Nigerian Tax System and Economic Development

Efficient taxation system is a necessity for economic growth and development of a country. While taxes such as personal income and sales taxes can have direct negative effect on the welfare of the people by reducing disposable income while it can increase revenue for the government. This study examined how revenue from taxation, namely, company income tax less (CINT), customs and excise duties (CUED), education tax (EDUT) personal income tax, PITX, (apart from PAYE), petroleum profit tax (PPT) and value added taxes (VATR) affect the country’s economic development from 1995 to 2023. Economic development was captured from two angles, GDP per capita and gross fixed capital formation (GFCF). The study used some preliminary tests to determine the properties of the variables and the Fully Modified Ordinary Least Squares (FMOLS) technique to analyze the data for the effect of dependent and independent variables. Two models were developed to address the two perspectives from which economic development were measured by the researcher. On the effect of tax on GPDPPC, CINT, CUED, EDUT and PPT have positive and significant effect on GDP Per Capita (coefficients = 0.453196, 0.100308, 0.21304 and 0.265514, and p = 0.0306, 0.0237, 0.0341 and 0.0000 respectively). In contrast, PITX and VATR exhibited a negative but insignificant effect on GDP. Oh how taxation affected the GFCF, while PITX had a negative and significant effect (coefficient = -22.75400, p = 0.038), VATR had a positive and significant effect on GFCF (coefficient = 56.95707, p = 0.0041). The study recommends that the government should continue to improve the efficiency of corporate tax collection to maximize revenue, allocate corporate tax revenues towards infrastructure development, healthcare, and education, support and protect local industries by maintaining and strategically adjusting customs and excise duties and ensure that education tax revenues are efficiently used to enhance the quality of education at all levels. We also advocate increased efforts to improve personal income tax compliance and appraisal of the impact of VAT on different income groups and consider adjustments that can make the tax system more equitable without significantly harming consumption and economic growth.