EMPIRICAL ASSESSMENT OF TAX REVENUE AND INFLATION RATE NEXUS IN NIGERIA

Abstract

The effect of tax revenue on inflation rate in Nigeria was examined utilizing the autoregressive distributed lag model on data spanning the period, 1986-2022. In order to have deeper insight into the relationship between the variables, we decomposed tax revenue into value added tax, petroleum profit tax, gas income tax, company income tax and stamp duty tax. The model was utilized primarily for the long run dynamic approach and the contemporaneous unrestricted error correction technique of short run estimations. It was discovered by the study that evidence of equilibrium long run relationship exists between inflation rate and tax revenue in Nigeria. Specifically, the study found in the long run that while tax revenue from gas income, company income and petroleum profit showed negative influence on inflation rate and at the same time value added tax and stamp duty tax exerted positive relationship, no evidence of statistical significant relationship was established. However, in the short run a significant direct relationship existed between inflation rate, gas income tax and company income tax contrary to significant negative influence from stamp duty tax, value added tax and petroleum profit tax during the period of analysis. It was therefore the recommendation of the study that domestic increase in prices of petroleum products should not be encouraged while corporate income tax for SMEs should be kept low. Finally, a reduction in VAT is advocated for goods of necessity such as pharmaceutical products