Taxation and the Challenge of Fiscal Sustainability in a Resource-Rich Developing Country: A Re-evaluation of the Nigerian Perspective

Abstract

Taxation plays a pivotal role in the fiscal management and financing of the public sector by the government. This study is dedicated to a comprehensive exploration of taxation and its implications for fiscal sustainability, particularly in the context of a resource-rich developing nation, with a specific focus on Nigeria. In our investigation, we harnessed the power of the Autoregressive Distributed Lag (ARDL) model alongside other robust econometric tools such as the Augmented Dickey-Fuller unit root test and the ARDL bounds test of cointegration. The empirical findings of this study underscore the substantial influence of taxation on Nigeria’s economic growth over the entire period under consideration. While petroleum profit tax exhibited a dampening effect on economic growth, companies’ income tax and value-added tax contributed positively. Significantly, the impact of value-added tax on overall productivity eclipsed that of companies’ income tax. The recommendations emphasize strengthening tax collection institutions for better compliance. The government should also focus on establishing an efficient tax system that widens the tax base, which can be achieved by formalizing informal businesses. This approach is crucial for increasing tax revenues, enhancing fiscal sustainability, and restructuring Nigeria’s economy.