The Consequences of Shadow Economy and Corruption on Tax Revenue Performance in Nigeria

Abstract

Shadow economy and corruption are the two harmful activities that do not work in the favour of tax revenue performance. As a result it renders an effective government incapacitated and unable to carry out its social responsibilities. This study considers the effect of the informal economy and graft on tax revenue performance in Nigeria using secondary data that cover a period from 1996 to 2018. This period has been covered by the corruption perception index captured by the Transparency International for Nigeria. Despite the theoretical approaches available in measuring the size of the shadow economy, the ordinary least squares technique is specifically used to perform the multi-regression analysis to arrive at the empirical results which indicate that both the shadow economy and corruption have negative influences on tax revenue performance in Nigeria, although the negative impact of corruption on tax revenue is more robust and significant. Thus, the study suggests among others that the government should step up action against corruption and also address the root causes of shadow economy in order to make the participants of the informal sector willing to formalize their businesses and voluntarily comply with tax payment obligations.

Control Of Corruption In Moderating The Effect Of Per Capita Income And Shadow Economy On Tax Revenue

“…However, various studies show that the shadow economy has a negative effect on tax revenue. This finding, among others, is based on research conducted by Bird et al (2004) based on data sets from 1990 to 1999 in a number of developing countries, Omodero (2019) based on the 1991 to 2018 dataset in Nigeria, and Khujamkulov (2017) based on 1980 to 2010 dataset in Tajikistan. Meanwhile, according to Indupurnahayu & Walujadi (2019) on average from 1990 to 2018, Indonesia lost potential tax revenue of 0.7% of gross domestic product due to the shadow economy.…”

“…Based on the coefficient value, it can be interpreted that a 1% increase in the proportion of shadow economy in the economies of South Asian and Asia-Pacific countries reduces tax revenue by 0.0968818% of the country's gross domestic product, ceteris paribus. Omodero (2019) in his research revealed that the shadow economy affects tax revenue because economic activities are not reported and not taxed. In line with this Khujamkulov (2017) emphasized that shadow economy activities are caused by several factors such as entrepreneurs and businesses that face burdensome tax regulations with weak law enforcement, so that state revenue from business is lost.…”

“…This means that at the α level of 5% control of corruption can reduce the negative effect of the shadow economy on tax revenue. Omodero (2019) found evidence that corruption and shadow economy are interconnected. Corruption can increase informal economic activities, while informal economic activities can exacerbate the level of corruption.…”

“…As for corruption, it has a negative influence on tax revenue, among others, as stated in a study conducted based on data in Middle Eastern countries (Imam & Jacobs, 2007) and other developing countries (Bird et al, 2004). Suboptimal tax revenue leaves the government with insufficient funds to provide public infrastructure (Omodero, 2019) and reduces the government's ability to provide adequate public services (Tanzi & Zee, 2000). In fact, tax revenue is an important instrument for the government to develop the country's economy.…”

Understanding the ‘Shadow Economy’ in Smes – a Malpractice From Indonesia, 2009-2020

“…Based on arguments from the theoretical basis, previous studies, and an explanation of the study locus, we assessed the relationship between FDI, SS, CP, CC, IPT, SE, and TR by taking the following form: 2020), and Omodero (2019) who have investigated the relationship between these variables, so that it is very suitable to be applied in developing countries such as Indonesia.…”