A Proposed Formula for Horizontal Revenue Allocation in Nigeria

Abstract

In this study, we have applied optimal control theory to determine the optimum value of tax revenues accruing to a state given the range of budgeted expenditure on enforcing tax laws and awareness creation on the payment of the correct tax. This is achieved by maximizing the state's net tax revenue over a fixed time interval subject to certain constraints. By assuming that the satisfaction derived by the Federal Government of Nigeria on the ability of the individual states to generate tax revenue which is as near as the optimum tax revenue (via the state's control problem) is described by the logarithmic form of the Cobb–Douglas utility function, a formula for horizontal revenue allocation in Nigeria in its raw form is derived. Afterwards, we illustrate the use of the proposed horizontal revenue allocation formula using hypothetical data.

A note on the self-reliant horizontal revenue allocation formula

“…This subsection takes a 'snapshot' into the self-reliant horizontal revenue allocation formula of Ekhosuehi and Osagiede (2012). The formula proposed by Ekhosuehi and Osagiede (2012) is presented as follows.…”

“…This subsection takes a 'snapshot' into the self-reliant horizontal revenue allocation formula of Ekhosuehi and Osagiede (2012). The formula proposed by Ekhosuehi and Osagiede (2012) is presented as follows. Let µ i be the maximum tax revenue a state i can collect if Journal home page: www.jafristatap.net Ekhosuehi, V. U., African Journal of Applied Statistics, Vol.…”

“…The distribution of national revenue from the Federation Account among the various governments in a federation so as to reflect the fiscal responsibilities vested in the central and lower-level governments is referred to as 'revenue allocation'. The subject of revenue allocation in Nigeria has received a considerable attention in the literature (for example, Phillips (1991); Anyanwu (1997); Ekhosuehi and Osagiede (2012)). These studies have shown that the major source of revenue to the Federation Account comes from the export of oil, which is mainly extracted from the oil rich Niger Delta region, and that revenue allocation in Nigeria is a long-standing controversy among the federating units of the intergovernmental sharing scheme and a subject of geopolitical tension.…”

“…Another way out of this problem is to encourage the states to be self-reliant by improving their internally generated revenue. This second option of self-reliance was used by Ekhosuehi and Osagiede (2012) to develop a formula for the horizontal revenue sharing scheme.…”

“…This study design is centred on parameter estimation and programming with MATLAB. The study aims to provide techniques to estimate the transition parameters and to modify the MATLAB program for the proposed horizontal revenue allocation formula of Ekhosuehi and Osagiede (2012). The MATLAB program is defined by the function hra.…”