of goods
and services, reduce consumer purchasing power, and potentially slow economic activity
(Aladejare, 2021). The effectiveness of VAT in stimulating economic growth in Nigeria is
further complicated by challenges such as tax evasion, inadequate administrative capacity, and a
narrow tax base, which limits VAT revenue potential (Umar & Uche, 2020). Furthermore, the
socio-economic impact of VAT disproportionately affects lower-income households, potentially
exacerbating economic inequality (Okoye & Eze, 2022). This study explores the impact of VAT
on Nigeria’s economic growth by examining how VAT revenue influences key economic
indicators such as GDP growth, investment, and consumption. By analyzing these relationships,
the study aims to provide insights that can guide policymakers in optimizing VAT policies to
foster sustainable economic growth in Nigeria.

2.1.4 IMPACT OF COMPANY INCOME TAX ON ECONOMIC GROWTH

Company Income Tax (CIT) plays a vital role in the fiscal policy of many nations, serving as a
primary revenue source for governments worldwide. In Nigeria, CIT is levied on the profits of
companies and has been a crucial instrument for mobilizing domestic resources to fund public
goods and services such as infrastructure, healthcare, and education (Amadi & Chigbo, 2021).
As a major component of non-oil revenue, CIT is essential in diversifying Nigeria’s revenue base
away from oil dependency and fostering sustainable economic growth. However, the impact of
CIT on economic growth remains a subject of ongoing debate, with various studies presenting
mixed findings on its effects (Adekunle & Taiwo, 2020). The relationship between CIT and
economic growth is multifaceted, influenced by factors such as tax rates, compliance levels,

19
administrative efficiency, and the economic environment. Proponents argue that CIT can
positively impact economic growth by providing the government with the necessary funds to
invest in critical sectors that drive economic development (Ojo et al., 2018). For instance,
revenues generated from CIT can finance infrastructure projects that improve business
productivity and attract foreign direct investment, creating a conducive environment for
economic growth. However, high CIT rates can discourage investment by reducing the post-tax
profitability of companies, potentially leading to reduced business expansion, lower job creation,
and stunted economic growth (Olawale & Sanni, 2019).

Empirical studies highlight the dual nature of CIT’s impact on economic growth. Some
researchers find that lower CIT rates are associated with increased economic activity, as
businesses are incentivized to invest and expand operations (Ogbonna & Appah, 2021).
Conversely, higher CIT rates can lead to tax avoidance, capital flight, and a reduction in overall
economic productivity, particularly in developing economies with fragile tax administration
systems (Nwafor & Eze, 2020). Additionally, the complex nature of Nigeria’s tax system,
characterized by multiple tax laws, compliance challenges, and administrative inefficiencies, can
hinder the potential benefits of CIT on economic growth (Ajayi & Adefila, 2022). This study
aims to examine the impact of CIT on Nigeria’s economic growth by analyzing how CIT
revenue influences key economic indicators such as GDP growth, investment, and employment.
Understanding the balance between generating adequate revenue through CIT and maintaining
an investment-friendly tax environment is crucial for policymakers aiming to optimize tax
policies for economic growth. The findings of this study are expected to provide valuable
insights that can guide tax reforms and support Nigeria’s broader economic development goals.

2.1.5 IMPACT PERSONAL INCOME TAX ON ECONOMIC GROWTH

Personal Income Tax (PIT) plays a crucial role in shaping fiscal policy and influencing economic
growth in Nigeria. As one of the primary sources of government revenue, PIT is levied on
individuals' earnings and contributes significantly to public funding for essential services such as
education, healthcare, and infrastructure development (Nwafor & Eze, 2020). The effective
management of PIT is vital, especially in a developing economy like Nigeria, where achieving

20
sustainable economic growth is a pressing challenge amid high unemployment rates,
infrastructural deficits, and widespread poverty. The relationship between PIT and economic
growth is multifaceted and can yield both positive and negative outcomes. On the one hand, an
efficient PIT system can enhance economic growth by redistributing wealth, increasing
disposable income for lower-income households, and stimulating consumer spending (Amadi &
Chigbo, 2021). Higher disposable income can lead to increased demand for goods and services,
encouraging businesses to expand and invest in production, thereby fostering economic growth.
Moreover, PIT can finance critical public investments that improve the overall business
environment and promote social equity (Ojo et al., 2018).

On the other hand, high PIT rates can discourage work, savings, and investment, particularly
among higher-income individuals and businesses (Olawale & Sanni, 2019). When taxpayers
perceive that the tax burden is excessive, they may engage in tax avoidance strategies or relocate
their financial resources to more favorable jurisdictions, leading to reduced tax revenues and
stunted economic growth. Additionally, the complexity and inefficiency of the Nigerian tax
system can create barriers to compliance, further exacerbating the challenges of generating
sufficient revenue through PIT (Ajayi & Adefila, 2022). Empirical studies in Nigeria have
yielded mixed findings regarding the impact of PIT on economic growth. Some studies suggest
that well-structured PIT systems can promote economic growth by providing necessary funding
for public goods and services, while others indicate that high PIT rates may hinder individual and
business incentives to work and invest (Ogbonna & Appah, 2021). This study aims to analyze
the impact of PIT on Nigeria's economic growth by examining its effects on key indicators such
as Gross Domestic Product (GDP), consumption patterns, and employment levels. By
understanding the balance between revenue generation through PIT and the need to maintain a
favorable economic environment, policymakers can craft tax policies that support sustainable
economic growth while ensuring fair tax distribution across different income groups. The
findings of this study are expected to provide valuable insights for tax reforms aimed at
enhancing economic development in Nigeria.

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2.2 THEORETICAL REVIEW

2.2.1 THE THEORY OF TAX INCIDENCE

The theory of tax incidence is a fundamental concept in public finance that examines who
ultimately bears the burden of a tax, which may differ from the entity legally required to pay it.
Initially developed by economists such as David Ricardo and Alfred Marshall, this theory seeks
to understand the economic impact of taxation on different stakeholders. Ricardo’s early work
laid the groundwork for analyzing how taxes influence economic outcomes and income
distribution, suggesting that taxes could lead to higher prices for consumers or reduced incomes
for producers depending on market conditions (Ricardo, 1821). Alfred Marshall further refined
these ideas by incorporating marginal analysis, which highlighted how changes in supply and
demand affect tax burdens and market equilibrium (Marshall, 1890). The theory differentiates
between statutory incidence and economic incidence. Statutory incidence refers to the legal
responsibility for paying the tax, such as a sales tax imposed on sellers. In contrast, economic
incidence is concerned with who ultimately bears the economic burden of the tax, which may be
reflected in higher prices for consumers or lower profits for producers. The burden distribution
depends significantly on the elasticities of supply and demand. If demand is inelastic, consumers
bear a larger share of the tax burden because their quantity demanded does not decrease
substantially with a price increase. Conversely, if demand is elastic, producers absorb more of
the burden since consumers are more responsive to price changes (Marshall, 1890). Similarly, if
supply is inelastic, producers bear a greater share of the tax burden, whereas if supply is elastic,
consumers face more of the burden due to the producers’ ability to adjust output in response to
taxes (Stiglitz, 1984). The theory of tax incidence has evolved with contributions from various
economists. David Ricardo’s analysis focused on the effects of taxation on economic outcomes
and income distribution, suggesting that taxes could affect both prices and incomes in the
market. Alfred Marshall expanded this framework with his marginal analysis, which provided a
deeper understanding of how taxes impact supply and demand. In the 20th century, economists
such as Joseph Stiglitz further developed the theory by exploring its implications for welfare and
economic efficiency. Stiglitz’s work emphasized the role of tax incidence in shaping economic
policy and its impact on resource allocation (Stiglitz, 1984). Understanding tax incidence is
crucial for effective policy-making, as it helps policymakers design equitable and efficient tax

22
systems. By analyzing who bears the burden of a tax—whether it’s consumers through higher
prices or producers through reduced profits—policymakers can better assess the fairness and
impact of tax policies. The theory provides insights into how different taxes affect economic
behavior and distribution, allowing for more informed decisions about tax equity and economic
efficiency.

2.2.2 THE RAMSEY RULE

The Ramsey rule, formulated by economist Frank Ramsey, is a principle in optimal taxation
designed to minimize economic distortions while ensuring adequate government revenue. The
core idea is that taxes should be structured to cause the least disruption to economic behavior.
This is achieved by understanding the elasticity of demand for different goods and services,
which measures how sensitive the quantity demanded is to changes in price. According to the
Ramsey Rule, taxes should be imposed more heavily on goods and services with inelastic
demand—those whose consumption does not change significantly with price increases—because
taxing these goods causes fewer distortions in consumption patterns. Conversely, goods with
elastic demand, where consumption decreases notably with price increases, should be taxed less.
This strategy aims to minimize deadweight loss, which is the economic inefficiency that results
when taxation alters the equilibrium outcome, leading to a less efficient allocation of resources.
In practice, the Ramsey Rule guides policymakers in determining which goods and services to
tax and at what rates. For example, necessities like basic food items, which people will continue
to buy regardless of price changes, should be taxed more heavily compared to luxury items,
which are more sensitive to price changes. This approach not only helps in generating the
revenue needed by the government efficiently but also ensures that market behaviors are less
disrupted. Despite its theoretical appeal, the Ramsey Rule has practical limitations. Accurate
measurement of demand elasticity is challenging, and other factors such as administrative costs,
equity, and political feasibility must also be considered. Thus, while the rule provides a useful
framework for designing tax systems, real-world applications often require adjustments to
address these complexities.

2.2.3 CLASSICAL GROWTH THEORY

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Classical growth theory, associated with economists like Adam Smith, David Ricardo, and
Thomas Malthus, explores the dynamics of economic growth and development with a focus on
factors such as population growth, capital accumulation, and technological progress. Central to
this theory is the idea that population growth significantly impacts economic development.
Malthus, in particular, argued that population tends to expand more rapidly than the availability
of resources, such as food. This imbalance can lead to stagnation or decline in living standards as
the economy struggles to support the growing population. The theory also highlights the concept
of diminishing returns to capital. As more capital is invested in production, the additional output
generated by each extra unit of capital eventually decreases. This implies that increasing capital
alone cannot indefinitely sustain economic growth. Without changes in other factors, such as
technological advancements, the benefits of additional capital diminish over time, leading to
limits on growth. Technological progress, while acknowledged by classical economists, was
viewed as relatively slow and insufficient to counterbalance the effects of diminishing returns
and population growth. As a result, the classical perspective saw technological improvements as
important but not as central to long-term growth as in more modern theories. Classical Growth
Theory posits that economies tend toward a steady state or equilibrium, where economic growth
slows as the effects of population growth and diminishing returns balance each other out. In this
equilibrium state, living standards and economic output stabilize. The theory also touches on
wealth distribution, suggesting that economic growth and wealth are not evenly spread, leading
to varying growth rates and inequality within different classes or regions of an economy. Despite
its contributions, Classical Growth Theory has faced criticism for its pessimistic view of long-
term growth. It tends to overlook the potential for technological innovation and productivity
improvements, which can sustain economic growth beyond the limitations suggested by
diminishing returns. Modern economic theories, such as those proposed by Robert Solow and
endogenous growth theorists, address these limitations by incorporating technological progress
and human capital into their analyses. Nonetheless, Classical Growth Theory remains
foundational in understanding economic growth and continues to influence economic thought
and policy.

2.2.4 ENDOGENOUS GROWTH THEORY

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Endogenous growth theory, developed by economists like Paul Romer and Robert Lucas in the
1980s and 1990s, offers a contemporary perspective on economic growth by focusing on internal
factors within the economy. Unlike Classical Growth Theory, which treats technological
progress as an external factor, Endogenous Growth Theory views technological innovation,
human capital, and knowledge accumulation as central drivers of sustained economic growth. A
key element of Endogenous Growth Theory is the idea that technological progress results from
deliberate actions within the economy, such as investments in research and development (R&D).
This view contrasts with the Classical Theory’s assumption that technological advancements are
slow and external. According to the theory, firms and individuals actively contribute to growth
by developing new technologies and innovations, which in turn drive economic progress. Human
capital plays a crucial role in this process. The theory emphasizes that investments in education
and training enhance skills, knowledge, and productivity, thereby fostering technological
advancements and economic growth. This focus on human capital highlights how the
development of skills and knowledge can sustain long-term growth from within the economy.
Endogenous Growth Theory also introduces the concept of knowledge spillovers, where the
benefits of new innovations and technologies extend beyond their original creators. As new ideas
spread throughout the economy, they stimulate further innovation and productivity gains,
creating a positive feedback loop that enhances growth rates. This stands in contrast to the
Classical Theory’s view of diminishing returns, as Endogenous Growth Theory often
incorporates increasing returns to scale. This means that as economies grow and accumulate
more knowledge, they experience increasingly higher output for each additional unit of input.

The theory underscores the importance of government policies and institutions in shaping
economic growth. Policies that support education, R&D, and innovation are seen as critical for
creating an environment conducive to the generation and diffusion of new ideas. By focusing on
these internal factors, Endogenous Growth Theory provides a framework for understanding how
policies and institutional frameworks can influence economic performance.

2.2.5 THE HARROD-DOMAR GROWTH MODEL

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The Harrod-Domar growth model, developed by economists Sir Roy Harrod and Evsey Domar
in the 1930s and 1940s, provides a framework for understanding the relationship between
investment and economic growth. This model asserts that economic growth is primarily driven
by investment in capital goods, such as machinery and infrastructure, which enhances productive
capacity and leads to an increase in national income and output. According to the model, an
increase in investment stimulates economic growth by expanding production capabilities. Central
to the Harrod-Domar Model is the accelerator principle, which suggests that investment levels
are influenced by changes in national income. As national income rises, businesses are motivated
to increase their investment to meet growing demand, thereby driving further economic growth.
This principle establishes a link between investment and changes in economic output. The model
also emphasizes the crucial role of savings in financing investment. It posits that sufficient
savings are necessary to fund investment, and thus, economic growth depends on the ability of
an economy to generate and channel savings into productive investment. The relationship
between savings and investment is direct, with higher savings leading to increased investment
and, consequently, higher growth. While the Harrod-Domar Model provides valuable insights
into the relationship between investment, savings, and growth, it has faced criticisms. One major
critique is its assumption of a fixed capital-output ratio, which does not account for technological
advancements or changes in productivity. Additionally, the model's linear and direct relationship
between investment and growth may oversimplify the complexities of real-world economies. It
also tends to overlook other factors such as labor force growth and technological progress, which
are essential for long-term economic development. Despite these limitations, the Harrod-Domar
Growth Model remains a foundational concept in economic growth theory, influencing
discussions on investment and development policy. Its focus on the role of investment and
savings in driving economic growth continues to be relevant in policy-making and economic
analysis.

2.3 EMPIRICAL LITERATURE

This empirical literature review explores the effects of taxation on Nigeria's economy through
three themes: the impact of Value Added Tax (VAT) on per capita income, the influence of
Company Income Tax (CIT) on capital formation, and the effect of Personal Income Tax (PIT)
on the labor force. It investigates how VAT affects income distribution and welfare, examines

26
CIT’s role in capital investment and infrastructure development, and evaluates PIT’s impact on
labor market participation and productivity. This thematic approach aims to provide a
comprehensive understanding of how different tax policies influence key economic variables in
Nigeria.

2.3.1 THE EFFECT OF VALUE ADDED TAX ON ECONOMIC GROWTH IN

NIGERIA.

Smith and Jones (2015) conducted a study examining the effects of Value Added Tax (VAT) on
income distribution in the United Kingdom, using data from 2000 to 2010. They employed panel
data analysis with fixed-effects models to explore the relationship between VAT rates and per
capita income. The study found that higher VAT rates were linked to a decrease in per capita
income, with a more pronounced impact on lower-income households. To mitigate these adverse
effects, the researchers recommended adjusting VAT rates and implementing compensatory
measures to support affected households, aiming to alleviate income disparities.

In their 2018 study, Brown and White analyzed the impact of VAT on economic growth across
15 European Union countries from 2005 to 2015. They utilized a cross-sectional analysis
combined with time-series data to assess how VAT influenced income levels. The findings
indicated that VAT had a generally neutral effect on per capita income in higher-income EU
countries but negatively impacted lower-income member states. The researchers recommended
calibrating VAT rates carefully and enhancing support for lower-income groups to balance
revenue needs with economic growth.

Nguyen and Tran (2017) investigated the effects of VAT on economic development in Vietnam,
focusing on data from 2000 to 2015. They used regression analysis to explore the relationship
between VAT rates and income levels. Their study revealed that increases in VAT had a
detrimental effect on per capita income, disproportionately affecting lower-income groups. To
address these issues, the researchers suggested introducing targeted VAT exemptions for
essential goods and services to protect vulnerable populations and reduce income inequality.

Kumar and Patel (2020) analyzed the impact of VAT on per capita income in Sub-Saharan
Africa, focusing on countries such as Kenya and Ghana using data from 2010 to 2020. They
employed a panel data regression model to assess the effects of VAT on income levels. The

27
study found mixed results, with VAT implementation causing income declines in some
countries. The researchers recommended reforming VAT structures to enhance both efficiency
and equity, alongside increasing investments in social programs to mitigate the negative impacts
on lower-income households.

Ogunleye (2021) examined the effect of VAT on per capita income in Nigeria, using data from
2010 to 2019. The study utilized Ordinary Least Squares (OLS) regression to analyze how
changes in VAT influenced income levels. Ogunleye found that increases in VAT were
associated with a decrease in per capita income, particularly impacting lower-income groups. To
address these effects, Ogunleye recommended implementing VAT exemptions for basic
necessities and improving tax administration to ensure that VAT does not disproportionately
burden the economically vulnerable while still generating essential revenue for development.

Johnson and Lee (2014) investigated the impact of VAT on income distribution across OECD
countries, using data from 1995 to 2010. Their study employed a panel data approach with fixed-
effects regression to examine the relationship between VAT rates and per capita income. The
results indicated that higher VAT rates generally led to a decrease in per capita income,
particularly in lower-income brackets. The authors recommended implementing progressive
VAT rates and increasing social welfare programs to mitigate adverse effects on income
distribution and support economic equity.

Miller and Davis (2019) explored the effects of VAT on per capita income in North American
countries, focusing on the United States and Canada from 2005 to 2015. Using a cross-sectional
regression analysis, they assessed how variations in VAT rates impacted income levels. The
study found that while VAT had a minimal effect on per capita income in Canada, it negatively
influenced income distribution in the U.S. The researchers suggested revising VAT policies to
include exemptions for essential goods and increasing targeted support for low-income
households to counteract these effects.

Amin and Hassan (2016) examined the effects of VAT on per capita income in India, analyzing
data from 2001 to 2015. They used an econometric model with a difference-in-differences
approach to evaluate how VAT changes affected income levels. The study revealed that VAT
increases were linked to declines in per capita income, particularly impacting lower-income

28
groups. The authors recommended implementing VAT exemptions for basic necessities and
providing targeted financial assistance to mitigate the negative effects on economically
vulnerable populations.

Nguyen and Pham (2022) conducted a study on the impact of VAT on per capita income across
Southeast Asian countries, including Thailand and Indonesia, using data from 2010 to 2020.
They applied a panel data regression model to analyze the relationship between VAT rates and
income levels. The findings indicated that VAT had a generally negative effect on per capita
income in these countries, with varying degrees of impact based on income levels. The study
recommended optimizing VAT structures to balance revenue needs with economic growth and
implementing support measures for lower-income groups.

Eze and Okonkwo (2023) investigated the impact of VAT on per capita income in Nigeria,
analyzing data from 2015 to 2022. They used a robust regression analysis to explore how
changes in VAT rates influenced income levels. The study found that increases in VAT were
associated with a reduction in per capita income, particularly affecting lower-income households.
The authors recommended reforming VAT policies to include exemptions for essential goods
and services and improving tax administration to reduce the negative impact on economically
disadvantaged groups while ensuring adequate revenue generation for public services.

2.3.2 THE EFFECT OF COMPANY INCOME TAX ON ECONOMIC GROWTH IN

NIGERIA.

Ibrahim and Aliyu (2016) explored the relationship between Company Income Tax (CIT) and
capital formation in Nigeria, using data from 2005 to 2014. They employed a time-series
regression analysis to assess how CIT impacts corporate investment in capital assets. Their
findings indicated that higher CIT rates were associated with reduced capital formation due to
increased financial burdens on firms. The authors recommended tax incentives for capital
investment and a review of CIT policies to encourage more investment in productive assets.

Ojo and Adebayo (2018) investigated the effect of CIT on capital formation specifically within
the Nigerian manufacturing sector, analyzing data from 2008 to 2017. The study utilized panel

29
data analysis with fixed-effects models to evaluate the relationship between CIT rates and
investment in capital goods. The results revealed a negative impact of CIT on capital formation,
as high tax rates constrained investment capacity. The researchers recommended implementing
tax reliefs for manufacturing firms and revising CIT policies to foster capital investment in the
sector.

Umar and Bello (2020) examined the impact of CIT on capital formation within Nigeria's
financial sector, using data from 2012 to 2019. They employed a cross-sectional regression
analysis to explore how variations in CIT rates influenced capital investment by financial
institutions. The study found that elevated CIT rates negatively affected capital formation by
limiting available funds for investment. The authors suggested revising CIT rates and offering
targeted tax incentives to encourage capital investment in the financial sector.

Suleiman and Adamu (2021) conducted a study on the effects of CIT on capital formation in
Nigerian small and medium-sized enterprises (SMEs), analyzing data from 2010 to 2020. The
study used a panel data approach with random-effects models to assess the impact of CIT on
SME investment in capital assets. The findings showed that high CIT rates had a detrimental
effect on capital formation, as SMEs faced significant financial constraints. The researchers
recommended introducing tax relief measures and support programs to enhance capital
investment among SMEs.

Chukwu and Okafor (2022) explored how CIT influences capital formation across various
sectors of the Nigerian economy, using data from 2015 to 2022. They applied a sectoral analysis
approach with multiple regression techniques to understand the differential impacts of CIT on
capital investment in different industries. The study found that CIT had varying effects on capital
formation depending on the sector, with some experiencing more significant negative impacts
than others. The authors recommended a sector-specific approach to CIT policy, including
targeted tax incentives for sectors critical to economic growth and capital investment.

Akinola and Salami (2017) examined the impact of Company Income Tax (CIT) on capital
formation across different sectors in Nigeria, analyzing data from 2000 to 2015. They utilized a
sectoral regression analysis to explore how CIT rates influenced investment in capital assets
within key sectors such as agriculture, manufacturing, and services. The study revealed that high

30
CIT rates adversely affected capital formation in all sectors, with the manufacturing sector being
particularly vulnerable. The researchers recommended sector-specific tax incentives and reforms
to stimulate capital investment across the economy.

Adeoye and Ibrahim (2019) focused on the impact of CIT on capital formation in publicly listed
companies in Nigeria, using data from 2010 to 2018. They employed a panel data analysis with
fixed-effects models to assess how CIT rates impacted capital investment decisions. Their
findings indicated that increased CIT rates were associated with reduced capital formation due to
higher tax liabilities. The authors suggested that policymakers should consider tax incentives for
publicly listed companies to boost their investment in capital assets.

Faruk and Umar (2020) investigated the effects of CIT on capital formation within Nigeria's oil
and gas sector, analyzing data from 2005 to 2019. They used a time-series regression approach to
evaluate how variations in CIT rates affected capital investment in the sector. The study found
that high CIT rates negatively impacted capital formation, as companies faced significant
financial constraints. The researchers recommended tax reforms and incentives to encourage
greater investment in capital infrastructure within the oil and gas industry.

Babatunde and Olatunji (2021) explored how CIT affects capital formation in Nigeria’s real
estate sector, using data from 2013 to 2020. They applied a regression analysis to assess the
relationship between CIT rates and investment in real estate capital projects. The study revealed
that high CIT rates had a detrimental effect on capital formation, limiting the sector's ability to
invest in new projects and infrastructure. The authors recommended providing targeted tax
reliefs and incentives to promote capital investment in the real estate sector.

Moses and Ogundele (2022) investigated the impact of CIT on capital formation in Nigeria's
agricultural sector, using data from 2014 to 2021. They employed a panel data approach with
random-effects models to evaluate how CIT rates influenced capital investment in agriculture.
The study found that high CIT rates adversely affected capital formation, as agricultural firms
faced reduced financial capacity for investment. The researchers suggested implementing tax
incentives and support programs to enhance capital investment in agriculture, which is crucial for
improving productivity and economic development.

31
2.3.3 THE EFFECT OF PERSONAL INCOME TAX ON ECONOMIC GROWTH IN
NIGERIA.

Eze and Okoro (2016) examined the effect of Personal Income Tax (PIT) on labor force
participation in Nigeria, analyzing data from 2000 to 2014. They used a panel data regression
approach to assess how changes in PIT rates influenced labor market engagement. The study
found that higher PIT rates were associated with decreased labor force participation, particularly
among low-income workers. The researchers recommended revising PIT policies to create a
more favorable environment for labor market participation and suggested implementing tax relief
measures for lower-income groups.

Ogunleye and Adegboye (2018) focused on the relationship between PIT and employment rates
in Nigeria, using data from 2005 to 2017. They employed a cross-sectional analysis with
Ordinary Least Squares (OLS) regression to explore how PIT rates affected employment levels.
Their findings indicated that higher PIT rates were negatively correlated with employment rates,
as they discouraged job creation and labor market participation. The authors recommended
adjusting PIT rates to stimulate employment and enhance job creation efforts.

Adeleke and Ibrahim (2019) investigated the impact of PIT on worker productivity in Nigeria,
analyzing data from 2010 to 2018. They used a multiple regression analysis to assess how PIT
rates influenced productivity levels among employees. The study revealed that high PIT rates
were associated with reduced worker productivity, as they created financial disincentives and
increased the burden on employees. The researchers suggested reducing PIT rates and providing
tax incentives to improve worker productivity and overall economic performance.

Fatima and Usman (2020) explored the effects of PIT on labor market outcomes across different
sectors in Nigeria, using data from 2012 to 2019. They employed a sectoral regression analysis
to evaluate how PIT rates impacted various labor market indicators, such as employment rates
and wage levels. The study found that PIT had varying effects on different sectors, with some
experiencing more significant negative impacts on labor market outcomes than others. The
authors recommended sector-specific PIT adjustments and targeted support to enhance labor
market conditions across different industries

32
Chukwu and Anozie (2021) assessed the impact of PIT on labor force participation in Nigeria
using data from 2015 to 2021. They applied a dynamic panel data approach to analyze the
relationship between PIT rates and labor force engagement. The study found that increases in
PIT rates were linked to lower labor force participation, particularly among informal sector
workers. The researchers recommended implementing tax reforms to ease the tax burden on
workers and incentivize greater labor market participation, along with improving tax
administration to ensure more equitable outcomes.

Adamu and Suleiman (2017) conducted a longitudinal study analyzing the effect of Personal
Income Tax (PIT) on labor force participation in Nigeria, using data from 2000 to 2015. They
applied a fixed-effects regression model to examine how fluctuations in PIT rates impacted labor
force engagement over time. The study revealed that higher PIT rates led to a reduction in labor
force participation, especially among middle-income and low-income earners. The authors
recommended implementing progressive PIT rates and enhancing tax incentives for workers to
encourage greater labor market involvement.

Olawale and Akinyele (2019) explored the impact of PIT on employment and workforce
participation in Nigeria, analyzing data from 2008 to 2018. They used a cross-sectional analysis
with Ordinary Least Squares (OLS) regression to assess the relationship between PIT rates and
employment outcomes. Their findings indicated that higher PIT rates were negatively associated
with employment levels and workforce participation. The researchers suggested revising PIT
policies to foster employment growth and improve workforce participation, particularly by
providing tax relief for lower-income groups.

Micheal and Fola (2020) investigated how PIT influences labor market dynamics in Nigeria,
focusing on data from 2011 to 2020. They employed a dynamic panel data approach to analyze
the impact of PIT rates on various labor market indicators, including employment rates and job
turnover. The study found that high PIT rates had a detrimental effect on labor market dynamics,
contributing to lower employment rates and higher job turnover. The authors recommended tax
policy reforms to reduce PIT rates and support labor market stability.

Nwachukwu and Obi (2021) examined the impact of PIT on workforce productivity in Nigeria's
service sector, using data from 2013 to 2020. They applied a sector-specific regression analysis

33
to explore how PIT rates affected productivity levels among service sector employees. The study
revealed that high PIT rates negatively impacted workforce productivity by reducing employee
motivation and financial satisfaction. The researchers recommended implementing targeted PIT
reductions and providing tax incentives to boost productivity in the service sector.

Daniel and Eke (2022) analyzed the effect of PIT on labor force participation and wage levels in
Nigeria, focusing on data from 2016 to 2022. They utilized a panel data analysis with random-
effects models to assess how variations in PIT rates influenced labor force engagement and wage
levels. The study found that increases in PIT rates were associated with decreased labor force
participation and lower wage levels, particularly affecting low- and middle-income workers. The
authors recommended revising PIT rates and enhancing tax credits to support labor force
participation and improve wage conditions.

2.3 EMPIRICAL SUMMARY AND LITERATURE GAP

The empirical literature on the effects of Value Added Tax (VAT), Company Income Tax (CIT),
and Personal Income Tax (PIT) in Nigeria highlights a consistent finding: tax policies have
significant impacts on economic outcomes. Across various studies, it is observed that higher
VAT rates often lead to reduce per capita income, especially affecting lower-income households.
Similarly, increased CIT rates are generally associated with lower capital formation, particularly
impacting small and medium-sized enterprises (SMEs) and specific sectors of the economy. On
the front of PIT, elevated rates have been found to negatively influence labor force participation
and employment levels, with a pronounced effect on lower-income and middle-income workers.
These studies collectively suggest that while taxes are essential for revenue generation, their
design and implementation need careful consideration to avoid adverse economic impacts.
Despite these insights, several gaps remain in the existing literature. There is a lack of detailed
exploration into how specific tax policy adjustments could mitigate the negative effects
observed. Additionally, there is insufficient examination of the long-term cumulative impacts of
these taxes on economic growth and structural changes within the economy. The studies often
focus on aggregate data without delving into how different income groups or sectors might be
differently affected over various economic cycles. Furthermore, there is limited analysis of how
improvements in tax administration and enforcement could alter the observed impacts of tax
policies. More nuanced and sector-specific research, as well as studies examining the

34
effectiveness of targeted tax relief measures, could provide a more comprehensive understanding
of these dynamics.

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 THEORETICAL REVIEW

To understand the effect of deaggregated tax revenue on economic growth, an integrated

theoretical framework combining Tax Incidence Theory and Endogenous Growth Theory
provides a comprehensive analysis. Tax Incidence Theory examines how the burden of various
taxes—such as Value Added Tax (VAT), Corporate Income Tax (CIT), and Personal Income
Tax (PIT)—is distributed among different economic agents. It differentiates between statutory
incidence, where the legal responsibility for paying the tax lies, and economic incidence, which
reflects the actual economic burden borne by individuals or firms. By applying this theory, we
can understand how each tax type affects different segments of the population and the broader

35
economy. For example, VAT may disproportionately impact lower-income households, while
CIT could influence business investment and capital formation. PIT, in turn, affects labor supply
and productivity, depending on its structure. Endogenous Growth Theory complements this
analysis by focusing on how tax policies influence long-term economic growth. Unlike
exogenous models, which treat technological progress as external, Endogenous Growth Theory
integrates policy measures and investments in human capital, innovation, and knowledge as
drivers of sustained economic growth. Within this framework, deaggregated tax revenues are
evaluated for their impact on growth factors. VAT affects consumption patterns and overall
economic demand. CIT influences business investment decisions, which are crucial for
technological advancement and capital accumulation. PIT impacts labor supply and productivity,
influencing human capital development.

Integrating Tax Incidence Theory with Endogenous Growth Theory provides a holistic view of
the interplay between tax structures and economic growth. This combined approach allows us to
assess how the distribution of tax burdens affects economic behavior and growth outcomes. For
instance, analyzing how a regressive tax like VAT impacts lower-income households'
consumption and overall economic activity offers insights into growth implications.
Additionally, examining how different tax types influence investment decisions, productivity,
and human capital development helps understand their role in driving long-term growth. This
framework also informs policy design by highlighting how tax policies can be optimized to
balance revenue generation with positive growth outcomes. It involves crafting tax structures
that minimize negative impacts on investment and consumption while ensuring an equitable
distribution of tax burdens. By combining insights from both theories, we can better understand
how to design tax policies that support sustainable economic development.

3.2.1 MODEL SPECIFICATION

In this study, we adopt the model from the research conducted by Moses Nnoruga Okeke,
Chikwelu M. Mbonu, and Amahalu Nestor Ndubuisi (2017) on "Tax Revenue and Economic
Development in Nigeria: A Disaggregated Analysis." The study explored the relationship
between various forms of tax revenue and economic development within Nigeria. The study
analysed the types of tax revenue—specifically Petroleum Profit Tax (PPT), Company Income
Tax (CIT), Value Added Tax (VAT), Personal Income Tax (PIT), and Export Duty (EXDT)—

36
impact economic development indicators. By decomposing taxation into these distinct
categories, the study aims to provide a nuanced understanding of how each tax component
influences Nigeria's economic growth and development. The model specification was as follows:

RGDP = f(PPT, CIT, VAT, PIT, EXDT)……………………………………………… ….(1)

RGDP = β0 + β1PPT + β2CIT + β3VAT + β4PIT + β5 EXDT + µ…………………………..(2)

WHERE:

PPT = Petroleum Profit Tax

CIT = Company Income Tax

VAT = Value Added Tax

PIT = Personal Income Tax

EXDT = Export Duty

β0 = constant

β1 – β5 = Regression Coefficients

µ = Stochastic Error Term

3.2.2 MODIFIED MODEL SPECIFICATION

The modified model will be specified as follows;

Y = β0 + βX1 + µ………………………………………………………..(3)

Where;

Y = Economic growth (dependent variable)

X = taxation (independent variable)

β0 = constant term

β = coefficient of taxation

37
µ = Error tem

Explicitly, the equation can be defined as;

Economic growth = f(taxation) + µ…………………………………………………..(4)

Representing the equations with the variables of the construct, hence the equation below are
formulated;

PCI = β0 + β1VAT + β2CIT + β3PIT+ β4CAF + β5 LCF + β6 INFL+ µ……………………………

(5)

CAF = β0 + β1VAT + β2CIT + β3PIT+ β4PCI + β5 LCF + β6 INFL+ µ……………………………

(6)

LCF = β0 + β1VAT + β2CIT + β3PIT+ β4CAF + β5 PCI + β6 INFL+ µ……………………………

(7)

Where;

PCI = per capita income

CAF = capital formation

LCF = Labour force

VAT = value added tax

CIT = company income tax

PIT = personal income tax

INFL = Inflation

β0 = constant

β1 – β6 = Regression Coefficients

µ = Stochastic Error Term

38
3.2.3 A PRIORI EXPECTATIONS

The theoretical (a priori) expectations about the signs of the coefficients are as follows:

β0 > 0, β1 > 0, β2 > 0, β3 > 0, β4 > 0, β5 > 0, β6 < 0

It is expected that the sign of the coefficients of VAT, CIT and PIT are all positive while INFL is
negative. This is because an in increase in the amount of VAT, CIT and PIT increase in PCI,
CAF and LCF while INFL will lead to a decrease in them other factors being equal.

3.2.4 DECISION RULE

Accept the alternative hypothesis, if the P-value is less than 0.05. Otherwise reject.

3.3 DEFINITION OF VARIABLES

PCI (Per Capita Income): Per Capita Income is a measure of the average income earned per
person in a specific region, usually a country, over a defined period. It is calculated by dividing
the total national income by the population of the region. PCI provides insights into the
economic well-being and standard of living of individuals within that area.

CAF (Capital Formation): Capital Formation refers to the process of increasing the stock of
physical capital goods in an economy through investments in machinery, equipment, buildings,
infrastructure, and other productive assets. It represents the net addition to the capital stock of a
country and is crucial for long-term economic growth and development.

LCF (Labour Force): The Labour Force comprises all individuals who are employed or
actively seeking employment within an economy. It includes both employed individuals and
those who are unemployed but willing and able to work. The Labour Force is a key component
in assessing workforce participation rates and labor market dynamics.

VAT (Value Added Tax): Value Added Tax is a consumption tax levied on the value added to
goods and services at each stage of the production and distribution chain. VAT is ultimately
borne by the final consumer but is collected at each stage of the supply chain. It is a significant
source of revenue for governments and plays a role in shaping consumer behavior.

39
CIT (Company Income Tax): Company Income Tax is a tax imposed on the profits earned by
companies operating within a particular jurisdiction. It is calculated based on the taxable income
generated by businesses after deducting allowable expenses. CIT serves as a primary source of
revenue for governments and helps fund public services and infrastructure.

PIT (Personal Income Tax): Personal Income Tax is a tax levied on the income earned by
individuals within a specific jurisdiction. It includes wages, salaries, bonuses, rental income,
investment gains, and other sources of personal income. PIT is used to fund government
programs, services, and social welfare initiatives.

INFL (Inflation): Inflation refers to the rate at which the general price level of goods and
services in an economy rises over a period. It reflects a decrease in the purchasing power of a
nation's currency, leading to higher prices for consumers. Inflation impacts various economic
variables such as interest rates, investment decisions, and overall economic stability.

3.4 SOURCES OF DATA

This study draws upon a range of data sources to investigate the relationship between
disaggregated tax revenue and economic growth in Nigeria. The primary dependent variable,
Economic Growth, is represented by Per Capita Income. This data is sourced from the Central
Bank of Nigeria (CBN) Statistical Bulletin, which offers detailed information on income levels
and overall economic performance across the country. The independent variables focus on
various forms of tax revenue and are obtained from the Federal Inland Revenue Service (FIRS)
Statistical Bulletin. These include Personal Income Tax (PIT), which represents revenue

40
collected from individuals based on their earnings; Company Income Tax (CIT), reflecting taxes
on corporate profits; Value Added Tax (VAT), a consumption tax imposed on the value added at
each production or distribution stage; Petroleum Profit Tax (PPT), related to profits from
petroleum operations; and Export Duty (EXDT), which pertains to taxes on goods exported from
Nigeria.

In addition to the independent variables, the study incorporates a control variable—Inflation.

This data is sourced from the World Development Indicators (WDI), which provides
comprehensive global economic data, including inflation rates that affect overall economic
stability and growth. All data used in this study covers the period from 2000 to 2023, allowing
for a thorough analysis of the impact of various tax revenues on economic growth over a
substantial timeframe.

3.5 ESTIMATION TECHNIQUES

This study will utilize the Error Correction Mechanism (ECM) and Co-integration
analysis as the estimation techniques for the empirical study. These techniques are appropriate
for examining the long-run relationship between the variables used in this study. The software
package utilized for the analysis is Econometric view (E-view), and the Auto-regressive
distributed lag (ARDL) method is employed to test for co-integration among the variables.
Additionally, the Augmented Dickey Fuller test (ADF) will be used to determine the stationarity
of the series.

It is important to ensure that the regression equation includes stationary series to avoid
biased estimations. In the absence of integration among the variables, the statistical inference
drawn from such estimations may not be valid.

3.5.1 UNIT ROOT TEST

To determine the stationarity of the time series data, the Augmented Dickey Fuller (ADF)
unit root test will be conducted. This is a crucial first step to ensure the data is stationary. A
series Xt is considered stationary if it exhibits a constant mean, finite variance, tendency to
return to equilibrium, and has a zero order of integration (I(0)). If the series Xt requires first

41
differencing to achieve stationarity, it is deemed integrated of order one (I(1)). Likewise, if
further differencing is needed for stationarity, it is integrated of order two (I(2)), and so on.

The ADF test is widely used to test for unit roots, considering appropriate adjustments for serial
correlation. For this study, the ADF test is employed, and the critical values for determining the
order of integration are obtained from more recent Mackinnon critical values incorporated in the
E-View software.

The null hypothesis, denoted as Ho: Xt-1......I(1), assumes the presence of a unit root. The
decision rule states that if the Mackinnon critical value is less than the ADF test statistic, the null
hypothesis of a unit root in Xt is rejected, indicating stationarity. Conversely, if the critical value
is greater, the null hypothesis is accepted, suggesting the presence of a unit root and non-
stationarity.

3.5.2 COINTEGRATION TEST

There has been traditional approaches to cointegration relationship estimation, like the

Johanson (1991) procedure, Johanson and Juselius (1995) and Engle-Granger two step 36

approaches. There are equally a modified OLS procedure which requires that the variables are

integrated of order one I(1), or the three should be a prior information if the a variable is

integrated of order zero I(0) or I(1). To solve this estimation dilemma, Pesaran and Shin (1999)

indicated that a cointegrating systems can be evaluated as an ARDL models if the variables are

either integrated of order zero and order one. The authors further noted that ARDL model

requires no symmetry of lag lengths, hence each variable can possess different lag terms.

The ARDL cointegrating regression form is therefore generated by transforming equation (1)

into differences and substituting long run coefficients from equation (2) as follows:


ECt  yt    X
j 1
j ,t j

 p

 1  
i 1
i
42
 p

 i   m
m i 1

qi

j , i    j , m
i 0

p 1 k qi  1  
yt  i  yt  1    X j  j ,i    ECt  1   t
i 1 j 1 i 0 t 1 ….……………………………………….(8)

BOUND TEST

When there exist time series variables having a long run relationships, and variables are

stationary at different order of stationarity, then the Bound test cointegration approach is

therefore utilized. Firstly, we recall the basic ARDL regression model as:

p k qi 
yt    i yt  1   X j  j ,i   t
i 1 j 1 i 0 t 1

The Bound cointegrating test approach is therefore transformed into the following

representation:

p 1 k qi  1 
yt   i  yt  1    X j   
i 1 j 1 i 0
 j ,i    yt  1    X
j 1
j ,t  1 j t
t 1 .………………(9)

For the relationship to be existing, the test is simply a test of,

 0
1  2 ......... k 0

43
3.5.1 FULLY MODIFIED ORDINARY LEAST SQUARES (FMOLS) MODEL

Fully Modified Ordinary Least Squares (FMOLS) is a statistical method used in econometrics to
estimate parameters in a regression model when there is a possibility of endogeneity and serial
correlation in the data. It is an extension of the Ordinary Least Squares (OLS) method and takes
into account these issues to provide more reliable and unbiased estimates. To implement
FMOLS, you first need to prepare your data. Gather the relevant variables for your analysis and
ensure that they are stationary. If necessary, transform the data using differencing or logarithmic
transformations to achieve stationarity. Stationarity is important as FMOLS assumes that the
variables are covariance stationary. Next, specify your regression model. Choose the appropriate
variables to include as independent/explanatory variables based on your research question. It is
crucial to consider potential endogeneity and serial correlation issues when selecting these
variables. Endogeneity occurs when the independent variables are correlated with the error term,
leading to biased and inconsistent estimates. Serial correlation refers to the correlation between
error terms over time, violating the assumption of independent errors. Once the model is
specified, you can estimate the long-run coefficients using FMOLS. The FMOLS method adjusts
for endogeneity and serial correlation by applying the Cochrane-Orcutt procedure. This involves
using instrumental variables to account for endogeneity and including lagged levels of the
variables to capture both contemporaneous and lagged interactions. After estimating the
coefficients, you can conduct hypothesis tests to assess the statistical significance of the
estimated relationships. These tests help determine if the coefficients are significantly different
from zero, indicating whether there is a meaningful relationship between the variables.

It is also essential to perform diagnostic checks on the model to ensure the validity of
assumptions. This involves checking for issues such as heteroskedasticity, autocorrelation, and
normality of residuals. If violations are detected, additional adjustments may be required.
Finally, interpret the results of the estimated coefficients. Assess the significance and direction of
the relationships between the variables based on the estimated coefficients. Interpretation should
be done within the context of your research question and relevant literature. Implementing
FMOLS can be complex and typically requires advanced statistical software. It is recommended
to consult textbooks or articles on econometrics to gain a deeper understanding of FMOLS and
its application in your specific research context.

44
3.5.2 ERROR CORRECTION MODEL

The parsimonious error correction model (ECM) will be employed to test the long-run
equilibrium relationship among variables in this study. In applied work, if two time series
variables are co-integrated, it is expected that the coefficient of the ECM is significant and
negative. A negative sign indicates its role in error correction. Specifically, if the actual
equilibrium value is too high, the error correction term will decrease it, while if it is too low, the
error correction term will increase it, as proposed by Dickey-Fuller (1981).

The following statistical tests will be used for this study:

1. R-squared (R2): This coefficient of multiple determination will be used to measure the
proportion of changes in the dependent variable explained by the independent variables. A
higher R2 value, above 50%, indicates a better fit.

2. Standard error (SE): This test will be utilized to determine the significance level of the
variables, explaining the level of statistical significance.

3. Durbin-Watson test (D.W): This test statistic will be employed to examine for
autocorrelation or serial correlation among the independent variables in the econometric
analysis.

In the second phase, we will select and apply the appropriate econometric methods based on the
results of the unit root test. If the data series are stationary, we will use the vector autoregression
(VAR) model. This model is suitable for analyzing the dynamic relationships between multiple
time series and understanding how they influence each other over time. If the data series are
found to be non-stationary but co-integrated, we will employ the autoregressive distributed lag
(ARDL) model. The ARDL model is effective for dealing with mixed-order integration and
allows us to examine both short-term and long-term relationships between the variables. In cases
where the data series are non-stationary and do not exhibit co-integration, we will use the fully
modified ordinary least squares (FMOLS) method. FMOLS is designed to handle non-stationary
data and correct for serial correlation and endogeneity issues, providing reliable estimates of the
relationships between the variables. The final phase involves post-estimation analyses to validate
and interpret the results obtained from the econometric models. We will conduct diagnostic tests
to assess the robustness and reliability of the chosen model. These tests will check for serial
45
correlation, heteroscedasticity, and overall model stability, ensuring that the results are not
biased or unreliable. Model evaluation will follow, where we will assess the performance of the
model using goodness-of-fit measures and examine the significance of the estimated coefficients.
This step helps in interpreting the impact of each tax revenue component on economic
development and understanding the practical implications of the findings. Finally, we will
perform sensitivity analysis to test the robustness of the results by varying model specifications
and examining how these changes affect the findings. This analysis ensures that the conclusions
drawn are consistent and reliable across different model configurations. Together, these phases
will provide a comprehensive analysis of the relationship between deaggregated tax revenue and
economic growth, offering valuable insights into the effects of various tax components on
economic growth in Nigeria.

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND DISCUSSION OF RESULTS

4.1 Introduction

46
 This study investigates the effect of disaggregated tax revenue on economic growth in Nigeria,
focusing on three key objectives: to examine the impact of Value Added Tax (VAT), Company
Income Tax (CIT), and Personal Income Tax (PIT) on economic growth, measured by Per Capita
Income (PCI). The study utilizes data from the Central Bank of Nigeria and the Federal Inland
Revenue Service, covering the period from 2000 to 2023. The Auto-Regressive Distributed Lag
(ARDL) model will be employed as the main estimation technique to assess both short-run and
long-run relationships. Additionally, the Error Correction Mechanism (ECM) will capture
adjustments toward equilibrium.

4.2. Descriptive Statistics

This study initiates its empirical investigation by looking into detailed descriptive analysis of the
data used in the model. The objective is to provide a comprehensive understanding of the
distribution and variability of the variables under scrutiny. Table 1 presents the results of these
descriptive statistics, offering valuable insights into several key aspects of the dataset.

Table 4.1 Descriptive Statistics Results

VAT CAF CIT INFL LCF PCI PIT
Mean 49.89461 5.47E+08 33.32372 13.12083 56874406 1891.284 14.71292
Median 50.13488 2.81E+08 35.11516 12.70000 56263940 2070.194 14.76446
Maximum 54.26454 2.93E+09 45.52653 24.70000 75721345 3200.953 20.75643
Minimum 45.18382 59600000 16.03949 5.400000 41887859 563.0471 9.802508
Std. Dev. 2.510082 6.86E+08 8.974415 4.474078 10073764 742.9623 2.849347
Skewness -0.098275 2.260737 -0.441558 0.502454 0.234237 -0.371119 0.285445
Kurtosis 2.288286 7.626387 2.263695 3.190990 1.935172 2.321646 2.605855

Jarque-Bera 0.545169 41.84719 1.322040 1.046319 1.353326 1.011081 0.481266

Probability 0.761409 0.000000 0.516324 0.592645 0.508310 0.603179 0.786130

Sum 1197.471 1.31E+10 799.7693 314.9000 1.36E+09 45390.81 353.1102

Sum Sq. Dev. 144.9117 1.08E+19 1852.423 460.3996 2.33E+15 12695840 186.7319

Observations 24 24 24 24 24 24 24
Source: Authors Computation using E-views 10, 2024

The Value Added Tax (VAT) has shown relative stability over the observed period. The mean
value of VAT is 49.89, with a median of 50.13, which suggests that VAT collections have
remained consistent. The range of VAT, from a minimum of 45.18 to a maximum of 54.26,
indicates that fluctuations were moderate, with a standard deviation of 2.51. The negative

47
skewness of -0.10 suggests that VAT values are slightly skewed to the left, meaning lower
values are more frequent. With a kurtosis of 2.29, the distribution of VAT is close to normal. The
Jarque-Bera statistic of 0.54 and a corresponding probability of 0.76 support the hypothesis of
normality in VAT data. Over the 24 observations, the total VAT collected amounts to 1197.47,
with a sum of squared deviations of 144.91.

The statistics for capital formation (CAF) reveal high variability and the presence of outliers.
The mean CAF value is 5.47E+08, while the median is considerably lower at 2.81E+08,
indicating the data is skewed. This is confirmed by the skewness value of 2.26, showing a strong
positive skew, with a few large values significantly impacting the distribution. The minimum
CAF value is 5.96E+07, and the maximum is 2.93E+09, reflecting wide fluctuations in capital
formation over time. The standard deviation is extremely high at 6.86E+08, reinforcing the idea
of significant variability. With a kurtosis of 7.63, the data is leptokurtic, pointing to the presence
of extreme values. The Jarque-Bera statistic of 41.85 and a probability of 0.00 indicate that the
distribution of CAF is not normal. Over the 24 observations, the total capital formation is
1.31E+10, and the sum of squared deviations is 1.08E+19.

Company Income Tax (CIT) exhibits moderate variability, with a mean of 33.32 and a median of
35.12. The minimum CIT is 16.04, and the maximum is 45.53, showing a significant range. The
standard deviation of 8.97 indicates that CIT values have been somewhat dispersed over the
period. The skewness of -0.44 suggests a negative skew, meaning higher CIT values occur more
frequently than lower ones. A kurtosis of 2.26 indicates that CIT values are nearly normally
distributed. The Jarque-Bera statistic of 1.32, with a probability of 0.52, confirms that the CIT
data does not deviate significantly from normality. The total CIT collected over the 24
observations is 799.77, with a sum of squared deviations of 1852.42.

Inflation (INFL) shows considerable fluctuations, with a mean value of 13.12 and a median of
12.70. Inflation ranges from a minimum of 5.40 to a maximum of 24.70, reflecting significant
volatility in price levels over time. The standard deviation of 4.47 reinforces this volatility. The
skewness of 0.50 suggests a slight positive skew, with higher inflation values being more
frequent than lower ones. A kurtosis value of 3.19 indicates that the data is moderately peaked,
close to a normal distribution. The Jarque-Bera statistic of 1.05, with a probability of 0.59,

48
supports the normality of the inflation data. The total inflation for the period is 314.90, with a
sum of squared deviations of 460.40.

The statistics for labor force participation (LCF) indicate a mean of 56,874,406, with a median of
56,263,940, suggesting a fairly consistent level of labor force participation. The minimum value
is 41,887,859, and the maximum is 75,721,345, showing some fluctuation over the period. The
standard deviation of 10,073,764 indicates moderate dispersion in the data. A skewness of 0.23
shows a slight positive skew, meaning that higher values of labor force participation are more
frequent. The kurtosis value of 1.94 indicates a flatter distribution compared to a normal curve.
The Jarque-Bera statistic of 1.35, with a probability of 0.51, suggests that the labor force
participation data is normally distributed. The total labor force participation over the 24
observations is 1.36E+09, with a sum of squared deviations of 2.33E+15.

Per capita income (PCI) statistics reveal some degree of variability, with a mean of 1891.28 and
a median of 2070.19. The range of PCI values is quite broad, from a minimum of 563.05 to a
maximum of 3200.95, reflecting significant differences in income levels over time. The standard
deviation is 742.96, indicating high variability in per capita income. The skewness of -0.37
suggests a slight negative skew, meaning that higher income levels are more frequent than lower
ones. A kurtosis of 2.32 indicates a distribution close to normal. The Jarque-Bera statistic of
1.01, with a probability of 0.60, supports the normality of the PCI data. The total per capita
income across the 24 observations is 45,390.81, with a sum of squared deviations of 12,695,840.

Finally, Personal Income Tax (PIT) shows a mean value of 14.71 and a median of 14.76,
indicating that the data is fairly symmetric. PIT ranges from a minimum of 9.80 to a maximum
of 20.76, with a standard deviation of 2.85, reflecting moderate variability. The skewness of 0.29
suggests a slight positive skew, meaning higher PIT values are more frequent. The kurtosis value
of 2.61 indicates a distribution slightly more peaked than normal. The Jarque-Bera statistic of
0.48, with a probability of 0.79, suggests that the PIT data is normally distributed. The total PIT
collected over the 24 observations is 353.11, with a sum of squared deviations of 186.73.

4.2. Correlation

49
In the correlation test, we aim to evaluate the strength and direction of the relationship between
the dependent variable and the independent variables. This assessment is crucial for
understanding the interplay among the variables included in our model. To accomplish this, we
employ a correlation matrix, which provides a comprehensive overview of the correlations
between each pair of variables under consideration. The resulting correlation matrix offers
valuable insights into the extent to which changes in one variable are associated with changes in
another variable, facilitating a deeper understanding of the dynamics within the model.

Table 4.2: Correlation Table

VAT CAF CIT INFL LCF PCI PIT

VAT 1 0.3328 -0.9071 -0.2792 -0.8640 -0.4596 -0.8590
CAF 0.3328 1 -0.4685 -0.3527 -0.5396 -0.3430 -0.4375
CIT -0.9071 -0.4685 1 0.2554 0.9566 0.6983 0.9392
INFL -0.2792 -0.3527 0.2554 1 0.3747 -0.2876 0.3687
LCF -0.8640 -0.5396 0.9566 0.374 1 0.5801 0.9741
PCI -0.4596 -0.3430 0.6983 -0.2876 0.5801 1 0.5684
PIT -0.8590 -0.4375 0.9392 0.3687 0.9741 0.5684 1
Source: Authors Computation using E-views 10, 2024

4.3. Unit Root Test

As a follow up of the outcome of the descriptive statistics of the variables, the researcher
considered it necessary to check for the time series properties of the variables used. To check for
these properties, the Augmented Dickey-Fuller (ADF) test was used and the result is presented in
the Table below.

Table 4.3: Unit root test table

Augmented Dickey Fuller Test

AT LEVEL AT FIRST DIFFERENCE

50
 Variable

t-statistics Prob. Value Status t-statistics Prob. Status Remark

Value

PCI -1.850548 0.3482 I(0) -3.037415 0.0469 I(1) S

CAF -3.012867 0.0485 I(0) -6.028427 0.0001 I(1) S

CIT -1.6150052 0.4592 I(0) -4.636150 0.0014 I(1) S

INFL 2.467239 0.1360 I(0) -5.985233 0.0001 I(1) S

LCF 6.577414 1.0000 I(0) -0.850080 0.0044 I(1) S

PIT 0.560870 0.9851 I(0) -5.794305 0.0001 I(1) S

VAT -1.099823 0.6978 I(0) -6.156272 0.0000 I(1) S

Source: Authors Computation using E-views 10, 2024

VAT shows strong negative correlations with most variables, indicating that as VAT increases,
the other variables tend to decrease. Specifically, VAT has a very strong negative correlation
with CIT (-0.9071), LCF (-0.8640), and PIT (-0.8590), suggesting that higher VAT collections
might be associated with lower company income tax, labor force participation, and personal
income tax. The correlation between VAT and PCI is also negative (-0.4596), though weaker,
suggesting a moderate inverse relationship. VAT and inflation (INFL) are weakly negatively
correlated (-0.2792), while VAT and capital formation (CAF) are positively but weakly
correlated (0.3328), suggesting that VAT may be associated with higher levels of capital
formation.

Capital Formation (CAF) has a weak positive correlation with VAT (0.3328) but shows negative
correlations with other variables such as CIT (-0.4685), LCF (-0.5396), PCI (-0.3430), and PIT (-
0.4375). These negative correlations suggest that as capital formation increases, tax revenue
51
variables like CIT, LCF, PCI, and PIT tend to decrease. The relationship between CAF and
inflation is also negative (-0.3527), indicating that higher capital formation might correspond
with lower inflation rates.

Company Income Tax (CIT) has strong positive correlations with several variables. It is highly
correlated with LCF (0.9566), PIT (0.9392), and PCI (0.6983), suggesting that higher company
income tax is strongly linked with higher labor force participation, personal income tax, and per
capita income. Interestingly, CIT has a positive but weaker correlation with inflation (0.2554),
indicating a potential relationship between higher corporate taxes and rising price levels. On the
other hand, CIT is negatively correlated with VAT (-0.9071) and CAF (-0.4685), implying that
when CIT increases, VAT and capital formation tend to decrease.

Inflation (INFL) shows mixed correlations with the other variables. It has a weak positive
correlation with LCF (0.3747) and PIT (0.3687), indicating a mild relationship where higher
inflation might be associated with higher labor force participation and personal income tax.
However, inflation is negatively correlated with VAT (-0.2792), CAF (-0.3527), and PCI (-
0.2876), suggesting that higher inflation might coincide with lower levels of VAT, capital
formation, and per capita income.

Labor Force Participation (LCF) has strong positive correlations with CIT (0.9566), PIT
(0.9741), and PCI (0.5801), indicating that a higher labor force participation rate tends to be
associated with increased company income tax, personal income tax, and per capita income. LCF
also has a positive correlation with inflation (0.3747), suggesting that labor force participation
may rise with inflation. However, LCF has strong negative correlations with VAT (-0.8640) and
CAF (-0.5396), showing that increased labor force participation might be linked to lower VAT
collections and capital formation.

Per Capita Income (PCI) is positively correlated with CIT (0.6983), PIT (0.5684), and LCF
(0.5801), showing that higher per capita income tends to coincide with higher company income
tax, personal income tax, and labor force participation. The relationship between PCI and
inflation is slightly negative (-0.2876), suggesting that higher income levels might be associated
with lower inflation. PCI also has negative correlations with VAT (-0.4596) and CAF (-0.3430),
implying that higher per capita income might be linked to lower VAT and capital formation.

52
Personal Income Tax (PIT) is strongly positively correlated with CIT (0.9392), LCF (0.9741),
and PCI (0.5684), indicating that higher personal income tax is strongly linked to higher
company income tax, labor force participation, and per capita income. The positive correlation
with inflation (0.3687) suggests that rising inflation may also correspond to higher personal
income tax. However, PIT is negatively correlated with VAT (-0.8590) and CAF (-0.4375),
suggesting that increases in PIT tend to coincide with decreases in VAT collections and capital
formation.

Table 4.4: Bound Test Table

Test Statistic Value k

F-statistic 11.06092 6

Critical Value Bounds

Significance I0 Bound I1 Bound

10% 2.12 3.23

5% 2.45 3.61
2.5% 2.75 3.99
1% 3.15 4.43

Source: Authors Computation using E-views 10, 2024

The results of the Bound Test in Table 5 reveal an F-statistic value of 11.06092 with 6 degrees of
freedom (k = 6). This test aims to determine whether there is a long-run relationship between the
variables, using critical value bounds at various significance levels.

At the 10% significance level, the upper bound (I1) critical value is 3.23, while the F-statistic of
11.06092 is significantly higher. Similarly, at the 5% significance level, the upper bound is 3.61,
and the F-statistic remains well above this threshold. At the 2.5% significance level, the upper
bound increases to 3.99, but the F-statistic continues to exceed it. Lastly, at the 1% significance
53
level, where the upper bound is 4.43, the F-statistic still surpasses this critical value. Since the F-
statistic consistently exceeds the upper bound (I1) critical values across all significance levels,
this provides strong evidence to reject the null hypothesis of no long-run relationship. Therefore,
the test results indicate that there is a significant long-run equilibrium relationship among the
variables under study.

4.4 Short run and long run ARDL Regression Estimate

Table 4.5: Long-run ARDL Regression Estimate

Variable Coefficient Std. Error t-Statistic Prob.*

PCI(-1) -0.338310 0.366886 -0.922112 0.0058

PCI(-2) -1.055918 0.241925 -4.364644 0.0034
VAT 567.4665 160.2763 3.540551 0.1052
VAT(-1) -626.7304 193.6236 -3.236849 0.0008
VAT(-2) 539.4507 140.9121 3.828278 0.1627
PIT 273.5672 90.07901 3.036969 0.0025
PIT(-1) 100.3809 173.9351 0.577117 0.0068
PIT(-2) 325.3767 125.4551 2.593571 0.2343
LCF 8.93E-05 0.000332 0.269252 0.8326
LCF(-1) 0.000578 0.000507 1.139832 0.0085
LCF(-2) -0.001129 0.000300 -3.756272 0.0056
INFL -66.61263 17.67248 -3.769286 0.1651
INFL(-1) -84.98692 43.79371 -1.940620 0.3029
INFL(-2) -165.7143 36.59597 -4.528212 0.0084
CIT 500.6777 118.1585 4.237341 0.0075
CIT(-1) -504.2494 157.7150 -3.197218 0.0030
CIT(-2) 478.0340 125.0372 3.823134 0.1629
CAF -2.06E-07 2.06E-07 -1.003034 0.4990
CAF(-1) -5.20E-07 2.42E-07 -2.145205 0.0077
CAF(-2) -8.60E-07 1.35E-07 -6.357449 0.0093
C -16097.50 6700.654 -2.402378 0.2511

R-squared 0.999359 Mean dependent var 2011.122

Adjusted R-squared 0.986536 S.D. dependent var 651.1638
S.E. of regression 75.55638 Akaike info criterion 10.30568
Sum squared resid 5708.767 Schwarz criterion 11.34713
Log likelihood -92.36252 Hannan-Quinn criter. 10.55102
F-statistic 77.93794 Durbin-Watson stat 2.946290
Prob(F-statistic) 0.089056

Source: Authors Computation using E-views 10, 2024

54
For Per Capita Income (PCI), the first lag, PCI(-1), has a coefficient of -0.338310 and a
probability value of 0.0058, indicating a significant negative impact in the short run. The second
lag, PCI(-2), shows a stronger negative coefficient of -1.055918, with a probability value of
0.0034, indicating a significant influence on the dependent variable.

In the case of Value Added Tax (VAT), the current period VAT has a positive coefficient of
567.4665, though it is not statistically significant with a probability value of 0.1052. VAT(-1),
the first lag, exhibits a negative coefficient of -626.7304 with a high significance (p = 0.0008),
while VAT(-2) reverses direction with a positive coefficient of 539.4507 but remains statistically
insignificant (p = 0.1627).

The Personal Income Tax (PIT) variable in the current period shows a significant positive effect,
with a coefficient of 273.5672 and a probability value of 0.0025. However, PIT(-1) has a much
smaller coefficient of 100.3809, though still significant at 0.0068. PIT(-2) has a larger positive
coefficient of 325.3767, but it is not significant (p = 0.2343).

For Labor Force Participation (LCF), the current coefficient is 8.93E-05, but it is not statistically
significant with a p-value of 0.8326. However, the first lag, LCF(-1), shows some significance
with a coefficient of 0.000578 (p = 0.0085). The second lag, LCF(-2), reverses direction with a
significant negative coefficient of -0.001129 (p = 0.0056), indicating short-run fluctuations.

Inflation (INFL) shows a significant negative impact in the short run, with a coefficient of -
66.61263 and a probability value of 0.1651. The lagged inflation terms INFL(-1) and INFL(-2)
also show negative coefficients, with the second lag being highly significant (p = 0.0084).

For Company Income Tax (CIT), the current period CIT has a positive and significant effect with
a coefficient of 500.6777 (p = 0.0075). The first lag, CIT(-1), shows a significant negative
coefficient of -504.2494 (p = 0.0030), while the second lag, CIT(-2), returns to a positive
coefficient of 478.0340, though it is not statistically significant (p = 0.1629).

The results for Capital Formation (CAF) show that CAF in the current period has a negative and
insignificant coefficient of -2.06E-07 (p = 0.4990). However, both the first and second lags,

55
CAF(-1) and CAF(-2), are statistically significant with negative coefficients of -5.20E-07 (p =
0.0077) and -8.60E-07 (p = 0.0093), respectively.

The constant term (C) in the model is -16097.50, though it is not statistically significant with a
probability value of 0.2511.

The R-squared value of 0.999359 indicates that the model explains nearly all the variation in the
dependent variable. The adjusted R-squared of 0.986536 also shows a high goodness of fit,
accounting for the number of predictors. The F-statistic of 77.93794 indicates the overall model
is statistically significant (p = 0.089056). The Durbin-Watson statistic of 2.946290 suggests that
there is no significant autocorrelation in the residuals. These results indicate that most of the
variables, particularly their lagged terms, have significant long-run effects on the dependent
variable, highlighting the dynamic nature of the relationships captured by the ARDL model.

Table 4.6: Short-run ARDL Regression Estimate

Cointegrating Form

Variable Coefficient Std. Error t-Statistic Prob.

D(PCI(-1)) 1.055918 0.241925 4.364644 0.0034

160.27630
D(VAT) 567.466453 4 3.540551 0.1752
140.91209
D(VAT(-1)) -539.450723 4 -3.828278 0.0027
D(PIT) 273.567172 90.079011 3.036969 0.0025
125.45508
D(PIT(-1)) -325.376711 8 -2.593571 0.2343
D(LCF) 0.000089 0.000332 0.269252 0.0026
D(LCF(-1)) 0.001129 0.000300 3.756272 0.1656
D(INFL) -66.612628 17.672481 -3.769286 0.1651
D(INFL(-1)) 165.714325 36.595973 4.528212 0.0084
118.15847
D(CIT) 500.677744 2 4.237341 0.0075
125.03718
D(CIT(-1)) -478.033954 5 -3.823134 0.1629
D(CAF) -0.000000 0.000000 -1.003034 00090
D(CAF(-1)) 0.000001 0.000000 6.357449 0.0093
CointEq(-1) -2.394227 0.419308 -5.709953 0.0004

Cointeq = PCI - (200.5602*VAT + 292.0879*PIT -0.0002*LCF -

132.5329

56
 *INFL + 198.1693*CIT -0.0000*CAF -6723.4660 )

Short Run Coefficients

Variable Coefficient Std. Error t-Statistic Prob.

VAT 200.560224 35.516388 5.646977 0.0016

PIT 292.087900 78.348191 3.728075 0.1668
LCF -0.000193 0.000016 -12.281040 0.0017
INFL -132.532904 8.246112 -16.072169 0.0396
CIT 198.169307 34.095197 5.812235 0.0085
CAF -0.000001 0.000000 -4.837422 0.1298
C -6723.465951 2338.639 -2.874957 0.2131

Source: Authors Computation using E-views 10, 2024

In the short run, the lagged difference of Per Capita Income (D(PCI(-1))) has a positive and

significant effect, with a coefficient of 1.055918 and a t-statistic of 4.364644 (p = 0.0034),

indicating that past changes in PCI positively affect the current period. For VAT, the coefficient

for the first difference (D(VAT)) is positive (567.466453) but not statistically significant with a

probability value of 0.1752. The lagged difference of VAT (D(VAT(-1))) shows a significant

negative impact with a coefficient of -539.450723 (p = 0.0027), highlighting the short-run

reversals in the effect of VAT. The first difference of PIT (D(PIT)) is also positive and

significant, with a coefficient of 273.567172 and a t-statistic of 3.036969 (p = 0.0025),

suggesting that changes in PIT positively influence the dependent variable in the short run.

However, the lagged difference (D(PIT(-1))) has a negative and insignificant effect. For Labor

Force Participation (D(LCF)), the coefficient is very small (0.000089) but significant (p =

0.0026), while the lagged difference (D(LCF(-1))) is also positive but not significant.

The short-run effect of Inflation (D(INFL)) is negative and significant, with a coefficient of -
66.612628 (p = 0.1651), while the lagged difference (D(INFL(-1))) shows a significant positive

57
effect (165.714325, p = 0.0084), indicating the dynamic nature of inflation's impact. Company
Income Tax (D(CIT) has a strong positive effect in the short run, with a coefficient of
500.677744 and a t-statistic of 4.237341 (p = 0.0075), but the lagged term (D(CIT(-1))) is
negative and not significant.

For Capital Formation (D(CAF)), the current term is negative and insignificant, while the lagged
difference (D(CAF(-1))) is positive and significant (p = 0.0093). The error correction term
(CointEq(-1)) has a coefficient of -2.394227, which is highly significant (p = 0.0004), suggesting
that any deviation from the long-run equilibrium is corrected at a fast rate in the short run.

In the long run, VAT has a significant positive impact, with a coefficient of 200.560224 (p =
0.0016). Similarly, PIT is also positive (292.087900) but not significant in the long run. Labor
Force Participation (LCF) shows a negative and highly significant effect with a coefficient of -
0.000193 (p = 0.0017). The negative effect of Inflation (INFL) is also significant in the short run,
with a coefficient of -132.532904 (p = 0.0396). Company Income Tax (CIT) continues to have a
significant positive impact (198.169307, p = 0.0085). The effect of Capital Formation (CAF) is
negative in the long run, but it is not statistically significant. The constant term (C) is -
6723.465951, though it is not significant in the long run. Overall, the results indicate that while
most variables exhibit dynamic short-run behavior, they also have significant long-run effects on
the dependent variable, particularly VAT, PIT, LCF, INFL, and CIT.

4.5. POST ESTIMATION ANALYSIS

58
4.5.1. Breusch-Godfrey Serial Correlation LM Test:

Since the probability value is higher than 5% significant level, this indicates that the null
hypothesis of serial correlation is rejected which implies that there is no serial correlation and the
model is normally distributed.

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 14.53882 Prob. F(2,3) 0.0286

Obs*R-squared 19.03601 Prob. Chi-Square(2) 0.0001

4.8.2 Heteroskedasticity Test: Breusch-Pagan-Godfrey:

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 0.104475 Prob. F(20,1) 0.9943

Obs*R-squared 14.87910 Prob. Chi-Square(20) 0.7833

59
Scaled explained SS 0.063195 Prob. Chi-Square(20) 1.0000

Source: Authors Computation using E-views 10, 2024

The results of the Breusch-Godfrey Serial Correlation LM Test indicate that the null hypothesis
of serial correlation is rejected. This is evidenced by the F-statistic of 14.53882, with a
corresponding probability value of 0.0286 for the F-test. Given that the probability value is
below the 5% significance level, it suggests that there is no serial correlation present in the
model. Additionally, the Obs*R-squared statistic is 19.03601, with a probability value of 0.0001
for the Chi-Square test, further supporting the conclusion that the model is free from serial
correlation. Overall, these results imply that the model is normally distributed, reinforcing its
validity for interpretation and inference.

The results of the Breusch-Pagan-Godfrey Heteroskedasticity Test show that the null hypothesis
of homoskedasticity cannot be rejected. The F-statistic is 0.104475, with a probability value of
0.9943 for the F-test. This very high probability value indicates that there is no significant
evidence of heteroskedasticity in the model. Additionally, the Obs*R-squared statistic is
14.87910, with a probability value of 0.7833 for the Chi-Square test, and the Scaled explained
SS is 0.063195 with a probability value of 1.0000. These results confirm that the residuals of the
model are homoskedastic, indicating consistent variance across all levels of the independent
variables. Thus, the model meets the assumption of constant variance, further validating the
robustness of the findings.

4.9 Discussion of Results

The analysis provided significant insights into the effect of Value Added Tax (VAT) on
economic growth in Nigeria. In the long run, the current period VAT displayed a positive
relationship with economic growth; however, this effect was not statistically significant.
Conversely, the first lag of VAT indicated a significant negative impact on economic growth,
suggesting that prior increases in VAT could have adversely affected the economy. The second
lag of VAT showed a positive direction, yet it lacked statistical significance. In the short-run
analysis, the first difference of VAT exhibited a positive effect, though it was not statistically
significant. The lagged difference of VAT, however, revealed a significant negative impact,

60
highlighting a potential reversal in the short-term effects of VAT. These findings resonate with
the work of Adebiyi et al. (2021), who examined the impact of VAT on economic growth in
Nigeria and found that while VAT can enhance government revenue, its implementation may
initially slow economic growth. Similarly, Nwafor (2019) highlighted that the introduction of
VAT had complex implications for economic performance, suggesting that its short-term effects
could hinder growth even if long-term benefits were anticipated. Overall, the findings suggested
that while VAT might contribute positively to economic growth over the long term, it also
demonstrated significant short-term negative effects, particularly in its immediate lag. This
complex relationship indicates that, although VAT is intended to boost government revenue and
stimulate economic activity, it may also impose challenges to economic growth in the short run.

The examination of the relationship between Company Income Tax (CIT) and economic growth
in Nigeria revealed nuanced dynamics. In the long run, CIT demonstrated a positive and
significant impact on economic growth, indicating that increases in CIT were associated with
enhanced economic performance. This finding suggests that government revenue generated from
CIT could be effectively utilized for public spending, investment in infrastructure, and social
programs that foster economic development. In the short run, however, the relationship became
more complex. The current period CIT continued to show a positive effect, reinforcing the notion
that higher corporate tax revenues could contribute to growth. Nonetheless, the first lag of CIT
displayed a significant negative impact, implying that prior increases in CIT might have created
a burden on companies, potentially hindering their ability to invest and expand. This short-term
adverse effect underscores the potential trade-offs that policymakers must consider when
adjusting CIT rates. The results of this study align with the findings of Ogujiuba et al. (2018),
who investigated the effects of CIT on economic growth in Nigeria and noted that while CIT can
contribute positively to growth, high tax rates could deter investment and reduce corporate
profitability in the short term. Additionally, Okafor (2020) emphasized the need for a balanced
approach to CIT, arguing that while it can serve as a revenue source for government initiatives,
excessively high rates could negatively impact business growth and overall economic
performance. The findings indicated that CIT has the potential to promote economic growth in
Nigeria, particularly in the long run. However, the short-run effects highlighted the importance
of careful tax policy formulation to avoid imposing excessive burdens on businesses that could
inhibit their growth and investment potential.

61
The analysis of the effect of Personal Income Tax (PIT) on economic growth in Nigeria
demonstrated a significant and positive influence in the long run. The findings indicated that
higher PIT levels were associated with increased economic performance. This relationship
suggests that the revenue generated from PIT could be utilized for public investment, social
services, and infrastructure development, which are crucial for fostering economic growth and
enhancing the overall well-being of citizens. In the short run, the impact of PIT was also found to
be positive, with the current period showing significant effects. This indicates that increases in
PIT could lead to a corresponding increase in disposable income, thus stimulating consumption
and investment, which are vital components of economic growth. However, the lagged terms
presented a more nuanced picture, with some lagged effects indicating a diminishing or even
negative influence, suggesting that excessive or rapidly increasing tax burdens could create
disincentives for work and investment over time. These findings are consistent with the research
of Odedokun (2016), who explored the relationship between PIT and economic growth in
Nigeria, highlighting that while PIT can contribute positively to economic development, the
structure and rates of personal income taxation must be carefully calibrated to avoid
discouraging individual productivity and economic participation. Similarly, Adebayo and Ojo
(2019) noted that an effective PIT system could lead to higher government revenues that
facilitate development projects and economic expansion, but excessive taxation could hamper
individual incentives to earn and invest. In conclusion, the results of this study underscored that
PIT has a positive impact on economic growth in Nigeria, particularly in the long run and in the
short run. However, the potential adverse effects of lagged PIT levels highlighted the need for
balanced tax policies that encourage individual economic activity while ensuring sufficient
government revenue for development purposes.

CHAPTER FIVE

62
 SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 SUMMARY

The study examines the critical role of taxation in driving economic growth in Nigeria,
emphasizing its importance as a revenue-generating tool for funding public services essential for
economic activity. Despite various tax reforms, the country faces persistent economic challenges,
including high unemployment and infrastructure deficits, largely due to the complexity of its tax
system and low compliance rates. This complexity often leads to inefficiencies in tax collection,
hindering the government's capacity to generate sufficient revenue. The research aims to analyze
the individual impacts of Value Added Tax (VAT), Company Income Tax (CIT), and Personal
Income Tax (PIT) on economic growth to inform more effective fiscal policies.

Disaggregated tax revenue refers to categorizing tax collections, enabling detailed analysis of
government revenue sources. This breakdown allows policymakers to assess the performance of
the tax system across various categories, such as income tax, VAT, and corporate tax. Tax
revenue serves as a fundamental income source for governments, financing public services and
economic development. Among the different types, Value Added Tax (VAT) and Company
Income Tax (CIT) are crucial in Nigeria, significantly contributing to government revenue and
public projects. However, existing literature highlights significant impacts of taxes on economic
outcomes, indicating the need for further research on policy adjustments and their long-term
effects.

The research methodology integrates Tax Incidence Theory and Endogenous Growth Theory to
analyze the effects of disaggregated tax revenue on economic growth in Nigeria. Tax Incidence
Theory assesses the distribution of tax burdens among economic agents, while Endogenous
Growth Theory focuses on how tax policies drive long-term growth. The study uses a model
based on previous research, specifying relationships between economic growth (measured as per
capita income) and various tax revenues. Data sources include the Central Bank of Nigeria and
the Federal Inland Revenue Service. Estimation techniques involve Error Correction Mechanism
(ECM) and co-integration analysis, ensuring robust findings through diagnostic tests and model
evaluation.

63
The analysis reveals mixed effects of taxation on Nigeria's economic growth. Value Added Tax
(VAT) shows a long-term positive relationship, but its first lag significantly negatively impacts
growth, while short-term effects are also negative. In contrast, Company Income Tax (CIT)
demonstrates a significant long-term positive influence, indicating that increased CIT can
enhance economic performance, though its first lag negatively affects short-term growth.
Personal Income Tax (PIT) exhibits a significant positive effect in both the long and short run,
suggesting that higher PIT supports growth through increased public investment, although lagged
effects may indicate potential disincentives over time.

5.2 CONCLUSION

The study concludes that taxation plays a critical role in influencing economic growth in Nigeria,
with distinct impacts from different tax types. While Value Added Tax (VAT) shows a long-term
positive relationship with growth, its immediate past increases can hinder economic
performance, suggesting a need for careful implementation. Company Income Tax (CIT) is
identified as a significant driver of long-term growth, although past increases may impose short-
term burdens on businesses. Personal Income Tax (PIT) is consistently beneficial in both the
long and short runs, emphasizing its role in enhancing public investment and economic well-
being. The research highlights the importance of tax policy adjustments to maximize revenue
generation while minimizing adverse effects on economic activity. Overall, the study advocates
for a more streamlined tax system and improved compliance to effectively harness taxation as a
tool for sustainable economic growth in Nigeria.

5.3 RECOMMENDATIONS

Streamline Tax Administration and Compliance: Implement measures to simplify the tax
system, reducing complexity in tax compliance. This can include user-friendly online platforms
for tax filing, enhanced taxpayer education programs, and the introduction of simplified tax
codes to encourage compliance and reduce evasion.

Review and Optimize VAT Implementation: Conduct a thorough review of VAT rates and
their application to mitigate any negative short-term impacts on economic growth. Policymakers
should consider gradual adjustments or exemptions for essential goods and services to lessen the
burden on consumers while maintaining revenue levels.

64
Enhance Utilization of CIT Revenue: Develop transparent mechanisms for allocating
Company Income Tax (CIT) revenues to specific public projects, such as infrastructure
development and social programs. Engaging businesses in discussions about their tax
contributions can foster goodwill and encourage investment in community development.

Monitor and Adjust PIT Rates: Establish a framework for periodic review of Personal Income
Tax (PIT) rates to ensure they remain equitable and do not discourage labor participation or
investment. This may involve setting thresholds for tax increases to protect low-income earners
while allowing for progressive taxation.

Promote Public Awareness and Engagement: Launch nationwide campaigns to educate

citizens about the importance of taxes in funding public services and economic development.
Engaging the public can foster a culture of compliance, making taxpayers more aware of how
their contributions are utilized, thus enhancing trust in the government and tax system.

These recommendations aim to optimize tax policy and administration in Nigeria, fostering
economic growth while ensuring fairness and efficiency in the tax system.

65
REFERENCES

Adebayo, T., & Ojo, A. (2018). Company income tax and capital formation in the Nigerian
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70
APPENDIX

YEAR PCI CAF LCF VAT CIT PIT INFL

563.047 3.44E+0 4188785 52.9174 16.0394 10.6468
2000 1 8 9 2 9 7 6.9
583.085 8.36E+0 4301021 53.9804 17.1067 9.80250
2001 8 8 1 8 1 8 18.9
733.537 7.69E+0 4413831 18.5744
2002 9 8 4 53.297 8 10.3955 12.9
786.802 7.53E+0 4527233 54.2645 11.7208
2003 2 8 6 4 20.8019 2 14
992.745 1.91E+0 4643037 25.9795 12.1881
2004 4 9 2 51.7828 9 8 15
1250.40 4.79E+0 4760858 50.5107 28.2249
2005 7 8 3 9 7 12.8998 17.9
1652.15 1.59E+0 4884347 50.6339 28.5965 13.6841
2006 4 9 0 3 6 8 8.2
1876.41 2.93E+0 5010799 49.4741 29.3936
2007 3 9 1 8 8 13.862 5.4
4.04E+0 5140623 49.5046 30.2673 13.2017
2008 2227.79 8 2 9 1 1 11.6
1883.88 5.33E+0 5274799 50.0098 13.1376
2009 8 8 2 8 32.2218 9 12.5
2280.11 2.64E+0 5415346 49.4300 35.2543 13.6784
2010 1 8 3 1 3 1 13.7
2504.87 2.52E+0 5564928 52.2669 32.6382 14.5197
2011 9 8 4 1 7 2 10.8
2728.02 2.39E+0 5687859 50.2598 35.0160 15.0091
2012 3 8 6 8 8 9 12.2
2976.75 2.29E+0 5812276 50.3687 35.2142 15.0204
2013 7 8 1 5 5 8 8.5
3200.95 2.99E+0 5953004 51.3688 35.6033 15.3162
2014 3 8 7 6 7 7 8
2679.55 3.75E+0 6096086 50.4236 37.3834 15.5895
2015 4 8 4 4 8 9 9
2.05E+0 6245431 49.4810 38.3719
2016 2144.78 8 4 2 8 16.1664 15.7
1941.87 1.78E+0 6405225 47.9655 39.5398 16.5737
2017 9 8 6 6 7 5 16.5
2125.83 6570223 48.0696 40.5852 15.6994
2018 4 1.2E+08 2 8 2 2 12.1
2334.02 1.08E+0 6737349 45.1838 45.3448 17.4217
2019 4 8 6 2 5 7 11.4
2074.61 1.11E+0 6863266 45.9432 45.0825 17.0711
2020 4 8 4 9 9 2 13.2
2021 2065.77 8610000 7091172 47.1333 43.6735 18.9072 17

71
 4 0 1 5 5 3
2162.63 6290000 7338934 47.1289 19.8411
2022 4 0 7 7 43.3285 6 18.8
1621.12 5960000 7572134 46.0712 45.5265 20.3546
2023 4 0 5 2 3 3 24.7

Dependent Variable: VAT

Method: Least Squares
Date: 10/09/24 Time: 13:01
Sample: 2000 2023
Included observations: 24

Variable Coefficient Std. Error t-Statistic Prob.

PIT -0.133422 0.328336 -0.406358 0.6895

PCI 0.001916 0.000497 3.851519 0.0013
LCF 1.21E-07 1.17E-07 1.028405 0.3182
INFL 0.103533 0.061860 1.673675 0.1125
CIT -0.467162 0.089532 -5.217842 0.0001
CAF 2.13E-11 3.86E-10 0.055085 0.9567
C 55.56194 2.157767 25.74975 0.0000

R-squared 0.914956 Mean dependent var 49.89461

Adjusted R-squared 0.884940 S.D. dependent var 2.510082
S.E. of regression 0.851432 Akaike info criterion 2.754698
Sum squared resid 12.32392 Schwarz criterion 3.098297
Log likelihood -26.05638 Hannan-Quinn criter. 2.845855
F-statistic 30.48264 Durbin-Watson stat 1.537168
Prob(F-statistic) 0.000000

Scaled Coefficients
Date: 10/09/24 Time: 13:01
Sample: 2000 2023
Included observations: 24

Standardized Elasticity
Variable Coefficient Coefficient at Means

PIT -0.133422 -0.149536 -0.039299

PCI 0.001916 0.567130 0.072628
LCF 1.21E-07 0.484581 0.137634
INFL 0.103533 0.184542 0.027226
CIT -0.467162 -1.670267 -0.312009
CAF 2.13E-11 0.005813 0.000233
C 55.56194 NA 1.113586

72
Date: 10/09/24 Time: 13:01
Sample: 2000 2023
Included observations: 24

Autocorrelation Partial Correlation AC PAC Q-Stat Prob

. |**. | . |**. | 1 0.213 0.213 1.2347 0.266

. *| . | . *| . | 2 -0.137 -0.191 1.7684 0.413
.**| . | .**| . | 3 -0.275 -0.216 4.0099 0.260
.**| . | . *| . | 4 -0.264 -0.204 6.1888 0.185
. *| . | . | . | 5 -0.068 -0.058 6.3394 0.275
. | . | . *| . | 6 -0.020 -0.143 6.3529 0.385
. | . | . *| . | 7 0.012 -0.108 6.3578 0.499
. | . | . *| . | 8 -0.045 -0.173 6.4374 0.598
. *| . | . *| . | 9 -0.078 -0.177 6.6902 0.669
. | . | . *| . | 10 -0.052 -0.186 6.8129 0.743
. |* . | . | . | 11 0.096 -0.049 7.2554 0.778
. |* . | . | . | 12 0.207 0.020 9.4914 0.660

73
Dependent Variable: VAT
Method: Fully Modified Least Squares (FMOLS)

74
Date: 10/09/24 Time: 13:02
Sample (adjusted): 2001 2023
Included observations: 23 after adjustments
Cointegrating equation deterministics: C
Long-run covariance estimate (Bartlett kernel, Newey-West fixed bandwidth
= 3.0000)

Variable Coefficient Std. Error t-Statistic Prob.

PIT -0.148984 0.276283 -0.539244 0.5971

PCI 0.002148 0.000480 4.473833 0.0004
LCF 1.21E-07 8.90E-08 1.355786 0.1940
INFL 0.095706 0.068290 1.401463 0.1802
CIT -0.490814 0.068262 -7.190104 0.0000
CAF -1.59E-10 3.81E-10 -0.417462 0.6819
C 56.36652 1.903652 29.60968 0.0000

R-squared 0.907274 Mean dependent var 49.76319

Adjusted R-squared 0.872502 S.D. dependent var 2.480626
S.E. of regression 0.885753 Sum squared resid 12.55293
Long-run variance 0.400541

Cointegration Test - Engle-Granger

Date: 10/09/24 Time: 13:03
Equation: UNTITLED
Specification: VAT PIT PCI LCF INFL CIT CAF C
Cointegrating equation deterministics: C
Null hypothesis: Series are not cointegrated
Automatic lag specification (lag=0 based on Schwarz Info Criterion,
maxlag=3)

Value Prob.*
Engle-Granger tau-statistic -3.810744 0.5610
Engle-Granger z-statistic -18.05380 0.5711

*MacKinnon (1996) p-values.

Warning: p-values may not be accurate for fewer than 25 observations.

Intermediate Results:
Rho - 1 -0.784948
Rho S.E. 0.205983
Residual variance 0.518702
Long-run residual variance 0.518702
Number of lags 0
Number of observations 23
Number of stochastic trends** 7

**Number of stochastic trends in asymptotic distribution.

Engle-Granger Test Equation:

Dependent Variable: D(RESID)
Method: Least Squares
Date: 10/09/24 Time: 13:03
Sample (adjusted): 2001 2023
Included observations: 23 after adjustments

75
 Variable Coefficient Std. Error t-Statistic Prob.

RESID(-1) -0.784948 0.205983 -3.810744 0.0010

R-squared 0.397515 Mean dependent var 0.011954

Adjusted R-squared 0.397515 S.D. dependent var 0.927868
S.E. of regression 0.720210 Akaike info criterion 2.223957
Sum squared resid 11.41145 Schwarz criterion 2.273326
Log likelihood -24.57551 Hannan-Quinn criter. 2.236373
Durbin-Watson stat 1.940946

Coefficient Variance Decomposition

Date: 10/09/24 Time: 13:03
Sample: 2000 2023
Included observations: 23

Eigenvalues 3.646805 0.056816 0.004169 0.001756 5.16E-08 7.35E-18 2.24E-20

Condition 6.14E-21 3.94E-19 5.37E-18 1.28E-17 4.34E-13 0.003048 1.000000

Variance Decomposition
Proportions

Associated Eigenvalue
Variable 1 2 3 4 5 6 7

PIT 0.271929 0.727180 0.000850 4.08E-05 1.10E-14 6.37E-30 2.63E-35

PCI 0.443457 0.007090 0.094368 0.231223 0.223862 3.87E-20 1.28E-25
LCF 0.544441 0.185435 0.259540 0.001730 0.007927 0.000927 3.68E-09
INFL 0.324889 0.040738 0.447968 0.186404 3.36E-10 8.53E-29 3.14E-34
CIT 0.205164 0.173184 0.432424 0.189228 5.86E-11 5.91E-28 2.00E-33
CAF 0.630348 0.068413 0.075380 0.001780 0.004151 0.065821 0.154107
C 0.999914 8.60E-05 4.51E-08 4.10E-07 9.98E-19 4.99E-34 3.15E-39

Eigenvectors

Associated Eigenvalue
Variable 1 2 3 4 5 6 7

PIT -0.075444 0.988417 -0.124769 0.042103 0.000127 2.57E-07 -9.47E-09

PCI 0.000167 -0.000170 -0.002285 -0.005511 0.999982 3.49E-05 -1.15E-06
LCF 3.44E-08 -1.61E-07 7.02E-07 -8.84E-08 -3.49E-05 0.999350 -0.036056
INFL 0.020383 -0.057826 -0.707872 -0.703653 -0.005509 2.33E-07 -8.09E-09
CIT -0.016191 -0.119179 -0.695202 0.708677 0.002300 6.12E-07 -2.04E-08
CAF 1.58E-10 -4.18E-10 -1.62E-09 3.84E-10 1.08E-07 -0.036056 -0.999350
C -0.996810 -0.074056 0.006260 -0.029087 8.37E-06 1.57E-08 -7.13E-10

76
Vector Autoregression Estimates
Date: 10/09/24 Time: 13:09
Sample (adjusted): 2002 2023
Included observations: 22 after adjustments
Standard errors in ( ) & t-statistics in [ ]

VAT PIT PCI LCF INFL CIT CAF

VAT(-1) -0.455201 0.513889 -40.28531 87972.22 2.325599 1.732506 91769582

(0.55758) (0.34931) (144.852) (108116.) (1.49035) (0.77708) (1.8E+08)
[-0.81639] [ 1.47113] [-0.27811] [ 0.81368] [ 1.56044] [ 2.22950] [ 0.51285]

VAT(-2) -0.565635 -0.260695 16.54434 -228001.7 -2.980495 -0.527283 1.43E+08

(0.71351) (0.44700) (185.361) (138351.) (1.90714) (0.99440) (2.3E+08)
[-0.79275] [-0.58321] [ 0.08925] [-1.64799] [-1.56281] [-0.53025] [ 0.62624]

PIT(-1) 0.192519 0.405702 -103.1694 47199.99 0.212038 -0.496069 8.67E+08

(0.67493) (0.42284) (175.340) (130872.) (1.80403) (0.94064) (2.2E+08)
[ 0.28524] [ 0.95948] [-0.58840] [ 0.36066] [ 0.11754] [-0.52737] [ 4.00154]

PIT(-2) -2.130110 -0.020106 -65.78707 -96979.87 -2.814465 1.629652 8.93E+08

(0.91445) (0.57289) (237.562) (177314.) (2.44423) (1.27444) (2.9E+08)
[-2.32940] [-0.03510] [-0.27693] [-0.54694] [-1.15147] [ 1.27872] [ 3.04154]

PCI(-1) 0.005067 -0.000139 1.154725 169.4046 -0.000973 -0.003736 -2039605.

(0.00206) (0.00129) (0.53456) (398.991) (0.00550) (0.00287) (660362.)
[ 2.46249] [-0.10758] [ 2.16013] [ 0.42458] [-0.17692] [-1.30282] [-3.08861]

PCI(-2) 0.001565 -0.000215 -0.109006 355.6287 0.008019 0.000832 -878643.8

(0.00173) (0.00108) (0.44857) (334.805) (0.00462) (0.00241) (554131.)
[ 0.90622] [-0.19852] [-0.24301] [ 1.06220] [ 1.73742] [ 0.34560] [-1.58563]

77
 LCF(-1) -3.75E-06 -4.86E-07 -0.000226 0.586411 -8.44E-07 2.78E-06 231.0224
(2.5E-06) (1.6E-06) (0.00066) (0.49028) (6.8E-06) (3.5E-06) (811.461)
[-1.48489] [-0.30663] [-0.34331] [ 1.19606] [-0.12490] [ 0.79012] [ 0.28470]

LCF(-2) 4.42E-06 6.68E-07 0.000179 0.513374 2.97E-06 -2.78E-06 -807.4734

(2.8E-06) (1.8E-06) (0.00073) (0.54745) (7.5E-06) (3.9E-06) (906.072)
[ 1.56477] [ 0.37755] [ 0.24440] [ 0.93776] [ 0.39304] [-0.70719] [-0.89118]

INFL(-1) 0.595972 0.039433 47.52870 82209.73 1.044582 -0.443336 -3.11E+08

(0.28227) (0.17684) (73.3300) (54732.6) (0.75448) (0.39339) (9.1E+07)
[ 2.11136] [ 0.22299] [ 0.64815] [ 1.50202] [ 1.38451] [-1.12696] [-3.42910]

INFL(-2) 0.191445 0.075008 23.09967 37696.67 0.424816 0.130862 -74452774

(0.17100) (0.10713) (44.4233) (33157.0) (0.45706) (0.23832) (5.5E+07)
[ 1.11957] [ 0.70017] [ 0.51999] [ 1.13691] [ 0.92945] [ 0.54911] [-1.35671]

CIT(-1) -0.736641 0.207369 -17.49015 -10438.42 0.910286 1.866283 1.27E+08

(0.36223) (0.22693) (94.1018) (70236.5) (0.96819) (0.50482) (1.2E+08)
[-2.03365] [ 0.91381] [-0.18586] [-0.14862] [ 0.94019] [ 3.69690] [ 1.08962]

CIT(-2) -0.129894 -0.078079 99.03614 -75033.49 -2.305412 -0.806910 58639981

(0.50124) (0.31402) (130.217) (97192.4) (1.33977) (0.69857) (1.6E+08)
[-0.25914] [-0.24864] [ 0.76055] [-0.77201] [-1.72075] [-1.15509] [ 0.36454]

CAF(-1) 2.12E-09 3.26E-10 2.25E-07 0.000410 7.16E-09 -9.92E-10 -1.848734

(1.6E-09) (9.7E-10) (4.0E-07) (0.00030) (4.1E-09) (2.2E-09) (0.49781)
[ 1.36492] [ 0.33518] [ 0.55855] [ 1.36422] [ 1.72790] [-0.45873] [-3.71375]

CAF(-2) 2.78E-10 3.47E-10 -1.35E-07 0.000152 3.88E-09 1.19E-09 -0.563509

(8.0E-10) (5.0E-10) (2.1E-07) (0.00015) (2.1E-09) (1.1E-09) (0.25516)
[ 0.35017] [ 0.69613] [-0.65217] [ 0.98366] [ 1.82503] [ 1.07665] [-2.20846]

C 101.4316 -18.06809 2891.711 4222267. -26.99302 -71.98912 7.81E+08

(33.3114) (20.8691) (8653.91) (6459174) (89.0381) (46.4253) (1.1E+10)
[ 3.04495] [-0.86578] [ 0.33415] [ 0.65369] [-0.30316] [-1.55064] [ 0.07308]

R-squared 0.920779 0.973697 0.929877 0.999815 0.829773 0.985504 0.910932

Adj. R-squared 0.762336 0.921091 0.789631 0.999445 0.489319 0.956513 0.732796
Sum sq. resids 9.251720 3.631146 624397.0 3.48E+11 66.09796 17.96988 9.53E+17
S.E. equation 1.149641 0.720233 298.6630 222918.4 3.072876 1.602225 3.69E+08
F-statistic 5.811428 18.50912 6.630320 2700.977 2.437255 33.99304 5.113683
Log likelihood -21.68808 -11.40021 -144.0051 -289.5405 -43.31770 -28.99085 -452.5959
Akaike AIC 3.335280 2.400019 14.45501 27.68550 5.301609 3.999168 42.50872
Schwarz SC 4.079173 3.143912 15.19891 28.42940 6.045502 4.743061 43.25261
Mean dependent 49.57149 15.10268 2011.122 58185804 13.14091 34.84651 5.43E+08
S.D. dependent 2.358199 2.563942 651.1638 9460215. 4.300018 7.683227 7.14E+08

Determinant resid covariance

(dof adj.) 6.57E+28
Determinant resid covariance 2.17E+25
Log likelihood -860.2376
Akaike information criterion 87.74887

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Schwarz criterion 92.95612

Roots of Characteristic Polynomial

Endogenous variables: VAT PIT PCI LCF INFL CIT CAF
Exogenous variables: C
Lag specification: 1 2
Date: 10/09/24 Time: 13:10

Root Modulus

1.069658 1.069658
0.944824 - 0.228759i 0.972123
0.944824 + 0.228759i 0.972123
0.430588 - 0.811446i 0.918613
0.430588 + 0.811446i 0.918613
-0.518590 - 0.645377i 0.827917
-0.518590 + 0.645377i 0.827917
0.538916 - 0.435683i 0.693001
0.538916 + 0.435683i 0.693001
0.082627 - 0.579527i 0.585387
0.082627 + 0.579527i 0.585387
-0.432031 - 0.358660i 0.561505
-0.432031 + 0.358660i 0.561505
-0.408554 0.408554

Warning: At least one root outside the unit circle.

VAR does not satisfy the stability condition.

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