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TAX SYSTEM (1970 2010)



A dissertation submitted to the Post Graduate School, Department
of Economics, in partial fulfilment of the Requirements for the
Award of the Master of Science (M.Sc) Degree in Economics of the
Delta State University, Abraka, Nigeria



This study evaluates the link between fiscal deficit and the productivity of the Nigeria tax
system between 1970 - 2010 using tax buoyancy and elasticity as indexes. It also
examines some major tax reforms within the period. Overall, the analysis shows that for
most of the tax sources, the elasticity indexes were significantly less than 0.5 while for 3
out of the 10 equations the elasticity fell between 0.5 and 0.9. This indicates a relatively
weak productive tax system. The study also indicates that unlike the overall equation the
result for the oil boom period, the elasticity of petroleum profit tax was unity. The other
results followed the general results. The results for the period of the Structural
Adjustment Programme (SAP) were not significantly different from those of the oil
boom and the entire period. The study concludes that administrative lags may have
affected the remittance of tax revenues to government which may be responsible for the
low productivity observed. We therefore recommend that government should broaden the
tax base and improve on administration of tax collection.


1.1 Background to the Study
Tax structure and regulations in Nigeria have undergone tremendous changes since the
colonial period. These changes were propelled by the inconsistencies and visible
confusions in the operation of various tax systems in the country. These inconsistencies
and confusion led to the establishment of the Raisman Fiscal Commission of 1958.
According to Aluko (2004), the Commission was mandated to apply uniform basic
principle for taxing incomes throughout the country. This recommendation was embodied
in the Nigerian Independence Constitution Order in Council 1960, which resulted
eventually in the enactment of the 1961 Income Tax Management Act (ITMA). ITMA
1961 was the forerunner of the Companies Income Tax (CIT) Acts 1961, 1979 and 1990
as well as the Personal Income Act 1993 as amended.

The structure of the Nigerian tax reflects the nature of the business in the economy.
Depending on the type of business, taxes are levied on businesses on an annual basis.
This implies that all businesses, organizations and taxable persons are obligated to make
a tax return to the Inland Revenue (State of Federal). Profits arising from transactions of
companies constitute taxable income following their assessment to tax. This also
includes personal income tax, which is duly imposed on individuals by the relevant tax
authority in the territory where the company has its principal office, or the place of
business on the first day of the year of assessment or year of commencement of business.
The state Board of Internal Revenue is responsible for the administration and collection
of the relevant tax in while the Federal Inland Revenue is charged with the responsibility

of the company and other related taxes. These structures are governed by the Personal
Income Tax Act (PITA, 1993) and Company Income Tax Act (CITA, 1994) respectively
(Anyaduba, 2004).

Therefore, the Nigerian tax system is prudently organized in order to effectively enhance
the collection of taxes and reduce the incidence of tax evasion and the subsequent loss of
revenue to the government. The tax laws therefore provides for the collection of taxes at
source of the taxpayers income. This is achieved through the withholding tax system,
which allows taxes to be deducted at the source of income. This is provided in sections
63 of CITA and 72 of PITA; where the laws recommends that income tax assessable on
any company, whether or not an assessment has been made, shall if the Board (the
relevant tax authority) so directs, be recoverable from any payments made by any person
to such company.

Taxation is a dynamic subject, which grows with the constant changes in the economic
environment in which it operates, hence the need to review the regulating instruments
from time to time. As a result, there had been amendments to the various tax laws to
reflect the intention of the government. Usually, tax policies announced in a budget
speech by government become legally operational on the 1
day of the next budgetary
year. This creates time lag in implementation and administration of tax policies. The
main purpose for reviewing the regulating instruments and changes in tax policies is to
create avenue for increased revenue from taxation. In spite of these reforms and the
visible increase in revenue from taxation, the federal and state governments have on a
regular basis engaged in fiscal deficit.

Fiscal deficit arises because public expenditure rises while revenue remains unchanged,
or tax revenue falls while public spending remains unchanged, or tax revenue falls while
public spending rises. A commonly observed phenomenon in most developing countries
like Nigeria is that, the public sector plays a dominant role in initiating and financing
economic growth. The resultant growth in public expenditure is expected to be financed
by public revenues from taxes and non-tax sources but the revenues always lag behind
the level of public expenditure, leaving large deficits in the focus.

Onwioduokit (1999) The growth and persistence of fiscal deficits in both the
industrialized and developing countries in recent times have brought the issue of fiscal
deficits into sharp focus. The issues surrounding fiscal deficits are certainly not new, but
the economic development of the past decade has rekindled the interest in fiscal policy
issues. In the advanced countries, the growth of United State Federal deficit provided the
impetus for a reassessment of the effect of fiscal deficits on economic activities (Islam
and Wetzel, 1991). In the less developed countries including Nigeria, fiscal deficits have
been blamed for much of the economic crisis that beset them in the 1980s: over
indebtedness and the debt crisis; high inflation and poor investment performance; and
growth. Attempts to regain stability at the macro-level through fiscal adjustment achieved
uneven success, raising questions about the macroeconomic consequences of public
deficits and fiscal deterioration or fiscal stabilization (Easterly and Schmidt-Hebbel,

The growth in public revenue through taxation in developing countries is restricted by
many factors such as low per capita income, limited base on which direct taxes can be

imposed, income tax exemptions in the form of tax holidays, accelerated depreciation
rates and tax credits usually provided to the manufacturing sector, and deficiencies in tax
administration. On the other hand, public expenditure continues to grow due mainly to
mismanagement/high rate of corruption; high cost of running public administration due to
the type of political system, the level of government participation in production and
control of economic variables; and sheer inability to control spending by public office
holders (Financial Indiscipline). In addition, increasing population, insecurity and the
political system are also responsible for increase in public expenditure.

1.2 Statement of the Problem
Over the years, huge amounts of revenue have accrued to the federal, state and local
governments from taxation. In a research conducted by Ariyo and Aaheem (1991), it was
confirmed that budgetary allocation does not necessarily exceed the expected revenue.
Yet, the government on regular basis embark on extra budgetary activities indicating the
non-sustainability of the tax revenue.

On the basis of the above, there has been a growing concern over the use of fiscal deficit
as an option in accelerating economic growth and development especially in developing
countries like Nigeria. This situation arises from the ever-increasing magnitude of deficit
by the government of most developing countries. It was on this ground that Ariyo,
(1993) points out the implications of fiscal deficits on growth and economic reforms in
these countries. Chibber and Khalizadeh, (1988), have also suggested that economic
reforms should cover not only the size and financing pattern of government deficits, but
also the structure of taxation and the level and composition of public expenditure.

Studies conducted by different scholars suggest the need for concerned attention about
the problem of fiscal deficit in Nigeria. A study by Ariyo and Raheem, (1990) reports
that fiscal deficit has become a recurring feature of Nigerias fiscal policy and notes the
absence of any identifiable macroeconomic objective to justify this deficit-prone
behaviour. In same vein, Onwioduokit (2002) opined that Government expenditure in
Nigeria has consistently exceeded revenue for most of the years beginning from 1980 and
that the symptoms of such fiscal imbalance are, of course, budget deficits. While budget
deficits are nothing new in the countrys history, the recent size of the deficit has been a
cause of concern to many people including academics, policy makers, and investors. It is,
however, pertinent to note that much of the debates over the deficits have been more
related to the effects of unacceptably large deficits rather than with the causes of the

Furthermore, Ariyo, (1993) reports that the level of fiscal deficit in Nigeria has become
unsustainable since 1980. When a country experiences non-sustainable fiscal deficit,
there are three options opened to the government for addressing the problem. These
options according to Zee, (1988) are determination of the optimal tax rate for a given
level of expenditure; determination of the optimal level of expenditure for a given tax
rate; and simultaneous determination of the optimal level of expenditure and tax rate.

This study therefore focuses on the first option to enable us to determine a sustainable
level of revenue as a basis for evolving sustainable deficit profile in Nigeria. This choice
is influenced by the following considerations. Firstly, this research is essentially a
follow-up of related studies by Ariyo and Raheem, (1990) and Ariyo, (1993), which

indicate that the level of fiscal deficit in Nigeria is no longer sustainable and it is not
desirable to continue to incur budget deficit for financing public expenditure. Rather,
efforts should be made to reduce expenditure or raise additional revenue by expanding
revenue sources and by exercising some financial discipline.

Second, it is preferable to focus on revenue enhancement tax policy in view of the current
situation in Nigeria. Most development policies in the country today are geared toward
rebranding Nigerians, fighting corruption and implementing the Vision 2020. This as we
know requires large financial outlay on activities that are not directly productive in the
short, a situation that is expected to continue for some years. Therefore, a significant
reduction or switching of public expenditure into directly non-productive real sectors of
the economy is not a viable proposition in the short run in the phase of high rate of
unemployment, youth restiveness, insecurity and unresolved political crisis.

Third, Lipumba and Mbelle, (1990) indicate that increasing revenue and reducing
expenditure are some of the most important fiscal challenges facing a government
entangled in the budget deficit problem. Ndekwu, (1991) also noted that more than ever
before, there is now a great demand for the optimization of revenue from various tax
sources in Nigeria. This probably influenced the decision of the Federal Government of
Nigeria (FGN), which in 1991 set up a Study Group on the Review of the Nigerian Tax
System and Administration.

Finally, an accurate estimation of the appropriate level of optimal rate that will match the
required level of expenditure requires the knowledge of the productivity of the tax
system. This will assist in identifying a sustainable revenue profile for the country. It will

also help in determining appropriate modifications to the existing tax structure and rates
as well as areas for improving tax administration.

It should be noted that the advent of the oil boom in the 1973 and 1974 fiscal year
encouraged over-reliance on oil revenue to the neglect of the traditional revenue sources.
As a result, some non-oil revenue sources were either, abandoned or became of less
concern to the government, and no attention was paid to assessing the optimal revenue
derivable from these non-oil sources. Further, there were episodic jumps in the countrys
total annual revenue and hence budget deficits (Ariyo and Raheem, (1990). This is a
reflection of the vagaries of the oil market whose fortunes fluctuate widely and

This research work therefore appraises fiscal deficit and the productivity of the Nigerian
tax system. This will assist in an objective assessment of the countrys sustainable level
of revenue as a basis for determining an optimal level of expenditure. It will also
facilitate the design of fiscal policies to overcome the deficit problem in the long run.

1.3 Research Questions
Given the magnitude of the fiscal deficit problem in Nigeria and the length of the period
of time under consideration, fundamental questions are raised for this dissertation.
Amongst these fundamental questions are:
1. What is the relationship between government total tax revenue (GTR) and the
Gross Domestic Product (GDP) in Nigeria?

2. Does an increase in government tax revenue (GTR) lead to the same proportionate
increase in Gross Domestic Product (GDP) in Nigeria?
3. What are the impacts of the non-oil revenue (NOR) on the non-oil gross domestic
product (NGDP) in Nigeria?
4. Is there any relationship between the custom and excise duties (CEXD) and the
gross domestic product (GDP) in Nigeria?
5. Does the petroleum profit tax (PPT) have any significant impact on the total oil
revenue (TOR)?
6. What is the impact of the petroleum profit tax (PPT) on the gross domestic product
(GDP) in Nigeria?
7. Does the company income tax (CIT) have any effect on the gross domestic
product (GDP) in Nigeria?
8. Does the company income tax (CIT) have any effect on the non-oil gross domestic
product (NGDP) in Nigeria?

1.4 Objectives of the Study
The main objective of this study is to examine the productivity of the Nigerian tax system
with a view to determining whether it is adequate in meeting budget proposals without
recourse to budget deficits as an option in budget finance, knowing well that taxation is
one of the major sources of government revenue. The specific objectives are as follows.
1. To examine the relationship between government total revenue and the gross
domestic product in Nigeria.
2. To investigate the impact of increasing government tax revenue on the Gross
Domestic Product (GDP) in Nigeria.

3. To examine the index of tax buoyancy in Nigeria from 1970 2010
4. To investigate the relationship between non-oil revenue and the gross domestic
product in Nigeria.
5. To empirically establish the relationship between petroleum profit tax and the total
oil revenue as well as the GDP.
6. To investigate the impacts of the total oil revenue on the gross domestic product of
7. To investigate the impact of custom and excise duties on the non-oil gross
domestic product in Nigeria.
8. To examine the relationship between the company income tax and the GDP and

1.5 Research Hypotheses
The hypothesis formulated for this dissertation is meant to test relationship between
government tax revenue, tax sources and tax productivity. These hypotheses are
formulated in null form.
Hypothesis 1
: There is no significant relationship between the federal government tax (GTR)
revenue and gross domestic product (GDP) in Nigeria.
Hypothesis 2
: There is no significant relationship between the non-oil revenue (NOR) and the
NGDP in Nigeria.


Hypothesis 3
: There is no significant relationship between the petroleum profit tax (PPT) and
total oil revenue (TOR).
Hypothesis 4
: Company Income tax does not significantly affect the GDP and the NGDP in
Hypothesis 5
: Revenue from total export (TEXP) does not have any significant effect on the
gross domestic product (GDP).
Hypothesis 6
: There is no significant relationship between custom and excise duties and the non-
oil gross domestic product (NGDP) in Nigeria.

1.6 Scope and Delimitation of the Study
This research work examines fiscal deficit and the productivity of the Nigerias Tax
System (1970 2010). It covers the structure of the Nigerian tax system and justifies the
productivity of the system. The researcher obtained data, which cover a period of 40
years after independence (1970 2010). It examines sources of revenue, tax elasticity
and buoyancy, fiscal federalism, the impact of the oil boom and government expenditure
in general.

1.7 Significance of the Study
Successive governments in developing countries have expressed concern about the level
of fiscal indiscipline and the low level of the productivity of the tax system especially in

developing countries and Nigeria in particular. Therefore, this research work is relevant
to all the three tiers of government as the research is concerned with the examination of
the link between fiscal deficit and the productivity of the Nigerias tax system and draw
attention to how this should be curtailed in Nigeria.
The dissertation also assist in identifying a sustainable revenue profile for the
country thereby helping to determine appropriate modifications to existing tax structure
and rates as well as improving tax administration. Significantly also, this work
contributes to knowledge as it improved upon the work of previous studies such as the
work of Ariyo, (1997), Ariyo, (1993), Ariyo and Raheem (1991, and 1990) by adding
more variables and extension of the period of study to 40 years.

1.8 Limitations of the Study
The major hindrance to this study is the dearth of adequate research materials such as the
accurate data on GDP, Custom and Excise Duties, Company Income Tax, etc necessary
for a smooth research work. However, these problems were resolved through the use of
published data from the Central Bank of Nigeria (CBN), the Federal Office of Statistics
(FOS), and The National Bureaux of Statistics (NBS). The problem encountered in the
use of these secondary data, was that there were slight variation in the data published by
the different agencies.

1.9 Organization of the Study
The research work is organized in five (5) chapters where chapter one discusses the
preliminary task of the research. It is sub-divided into nine sub-units. Chapter two
concentrates on the review of related literature and theoretical framework. Chapter three

discusses research methodology while four is concerned with data presentation and
analysis of results. The last chapter which is chapter five focuses on summary,
recommendations and conclusion.

1.10 Definition of Terms
To enhance a proper understanding of this dissertation, some of the terms used in this
work are defined and explained below:
Fiscal Deficit:- According to Alade, (2003) Fiscal deficit is the amount by which
government spending exceeds government revenue and it is usually considered
expansionary, while the World Bank (1988) refers to fiscal deficit as the excess of public
sectors spending over its revenue.

Deficit Financing:- This is an economic phenomenon which shows that government
expenditure surpasses the total revenue in the country.

Convection Fiscal Deficit:- This is the measure of the difference between total
government outlays and receipt, excluding changes in debts, which can be measured in
cash or actual basis.

Tax Productivity:- Tax productivity relates to the concept of efficiency in tax
administration and collection. Therefore, a tax system is said to be productive if and only
if the revenue generated is able to achieve the purpose for which the tax is being

Tax Elasticity:- This is the ratio between the percentage change in revenue and the
percentage change in the base year.

Fiscal Indiscipline:- This is a sheer inability of public office holders and policy makers
to control expenditure. It is the inability to adhere strictly to the expenditure as stipulated
budget allocation. Off time, they exceed what is allocated for a particular project or
sector. It is a phenomenon that arises due to the high level of corruption in an economy.

Tax Buoyancy:- T his is the measure of the total response of tax revenue to changes in
income. In fact, Ariyo (1997) opines that, tax buoyancy is the changes in tax revenue due
to changes not only in income but also in other discretionary changes in tax policy.

Laffer Curve:- According to Newberry and Stern (1987), Laffer curve is a theoretical
representation of the relationship between government revenue raised from taxation and
all possible rates of taxation. It is used to illustrate the concept of taxable income
elasticity. The Laffer curve assumes that at 0% tax rate no revenue is generated and at
100% tax rate, no revenue is also generated.
Dependency Syndrome:- An attitude and belief that a group (country) cannot solve its
own problems without seeking external help especially from other countries.

Dutch Disease Syndrome:- This is a concept that purportedly explains the apparent
relationship between the increase in exploitation of natural resources and a decline in the
manufacturing sector. In this research, it is used to refer to the relationship between the
increase in tax revenue and a decline in private sector benefits accruing from the tax


Crowding Out of Private Sector:- This is when there is decline in investment resulting
from the effect of the fiscal policy expansion in private expenditure or investment.
According to Jhingan, (2005), it is the reduction in private expenditure or investment
caused by any increase in government expenditure through deficit budget via a tax cut
increase in money supply or bond issue.


2.0 Introduction
This Chapter is concerned with a review of literature on fiscal deficit and the productivity
of the Nigerian tax system from 1970 2010. It is structured into five sections some of
which are further divided into sub-sections. The first section examines the overview of
the Nigerian tax system with fiscal deficit in Nigeria while the second deals with the
sustainability of the Nigeria tax system. The second comprises of two sub-sections such
as fiscal deficit in Nigeria and monetary impacts of fiscal deficit. The third section
discusses Nigerian Fiscal Federalism, which is also sub-divided into two sub-sections
Revenue Profile of the Federal Government of Nigeria and the Structure of Tax-Based
Revenue in Nigeria. In section four, the Current Legal Framework is examined. This is
made up of Tax Reforms in Nigeria, taxes collectible by the federal government,
taxes/levies collectible by state governments and taxes/levies collectible by local
governments. The last section of this chapter discusses the Concept of Productivity of a
tax system with sub-sections as, theoretical framework, the tax buoyancy, tax elasticity
and Tax Stability

2. 1 Overview of the Nigerias Tax System
Taxation is not new to the country. Prior to independence, taxes existed in the form of
direct taxes which were introduced into the Northern part of the country by Lord Lugard
in 1904 and later to other parts of the country specifically, Western Nigeria in 1917 and
Eastern Nigeria in 1928. After the independence, the need to collect personal income tax
from the entire country led to the promulgation of a uniform tax law, which gave birth to

the Income Tax Management Act (ITMA) of 1961, which was enforceable in the

Prior to the advent of oil in 1971, revenue from the traditional sources, such as tax on
export products like cocoa, groundnut and palm kernel provided adequate revenue for the
needs of the public sector. In addition, most people outside the tax net used to pay the
poll tax. Following the oil boom, however, little attention was paid to these non-oil
revenue sources. Consequently, there arose over-dependence on oil revenue as the anchor
for public expenditure programming thus, a structural change in the federal tax sources.
According to Ariyo (1997) the relative contribution of oil revenue increased from 18.9%
in 1970 to 80.7% in 1974, rising further to 82.2% in 1989. This trend continues in 1990
and rose to 84% in 1993. (See table above).

Given the fragile nature of the oil market, the countrys revenue profile has been
subjected to wide fluctuations over the years. This, in addition to overambitious
expenditure programmes resulted in episodic jumps in the countrys budget deficits.
Ijewere, (1991) and Ndekwu, (1991) noted that successive governments have expressed
concern about the low level of productivity of the Nigerian tax system. This has been
attributed largely to the deficiencies in the tax administration and collection system,
complex legislation, and apathy, especially on the part of those outside the tax net.

In view of this, the Federal Government of Nigeria (FGN) in 1991 set up a study group
on the review of the Nigerian tax system management and administration. A behavioural
explanation for this fiscal stance had been elaborated upon by Olopoenia (1991) in his

discussion of the impact of a sudden surge in oil revenue in the context of the Dutch
disease syndrome (Corden and Nealy, 1982; Herberger, 1983). He explained how the
confidence of wealth effect influences governments expenditures and non-oil revenue
efforts. With respect to the latter, he indicated that the government may want to pass on
some of its oil revenues to the private sector indirectly in the form of lower non-oil tax
rate and levels.

Aghevli and Sassanpour (1982), Veez-Zedeh (1989) and Ezeabasili and Mojekwu, (2011)
also noted that the level of non-oil revenue is influenced by the level of economic activity
in the non-oil sector as well as by the oil wealth effect. Specifically, the extent to which
the government withdraws resources from the non-oil sector may depend on its
perception of the oil wealth. If oil wealth is perceived to be permanent, there may be a
desire by government to transfer some of the wealth to the private non-oil sector through
a reduction in non-oil tax burden. This orientation negatively affects the productivity of
the non-oil tax sources in particular and the tax system in general. However, there is
paucity of comprehensive research on the productivity of the Nigerian tax system. Rather,
most research has focused only on a single aspect of the tax sources. For example,
Idachaba (1984) assessed the tax-to-base elasticities of import and export duties in terms
of total imports and exports. Similarly, Diejomaoh (1986) estimated the income
elasticities of import volume over the period 1954-1964.

The Nigerian tax system is discussed under three interrelated constituents. The first
constituent is tax policy, which is the particular course of action adopted, and in this case,
the line of action adopted by government in respect of taxation. Taxation, we know is one

of the major fiscal policy instruments used in regulating the economy, boosting
investments, encouraging savings capacity, regulating inflation and so on. Ariyo and
Raheem (1991) stated that the policy objective of any government tax system is aimed at
achieving the following: to create a fair and equitable society; to create an economic
society free of distortion to investment decisions; to encourage a fair allocation of savings
amongst investment opportunities; to create incentive to hard work or for risk taking in
business; to attract foreign investments or at least avoid capital flight to countries with
lower taxes; to reduce evasion and avoidance and the growth of underground economy
and encourage voluntary compliance and to reduce the complexity of the system both for
the tax administrators and the tax payers. The second constituent is tax laws, which are
the laid statutory acts, that guide the collection and administration of taxes in Nigeria.
These laid statutory acts where identified by Odusola (2006) as the major tax laws in
existence as of September 2003 and their various related amendments. The thirdly
constituent is tax administration in Nigeria, which is the regulatory framework set up to
guide and monitors the collection of taxes. Taxation has been in existence even before the
amalgamation of Nigeria as a political entity in 1914. Direct taxes, which were first
introduced into the northern part of Nigeria, were successfully administered because the
citizens were already used to one form of tax or another before the formalization of direct

The effectiveness of the administrative arrangement under the emirate system was the
major factor responsible for successfully administration of tax. With the amalgamation of
the northern and the southern protectorates in 1914, direct taxation was introduced into
the Western territory in 1919, and into the Eastern provinces around 1928. Therefore, the

enabling laws and regulations were fashioned after those of Britain. As a result, Odusola,
(2006) opined that the Nigerian tax administration faces serious, complex and
multidimensional problems. Similarly, according to Ariyo, (1997), the problems are; the
deficiency in tax administration and collection system, complex legislation and apathy of
the Nigerians caused by the lack of value received in return for their taxation money as

However, according to Odusola, some of the major problems are, the politics of revenue
allocation in Nigeria, which does not prioritize tax efforts. Instead, it is anchored on such
factors, as equality of states 40%, population 30%, landmass and terrain 10%, social
development needs 10%, and internal revenue efforts 10%. This approach, discourages a
proactive revenue drive, particularly for internally generated revenue, and makes all
government tiers heavily reliant on unstable oil revenues, which are affected by the
volatility of the international oil markets. Apart from the national Cake Sharing
Syndrome, the instability and volatility of oil revenue created an opportunity for
improved tax efforts within the provisions on taxation ratified in the 1999 Constitution.
Although some states governments such as Lagos, Edo, Delta, River etc, have initiated
measures to enhance their revenue generation base through taxation, the outcome has not
reflected any level of serious effort.

Taxation is one of the sources of revenue to the government, which is used to finance or
run public debts, and for any tax to be legal, it must be a creation of the law as no citizen
would want to pay any imposition which is not backed by law. Therefore, the basic laws
or principles applicable to all forms of tax collection are also applicable to the trading

income of individuals and companies, on their profits or gains. There is exception
however for agricultural business where there is no time limit for set-off of losses. All
income accruing to a company are taxed on preceding year basis rule and none is taxed
on actual basis except when the commencement or cessation provisions are being
applied. In case of Personal Income (PIT) however, salary, pension, commission, and
allowances are taxed on current year basis while rent, dividend, interest, and business
profits are taxed on preceding year basis.

However, due to high rate of corruption and fiscal indiscipline coupled with low tax base,
the revenue generated from taxation has not always been sufficient for the purposes for
which the revenue is generated. This insufficiency creates the problems of fiscal deficit as
most government often borrow to augment their revenue. When the government acquires
loans and it is not properly managed for the purposes for which the loan is acquired, the
vacuum created my result to macroeconomic instability in the country. Anyanwu,
(1997) opines that the size of public sector fiscal deficit is one of the most reliable
indicators of the overall macroeconomic instability or macroeconomic balance and
growth if not properly managed. He further contended that, high fiscal deficits is an
indication of at least one form of macroeconomic imbalance such as increase foreign
debts, increased inflation rate, shortage of foreign exchange and the crowding out of
public sector.

Researchers have found out that the most important statistics used in measuring the
impact of government fiscal policy in Nigeria is the size of government surplus or deficit.
In fact, Ariyo (1997), recalled that, the magnitude of government surplus or deficit is one

of the single most important statistics used in measuring the impact of government fiscal
policy on an economy. Based on this fact, it is widely accepted by scholars such as
Okpara (2010), Obi and Nurudeen (2008) as well as Ariyo (1993) that public sector
finances and related policies constitute the central aspect of the management of the
economy. Thus, the quality of this management in no small measure influences overall
macroeconomic performance as well as the distribution of resources between the public
and private sectors.

The budget structure of most developing countries indicates that fiscal deficit is a
recurring feature of public sector financing. This phenomenon is partly influenced by the
desire of these governments to meet up with the ever-increasing demands of their
populace and to accelerate economic growth and development. Ariyo, (1997) buttressed
this fact when he opined that the recurring feature of deficit is a common phenomenon in
developing countries where the populace looks up to the government for the satisfaction
of their needs.

Attempts have been made to categorise fiscal deficit in various ways. For example, the
usefulness of fiscal deficit as a tool for enhancing accelerated growth and development
has been discussed along positive and negative directions. The work of Thornton (1990)
indicates a net positive effect between fiscal deficit and economic growth and
development. On the other hand, Baily, (1980) and Landau (1983) indicate a net negative
effect. Secondly, the mode of financing a fiscal deficit is another issue. Ariyo, (1997)
identifies the different finance options available to the government as, (i) running down
government accumulated cash balance (ii) net borrowing from the banking system or

abroad (iii) issuing of new currency (iv) drawing down the countrys foreign assets. In
using any of these options however, the government has to be careful as each has
different impacts on the economy. The sustainability of a fiscal deficit requires that, if
there is no sustainability of the fiscal deficit, then according to Wickens and Uctum
(1990), the country will be permanently insolvent.

Taxation was one of the largest sources of government revenue before the discovering of
petroleum. Nevertheless, the amount of revenue collected from taxation is a function of
the tax system, which on its own is a major determinant of other macroeconomic indexes.
It is on this basis that Hinricks (1986) and Musgrave (1984) observed that economic
development has a very strong impact on a countrys tax system and policies. This is
because, the countrys tax policies vary with stages of development as the criteria by
which a tax structure is judged depends on the relative importance of each of the tax
sources and other sources of revenue generation, which as we know vary from time to
time. In spite of the huge amount of revenue realized from taxation, the government
especially in developing countries still engage in deficit financing. This was the view of
Anyawu, (1997) when he said that despite the fact that the revenue realized are often
above budgetary estimates, extra-budgetary expenditures have been rising so fast,
resulting in ever bigger fiscal deficit. He therefore defines the overall fiscal deficit as
the difference between the sum of both current and capital revenues plus grants and the
sum of current and capital expenditures plus net lending.

A critical review of the deficit financing option even from the lay point of view shows
that there is no identifiable macroeconomic objective given increase revenue from

petroleum, rising inflation rate, increasing in national debts, and low industrial capacity,
to justify the deficit financing option of the government. Hence, there is a reason to
believe that fiscal deficit in developing countries and Nigeria in particular, has generated
the problem of non-productivity of the tax system.

The problem of non-sustainability of fiscal deficit has become a recurring feature of
public sector financing all over the world. However, the tendency toward deficit
financing is more pronounced in developing countries where the populace looks to the
government for the satisfaction of most needs. In view of its phenomena growth, it is
now widely accepted that public sector finances and related policies constitute a central
aspect of the management of macroeconomic policies. The quality of this management in
no small measure influences overall macroeconomic performance as well as the
distribution of resources between the public and private sectors.

In other to enhance the quality of tax administration and management, the Federal
Government of Nigeria in 1991 set up a study group on the Review of the Nigerian Tax
System and Administration. This is relevant for the fact that an accurate estimation of the
optimal level of expenditure requires the knowledge of the productivity of the tax system.
This will assist in identifying a sustainable revenue profile for the country and will help
in determining appropriate modifications to the existing tax structure and rates as well as
areas for improving tax administration.

Various scholars have identified three issues that would guide decisions making on the
fiscal deficit profile for an economy. The first issue relates to the usefulness of fiscal

deficit as a tool for enhancing accelerated growth and development. This is an issue on
which, there is yet no consensus among economists, given the divergent findings of
reported studies. While some studies like that of Thornton, (1990) indicate a net positive
effect, that of Baily, (1980), Feldstein (1980) and Landau, (1983) suggest a net negative
effect. Ariyo and Raheem, (1991) also reported mixed results on the effect of deficit
financing as reported by some other studies.

The second issue relates to the mode of financing the deficit suggesting that running
down of government accumulated cash balance, net borrowing from the banking system
or from abroad, issuing of new currency as well as drawing down of foreign assets (Ariyo
and Raheem, 1990) are mode of financing fiscal deficit. However, Chibber and
Khalizadeh, (1988), Yellen, (1996) opined that each mode of financing fiscal deficit have
different impact on the economy. Thirdly, and most importantly, Buiter, (1988) as well as
Wickens and Uctum, (1990) reiterated that a fiscal deficit profile must be sustainable,
otherwise, the country will become perpetually insolvent.

The Nigerian tax system prior to the discovering of oil was dominated by revenue from
the traditional sources of revenue, export of primary products. Okpara (2010), opined that
between 1960 and early 1970s, revenue from agricultural products dominated the revenue
structure, while revenue from other sources was considered as residual. However, Ariyo
(1997) posited that, since the discovering of oil, and following the boom resulting from it,
oil revenue dominated the Nigeria revenue structure and thus, there is sharp increase in
the share of federally collected revenue. Since then, oil has accounted for at least over
80% of the federally collected revenue, implying that the traditional tax revenue sources

are being neglected and does not assume any strong role in the management of fiscal
policy in the country. The implication was a drastic fall in revenue from these sources
creating varied problems in the country.

The need to address the problems created through the negligence of the traditional
sources of revenue led to different tax policy reforms. These reforms however have
created no much impact on revenue generation in Nigeria since petroleum still dominates
the revenue profile. Therefore, the efficacy of the effect of the tax system reforms in
general seems to be questionable.

A countrys tax system is a major determinant of other macroeconomic indexes. There is
the fact that, for both developed and developing economies, there exist a relationship
between tax structure and the level of economic growth and development. In fact,
Hinricks, (1992) and Musgrave and Musgrave, (1994), have argued that the level of
economic development has a very strong impact on a countrys tax base, but however, tax
policy objectives vary with the stages of development. For example, during the colonial
era and immediately after the Nigerian political independence in 1960, the sole objective
of taxation was to raise revenue. Later on, emphasis shifted to the infant industries
protection and income redistribution objectives.

In addressing this issue of the relationship between productivity of the tax system and
economic development, Musgrave and Musgrave (1984) divided the periods of economic
development into two, the early period when an economy is relatively underdeveloped

and the later period when the economy is developed and that during the early period,
there is limited scope for the use of direct taxes because the majority of the populace
reside in the rural areas and are engaged in subsistence agriculture. Because their
incomes are difficult to estimate, tax assessment at these stages is based on presumptions
and prone to wide margins of error.

In the early period of economic development, government revenue is characterized by the
dominance of agricultural taxation, which serves as a proxy for personal income taxation.
This was not different in Nigeria where the various marketing boards served as effective
mechanisms for administering agricultural taxation. Ariyo (1997) opined that
agricultural taxation substituted for personal income tax given the difficulty in reaching
individual farmers and the inability to measure their tax liability accurately. Furthermore,
Musgrave and Musgrave (1984) opined that the large percentage of self-employment to
total employment makes effective personal income tax unworkable and this was the
situation in Nigeria. This problem thereby necessitates the use of the ability-to-pay
principle, effectively limiting personal income taxation to the wage income of civil
servants and employees of large firms both of which account for an insignificant
proportion of the total working population.

During the early period of economic development, direct taxes in form of Company
Income Taxes (CIT) were looked down upon because there were few home-based
industries and so revenue generation from these sources was insignificant. The same
principle applies to excise tax (an indirect tax) on locally manufactured goods. However,

both direct and indirect tax increased in relative importance as economic development
progresses, and due to growth or non-static nature of the bases of these taxes.

At this early stage also, taxes are difficult to collect because of the lack of skills and
facilities for tax administration (Hinricks, 1996). Given this, a complicated tax structure
is not feasible and the amount of revenue from personal income tax will depend on
taxpayers compliance and the efficiency of the tax collector. Although taxation was one
of the major sources of revenue to the government, other important source of government
revenue during the early stages of economic development is the foreign trade sector
because exports and imports are readily identifiable and they pass through few ports.
Massel (1996) opined that revenue from export and custom duties is not stable because of
periodic fluctuations in the prices of primary products and this tends to complicate plan
implementation in many developing countries.

Economic development brings with it an increase in the share of direct taxes in total
revenue. This is consistent with the experience of developed economies in which direct
taxes yield more revenue than indirect taxes. For example, personal income tax becomes
important as the share of employment in the industrial sector increases. In developing
countries like Nigeria however, the dominance of the agricultural sector decreases with
the discovery of oil and sales tax may be broadened because a great deal of output and
income go through the formal market as the economy becomes more monetized.
Musgrave and Musgrave, (1984) noted that at this stage, taxes may be imposed on firms
or individuals, on expenditures or receipts, and on factor inputs or products, among

others. He further argued that there would be a tendency to shift from indirect to direct
taxes. His theory relates to a normal development process. This was not however
relevant to Nigeria as he does not consider a situation where the sudden emergence of an
oil boom provides an unanticipated source of huge revenue. Hence, this stereotype may
not be applicable to an oil-based economy like Nigeria. Nevertheless, the theory still
represents a benchmark against which country specific empirical evidence may be

2.2 Sustainability of the Nigeria Tax System
In this dissertation, I will define the term Sustainable Tax System as means or tax
system that is sufficiently in agreement with or in harmony with the prevailing economic
and political factors in a country to persist without the need for repeated major tax
reforms. Experience suggests that any state that wishes to both grow and to implement
redistributive fiscal policies must first establish an administrable and efficient tax system.
At the same time, however, to make such a system politically sustainable, it must be
considered fair by a majority of the politically relevant population.

One reason why many developing countries like Nigeria do not appear to have either an
efficient or a fair tax system is essentially because of the very limited scope of this
segment of the population, so that the politically relevant domain of the fiscal system is
considerably smaller than the population as a whole. Specifically, researches has
indicated that any instrument that will help in achieving a sustainable tax system should
strike the right balance between the equity and efficiency aspects of taxation in terms of
the equilibrium of political forces.

Ariyo (1990) opines that in general however, any country that is absolutely relying on
taxation as their major source of revenue and wishing to attain rapid economic growth
and development must watch the sustainability of their tax system as it were, because it
cannot be induced by better fiscal institutions. On the contrary, a more encompassing and
legitimate state is itself the key ingredient needed for a more balanced and sustainable tax
system. Countries with similar economic characteristics and similar economic situations
can and have sustained very different tax levels and structures, reflecting their different
political situation. However, we must not ignore the phrase currently popular in the
literature of political economics, that when it comes to tax matters in general politics

2.2.1 Fiscal Deficit in Nigeria
There is no conceptual controversy over the definition of fiscal deficit. From every
ramification, the term is synonymous with budget deficit. Alade (2003) defines fiscal
deficit as the amount by which government spending exceeds government revenue and it
is usually considered expansionary. While the World Bank (1995) refers to fiscal deficit
as the excess of public sectors spending over its revenue. As a result of the fact that
fiscal policies are carried out to manage the entire economy, Anyanwu, (1997) opined
that the most important aspects of fiscal policies are centred on the management of the
public sectors fiscal deficit. This is because, it has been widely recognised that fiscal
deficit is one of the key macroeconomic indicators.

Anyanwu (1997) identifies three different instruments (gauges) with which we can assess
the fiscal deficit profile of a country. The first is, determined by the type of deficit to be

measured within the public sector coverage. According to him, the standard measure of
the fiscal deficit is the convectional deficit, which measures the difference between total
government outlays and receipts, excluding changes in debts, which could be measured in
cash or actual basis. As a result, if it is measured on pure cash basis, the convectional
deficit is the same as the Public Sector Net Borrowing Requirement (PSBR). Therefore,
the PSBR is a consolidated public sector deficit, which represents the total excess of
expenditure over revenue at all government levels. The second instrument, which
depends on the coverage or size of the public sector and its composition, recognises that
government transactions relevant for measuring the impact of the fiscal deficit are
sometimes carried out by non-government agencies.

In fact, Anyanwu further affirms that the general government deficit must in many cases
be expanded to encompass the operations of the non-financial public enterprise, which of
cause regenerate non-financial public sector deficit. The third gauge is that which is
relevant to the time horizon. This method of assessing fiscal deficit came into light due to
the failure of the convectional annual fiscal deficit assessment to put into consideration
the effects of changes in prices and valuation. Therefore, that to accurately assess the
sustainability of government fiscal deficit, it requires the replacement of the annual
deficit with a measure of changes in government net worth over the years.

In Anyanwu (1997), the extent to which any given public sector fiscal deficit can be
reconciled with broader macroeconomic goals also depends largely on the way it is being
financed. Thus, the success and failure of public sector fiscal deficit management
depends on how it is being paid for or financed. Iyoha (2004) opined that on account of

the structural and systematic problems in the Less Developed Countries (LDCs), budget
deficit invariably appears in the normal course of governance. He therefore, identifies
three sources of financing a public sector deficit as, deficit financing (borrowing from
central Bank), domestic borrowing (from non-bank public) and external borrowing i.e,
borrowing from other countries or international organisations such as International
Monetary Fund (IMF), Paris Club, World Bank etc.

Each of these approaches of financing public sector fiscal deficit has its advantages and
disadvantages depending on whether the money borrowed is being used to finance the
purchase of consumption goods for the economy or it is used to finance white elephant
projects, which is always the case with most Less Developed Countries (LDCs). In an
economy like that of Nigeria, which is prone to high rate of corruption, spending
government revenue on elephant projects is a common phenomenon. Hence, Gordon,
(2006) stated that fiscal deficit causes foreign borrowing in a small open economy; but it
causes both foreign borrowing and crowding out of the economy in a large open

2.2.2 Monetary Impacts of Fiscal Deficit
Alade, (2003) and Fjeldstad,(2003) pointed out that the impact of fiscal policy on
aggregate demand can also be estimated by looking at the fiscal deficit or surplus and
examining its impact on the liquidity of the economy. According to them, if an economy
is in a recession and operating at less than full capacity, higher government spending may
assist in increasing real output and promoting additional employment. He therefore
opines that monetary effects of government fiscal deficit are complex and show the inter-

relationship between fiscal and monetary policy. He identified two broad monetary
impact of fiscal deficit on the economy. Firstly, money supply will tend to rise,
influencing private sector wealth and asset portfolio decisions with respect to financial
and real assets. Interest rate will be affected and so will governments deficit financing
arrangement. Thus, financial crowding out may arise if governments demand for credit
reduces the availability of finance to the private sector. Secondly, as a result of the rise in
money supply arising from a fiscal deficit, the reserve base of the financial institutions
will tend to increase and this will affect their ability to create credit. In addition, if
accretion to financial institutions reserves is not curbed by monetary policy the supply of
credit may grow and contributes to further increase in monetary aggregate.

2.3 Nigerian Fiscal Federalism (Assignment of Tax Powers)
According to Ariyo (1997) fiscal federalism refers to the existence in a country of more
than one level of government, each with different taxing powers and responsibilities for
certain categories of expenditure. Nigeria is a good example of a country operating a
federal system of government through three tiers of government: the federal, the state and
the local. The present state of Nigerias fiscal federalism has evolved over time, starting
with the Phillipson Commission of 1946. As Ekpo and Ndebbio (1992) noted, this
evolution has been influenced by economic, political, social and cultural considerations.
The present arrangement has also undergone several revisions since the initial report of
the Phillipson Commission of 1946. Since then, there have been eight Commissions each
revising the reports of their respective predecessors. One of the most recent revision
exercise was undertaken by The National Revenue Mobilization, Allocation and Fiscal
Commission in 1988.

One major characteristic of federalism is the constitutional separation of powers among
the various levels of government. Drawing upon the reports of the various commissions
and revisions to previous constitutions, Section 4 (second schedule) of the 1989
Constitution of the Federal Republic of Nigeria (FGN, 1989b), reviewed in 1999,
specified three categories of legislative functions. The first is the exclusive legislative list
on which only the federal government can act. The second is the concurrent legislative
list on which both the federal and the state governments can act, and the third comprise
residual functions consisting of any matter not included in the above first two lists.

Ariyo (1997) further reiterated that In Nigeria, two major factors influence the
assignment of tax powers or jurisdiction among the three tiers of government. These are
administrative efficiency and fiscal independence. The efficiency criterion requires that a
tax be assigned to the level of government that is most capable of administering it as
efficiently as possible. Fiscal independence on the other hand requires that each level of
government should, as far as possible, be able to raise adequate funds from the revenue
sources assigned in order to meet its needs and responsibilities. Very often the efficiency
criterion tends to conflict with the principle of fiscal independence. The former entails a
great deal of centralization or concentration of tax powers at the higher level of
government, due to the limited administrative capacity of lower levels of government.
Conversely, the latter requires the devolution of more tax powers to the lower levels of
government to match the functions constitutionally assigned to them. In the Nigerian
context, the scale has always been tilted in favour of the efficiency criterion.


The Phillipson Fiscal Commission of 1946, set very stringent conditions for declaring
any revenue source as regional. It required revenue or taxes to be easily assessable by
local authority for easy assessment and collection, to be regionally identifiable, and in
general to have no implication for national policy. Given such conditions, very few
revenue heads (taxes) could be considered as regional and assignable to either the state or
the local government levels. There is also a distinction between the ability to legislate on
a particular tax and the ability to collect a particular tax. The two powers can reside with
the same level of government or be separated.

Available evidence from the current jurisdictional arrangement summarized in Table 4.9
suggests that both types exist in Nigeria. Researches by Ariyo (1997) shows that all the
major sources of revenue are left solely to the federal government in legislation and
administration (See Fig 4.9). These are import duties, excise duties, export duties, mining
rents and royalties, petroleum profit tax, and company income tax. This may be
attributable to the bias for the efficiency criterion noted earlier. The principal tax with
shared jurisdiction is the personal income tax on which the Federal Government Nigeria
(FGN) legislates. In terms of its administration, the FGN collects the personal income tax
of armed forces personnel and the judiciary. Olopoenia, R.A. (1991 recalled that, each
state government administers and collects personal income tax from other categories of
residents in its territory. Capital gains tax is also under shared jurisdiction in which the
FGN legislates while state governments collect the tax. Given the bias for the efficiency
criterion, the state and local governments have jurisdiction over minor, low-yielding
revenue sources. For example, state governments have jurisdiction over football pools
and other betting taxes, motor vehicle and drivers license fees, personal income tax

(excluding the judiciary and the military), and sales tax. Local governments administer
entertainment tax, radio and TV licensing, motor part fees and the potentially buoyant
property tax.

2.3.1 Revenue Profile of the Federal Government of Nigeria
Public revenue has been defined to mean cash flow from all available sources of income
to the government of a country in a given period of time, usually a fiscal year. Public
revenue is also used to refer to all funds required by the government or public authority
for the execution of its functions. Public revenue has been defined as the mobilization of
funds from available sources of finance the government, the collection, proper handling
and recording of the receipts by delegated agents of public authorities for the purpose of
discharging the national functions and responsibilities. In general, government sources of
revenue varied from country to country depending on the political and economic system
of that country.

The pre-independent and the period before 1970 were characterized by the dominance of
agricultural taxation (non-oil revenue source) which serves as a proxy for personal
income tax. There was the problem of collecting personal income tax in this period due to
the difficulty in reaching individual farmers and their inability to measure tax liability
accurately, yet non-oil revenue was the largest source of government revenue. In other to
enhance this, the government adopted the use of the various marketing boards as effective
mechanism for the administration of agricultural tax. During this period also, a large
percentage of the people were self-employed and so the effectiveness of personal income
tax was not workable. This was the same view by Musgrave and Musgrave, (1984) and

Hinricks, (1986) both of whom agreed that taxes are difficult to collect because of lack of
skills and facilities for tax administration. It was therefore not out of place when the
government shift base to the oil revenue sources and thus the revenue from the non-oil
sector gradually gave way.

The dominance of non-oil revenue gradually gave way to oil and gas revenue sales of
crude oil, introduction of petroleum profit tax (PPT), royalties, as there was increase in
oil export. However, the major fiscal policy instruments in Nigeria have been categorized
in four major headings namely:
(a) Non-Oil Revenue
- Company income tax (CIT)
- Import and export duties
- Education levy
- Personal income tax (PIT)
- Capital gain tax
- Value added tax
- Mineral rent and leases
- Fines, fees, licenses
- Stamp duties
- Investment and interest income
- Property rent/leases
- Withholding taxes

(b) Oil and Gas Revenue
- Crude oil sales

- Sales proceeds of liquified natural gas
- Oil exploration license
- Oil mining lease
- Royalties
- Rents
- Petroleum profit tax
(c) Capital Receipts
- Government borrowing
- Grants and international aids
- Sales of government investments
- Sales of government properties
- Donations
- Issuance of bonds and other securities
(d) New Sources of Public Revenue
- Premium from sales of foreign exchange
- GSM operating licenses
- Internally generated revenue from virtually all government agencies
- Saving from debt cancellation
- Recovery of looted public funds from some corrupt government officials.

The examination of the revenue profile above, showed that Nigeria has passed through
structural changes over time. Egwakhide, (1988) opined that some structural changes
emerged in the revenue profile in the early 1970s whereby indirect taxes gave way to
direct taxes with the emergence of the oil boom. Thus, there was a fall in revenue from

the non-oil sector; especially as agricultural was being neglected in favour of white-collar
jobs. This was however complemented with increase in excise duties except in 1975 and
1976 (see table below). This appreciable increase in revenue from excise duties was due
to enhance performance of the industrial sector in that period.

Different researches conducted have shown that the revenue profile of Nigeria indicates
that import and excise duties constitute the bulk of the government revenue since
independence. Hence, Ariyo (1997) observed that import and excise duties accounted for
41.9% and 21.9% respectively while Petroleum Profit Tax (PPT) and Company Income
Tax (CIT) stood at 19% and 8.9% respectively. He further opines that this trend starts
declining with respect to import and excise duties while PPT was increasing
progressively. The reason for this increase in revenue form PPT was due to the
negligence of agriculture as petroleum export replaces the traditional agricultural export.
And as at 1979, revenue from PPT rose to 74.9% while import duties and excise duties
fall to 12.8% and 3.7% respectively.

The 1979 constitution, section 149 (S.1) establishes the Federation account into which all
the revenue collected by the federal government shall be paid into except PIT. The
federal government has exclusive right to collect and remit into the federation account
revenue from crude oil and gas, oil lease rent, oil mining license, PPT, non-oil revenue
such as CIT, import and export duties, excise duties, mineral mining rents etc. Thus,
Ariyo (1997) puts it that before the advent of the oil on 1971, revenue from the
traditional sources such as tax on export products like cocoa, groundnut and palm kernel
provided adequate revenue for the needs of the public sector. Following the oil boom,

however, little attention was paid on non-oil revenue sources. Consequently, there arose
an over dependence on oil revenue as the anchor for public expenditure. Hence, given the
fragile nature of the oil market, the countrys revenue profile has been subjected to wide
fluctuations over the years.

2.3.2 Structure of Tax-Based Revenue in Nigeria
A brief review of the Nigerias tax-based revenue profile since 1960 shows a progressive
decline in income from the traditional sources of revenue. The revelation throw light on
the shifts in the relative importance of each revenue source over time and the extent to
which the Nigerian tax-revenue profile conforms with Musgraves theory. In the 1960s,
emphasis was on accelerated economic growth and development, and the main goal of
tax policy was maximum revenue generation to finance public sector programmes.
Similarly, policy makers emphasized import substitution to underlie the industrial
development strategy (Ekuarhare, 1980). Attention was directed toward increasing the
existing tax rates (especially import duties) in the form of high protective tariffs, and as a
consequence import duties provided the bulk of federal government revenue in the early
1960s (Phillips, 1991).

Another major macroeconomic objective underlying the increase in tariffs was the desire
to discourage imports and thereby curtail consumer demand. Excise duties were also
introduced on several goods to broaden the revenue base. Given the low industrial base,
the contribution of the latter was insignificant. Therefore, in overall, revenue from these
sources accounted for about 73% of total revenue. This makes the foreign trade sector the
major source of revenue in the 1960s. Some structural changes emerged in the revenue

profile in the early 1970s whereby indirect taxes gave way to direct taxes with the
emergence of the oil boom (Egwakhide, 1988). The fall in non-oil tax revenue due to the
neglect of the traditional (agricultural) sources was matched by an increase in import
duties until 1973. Further, there was an appreciable increase in revenue from excise
duties in the 1970s due to the enhanced performance of the industrial sector. This overall
picture has been sustained up till now given the dominant role of the oil sector as major
source of government revenue.

This scenario appears to conform with Musgraves theory to the effect that as an
economy develops, more reliance may be placed on direct tax revenue. However some
caution is advisable in confirming the relevance of Musgraves theory to the Nigerian
environment. We should note that the mere classification of petroleum profits tax and
royalties as direct taxes immediately distorts an objective assessment of the relative
importance of indirect taxes over time. In fact, a focus on non-oil revenue sources shows
that the indirect tax still dominates the old and traditional revenue sources.

In effect, Ariyo, and Raheem (1991) concluded that in reality Musgraves theory is not
applicable to the Nigerian environment for several reasons. For example, the behavioural
explanation in the context of Dutch disease noted earlier might have accounted for low
efforts on direct non-oil taxes. Similarly, the proceeds of the oil boom were spent largely
on massive importation of consumer goods, thus enhancing the income from import
duties, a policy which would have hindered rather than enhanced the pace and level of
industrial development in the economy. Nevertheless, documentation of objective
evidence relating to this issue awaits in-depth research.

2.4 Current Legal Framework
The Nigerian Tax System has undergone significant changes in recent times. The Tax
Laws are being reviewed with the aim of repelling obsolete provisions and simplifying
the main ones. Under current Nigerian law, taxation is enforced by the three tiers of
Governments, i.e. Federal, State, and Local Government with each having its sphere
clearly spelt out in the Taxes and Levies (approved list for Collection) Decree, 1998. Of
importance at this juncture however are tax regulations pertaining to investors both
foreign and local. The importance of tax regulations cannot be overemphasized, as most
transactions with any Ministry, department, or government agency cannot be concluded
without evidence of tax clearance, i.e. a Tax Clearance Certificate certifying that all taxes
due for the three immediately preceding years of assessment have been settled in full.

2.4.1 Tax Reforms in Nigeria
As a means of meeting their expenditure requirements, many developing countries
undertook tax reforms in the 1980s. Osoro (1991) however pointed out that most of these
reforms focused on tax structure rather than on tax administration geared towards
generating more revenue from existing tax sources. The situation was even of a wider
dimension in Nigeria. Osoro (1993) further opines that tax reform which is a change in
the status quo has been one of the major preoccupations of most developing countries in
the 1980s. He confirms that over 100 attempts at tax reforms in developing countries
have been recorded since 1945. In fact, Gills, (1989) reechoed that tax reform has turned
from a desired or preferred task to being a necessary one.

One of the victims of numerous economic crises that have plagued developing countries
like Nigeria since the first oil shock in 1973 has been the tax system. Consequently, tax
collections have been hit hard resulting in large fiscal deficits. Unfortunately, in the
1980s external finances with which to finance fiscal deficits were not forthcoming.
Developing countries were left with no option but to print more money to finance
deficits, with consequent double-digit inflation.

Most developing countries therefore suffer from over-dependence on a small number of
sources of tax revenue, which are vulnerable to external events, which remains a crucial
problem in their tax system. These sources include import and export taxes on mineral
products, the prices of which are determined on world markets, and tend to be volatile.
These taxes constitute a major source of revenue in many developing countries.

It was based on the above problems that led many developing countries to undertake tax
reforms during the 1980s. However, most of these reforms, however, have been on tax
structure, with the general objectives of revenue adequacy, economic efficiency, equity
and fairness, and simplicity. It is therefore pertinent to point out the fact that even if the
reform is compatible with the macroeconomic objectives of the government, there is little
chance of success because it either cannot be administered, or administrative reforms
cannot be undertaken. Many tax reforms carried out in developing countries have been on
tax structure rather than on tax administration.

In Nigeria, Odusola (2003) discussed the review of the existing tax policies and reforms
and opined that Nigerias fiscal policy measures have been largely driven by the need to

promote such macroeconomic objectives as promoting rapid growth of the economy,
generating employment, maintaining price levels and improving the balance-of-payment
conditions of the country. Although policy measures change frequently, these objectives
have remained relatively constant. Until the mid 1980s, tax policies, for instance, were
geared to achieving such specific objectives as:
(i) Ensuring effective protection for local industries;
(ii) Encouraging greater use of local raw materials;
(iii) Enhancing the value added of locally manufactured and primary products;
(iv) Promoting greater geographical dispersion of domestic manufacturing
(v) Generating increased government revenue

In accordance with Odusola (2003), the recent developments in the Nigerian tax system
and components of the countrys tax system, especially those included in the exclusive
and concurrent legislative lists, are briefly examined below:
(a) Personal Income Tax (PIT):- It was the oldest tax in the country and was first
introduced as a community tax in northern Nigeria in 1904. It was introduced the
western and eastern regions in 1917 and 1928, respectively and latter amendments
in the 1930s, and incorporated into Direct Taxation Ordinance No. 4 of 1940. The
need to tax personal incomes throughout the country prompted the Income Tax
Management Act (ITMA) of 1961. In Nigeria, personal income tax for salaried
employment is based on a pay as you earn (PAYE) system, and several
amendments have been made to the 1961 ITMA Act. In 1990, further amendments
were made to PIT.

(b) Company Income Tax (CIT):- Company income tax (CIT) was introduced in
1961. The original law (Company Income Tax) has been amended many times
and is currently codified as the Company Income Tax Act 1990 (CITA). The
Federal Board of Inland Revenue, whose operational arm is the Federal Inland
Revenue Services (FIRS), is empowered to administer the tax. The Company
income tax Act (CITA) policy regimes can be divided into two phases, namely, pre-
1992 and post-1992. The CIT policies in the pre-1992 era were narrowly based and
characterized with increasing tax rates and overburdening of the taxpayers, which
induced negative effects on savings and investment. Since 1992, however, measures
have been taken to address these structural problems.

(c) Education Tax:- This was introduced in 1993 under the Education Tax Act No.
7. The essence of this tax is to prevent the educational system from total collapse
due to the financial crisis that had affected the sector for years. Thus, an education
tax of 2% of assessable profits is imposed on all companies incorporated in
Nigeria. This tax is viewed as a social obligation placed on all companies in
ensuring that they contribute their own quota in developing educational
facilities in the country. The tax is applied to company net profits, and is deducted
from net profits before tax, thus it is not subject to company income tax. Odusola
(2006) argued that the introduction of this tax has added to the list of multiple taxes
that eats away the profit margins of companies. It is therefore a double tax on
company profits, and is argued to be a major disincentive to foreign investment in


(d) Capital Gains Tax:- This accrues on an actual year basis and it pertains to all gains
accruing to a taxpayer from the sale or lease or other transfer of proprietary rights in
a chargeable interest which are subject to a capital gains tax of 10%, such
chargeable assets may be corporeal or incorporeal and it does not matter that such
asset is not situated in Nigeria. Where however the taxpayer is a non-resident
company or individual the tax will only be levied on the amount received or brought
into Nigeria. Computation of capital gains tax is done by deducting from the sum
received or receivable from the cost of acquisition to the person realizing the
chargeable gain plus expenditure incurred on the improvement or expenses
incidental to the realization of the asset.

(e) Value Added Tax (VAT):- This was introduced by the VAT Act No. 102 of 1993
to replace the old sales tax but its implementation actually began in January 1994.
Ajakaiye and Odusola (1996) opined that VAT is a consumption tax levied at each
stage of the consumption chain, and is borne by the final consumer. It requires a
taxable person upon registering with the Federal Board of Inland Revenue (FBIR) to
charge and collect VAT at a flat rate of 5% of all invoiced amounts of taxable goods
and services. VAT paid by a business on purchases is known as input tax, which is
recovered from VAT charged on companys sales, known as output tax. If output
exceeds input in any particular month the excess is remitted to the Federal Board of
Inland Revenue (FBIR) but where input exceeds output the taxpayer is entitled to
a refund of the excess from FBIR though in practice this is not always possible. A
Taxpayer however has the option of recovering excess input from excess output
of a subsequent period. It should be stated at this point that recoverable input is

limited to VAT on goods imported directly for resale and goods that form the
stock-in-trade used for the direct production of any new product on which the
output VAT is charged.

(f) Petroleum Profits Tax (PPT):- Nigerian law by virtue of the Petroleum Profits
Tax Act requires all companies engaged in the extraction and transportation of
petroleum to pay tax. The taxable income of a petroleum company comprises
proceeds from the sale of oil and related substances used by the company in its own
refineries plus any other income of the company incidental to and arising from its
petroleum operations. The taxable income of a petroleum company is subject to tax
at 85%, but this percentage is lowered to 65.75% during the first 5 years of
operation. Where oil companies operate under production sharing contracts they will
be liable to tax at a rate of 50%. There are however some concessions granted
petroleum companies known as, Capital Allowance and Petroleum Investment
Allowance; the former is deducted in arriving at the taxable income and entails
expenditure on equipment, pipelines, and storage facilities, buildings and drilling
costs, these are referred to as qualifying assets.

The applicable rate of Capital Allowance for any year is of 20% of the cost of the
qualifying assets applied on a straight-line basis for the first 4 years and 19% for the
5th year. Anyanwu (197) opines that the latter is regarded as an addition to capital
allowance and covers allowance in respect of new investments in assets for
petroleum exploration; it is available in the accounting period in which the assets are
first used. It must be stated that the deduction of Capital Allowance is restricted, so

that for any accounting period, the tax on the company should not be less than 15%
of the tax which would have been assessable had no capital allowances been granted
the company. Currently, the legal provisions of the various types of taxes have been
codified, although they have been subjected to several revisions. Interested readers
are referred to Federal Government of Nigeria (1989a) and Federal Inland Revenue
Service (1990) for the latest set of amendments to the tax sources covered in this

Adesola (1995) further recalled that the frequency of amendments to the various
acts or decrees makes it very difficult to keep track of the various legislative
reforms. The worrisome frequency led interested observers to advise the FGN to
ensure the stability of each tax regulation for at least five years. This is meant to
encourage purposeful planning and investment decisions especially by corporate
agencies and foreign investors. For the purpose of this study, however, we are
interested in the net effect of the legion of reforms on tax yield. All efforts to secure
similar information on customs and excise duties proved abortive. The quality of
information currently available on tax reforms is constrained in at least two respects.
Firstly, it is not possible to assess objectively the net effect of tax burden over time.
We do note, however, government has stated intention to move towards a lower tax
regime especially on company income tax. Nevertheless, an objective determination
of the net effect of these tax-rule changes and reforms still awaits in-depth research.
Second, it is not possible to separate discretionary from non-discretionary tax
changes. The information shown in Table 6 merely covers some specific periods

without any information about the underlying reasons for the changes. Also, the
observed stability in tax rates is more apparent than real given the frequent changes
experienced in practice.

2.4.2 Approved Taxes and Levies for the Three Tiers of Government
In recent time, a list of taxes and levies for collection by the three tiers of government has
been approved by government and published by the Joint Tax Board (J.T.B.). These were
identified by Adesola (1995), Adekanola (1997), and Abiola (2002) as follows:

2.4.3 Taxes Collectible by the Federal Government
(1) Companies income tax
(2) Withholding tax on companies
(3) Petroleum Profit Tax
(4) Value-added tax (VAT)
(5) Education tax
(6) Capital gains tax - Abuja residents and corporate bodies
(7) Stamp duties involving a corporate entity
(8) Personal income tax in respect of:
- Armed forces personnel
- Police personnel
- Residents of Abuja FCT
- External Affairs officers; and
- Non-residents.


2.4.4 Taxes/Levies Collectible by State Governments
(1) Personal income tax:
- Pay-As-You-Earn (PAYE);
- Direct (self and government) assessment;
- Withholding tax (individuals only);
(2) Capital gains tax;
(3) Stamp duties (instruments executed by individuals);
(4) Pools betting, lotteries, gaming and casino taxes;
(5) Road taxes;
(6) Business premises registration and renewal levy;
- Urban areas (as defined by each state): Maximum of N 10,000 for registration
and N5,000 for the renewal per annum
- Rural areas: Registration N2,000 per annum
- Renewal N 1,000 per annum
(7) Development levy (individuals only) not more than N100 per annum on all taxable
(8) Naming of street registration fee in state capitals
(9) Right of occupancy fees in state capitals;
(10) Rates in markets where state finances are involved.

2.4.5 Taxes/Levies Collectible by Local Governments
(1) Shops and kiosks rates;
(2) Tenement rates
(3) On and off liquor licence;

(4) Slaughter slab fees;
(5) Marriage, birth and death registration fees
(6) Naming of street registration fee (excluding state capitals)
(7) Right of occupancy fees (excluding state capitals)
(8) Market/motor park fees (excluding market where state finance are involved)
(9) Domestic animal licence;
(10) Bicycle, truck, canoe, wheelbarrow and cart fees;
(11) Cattle tax;
(12) Merriment and road closure fees;
(13) Radio/television (other than radio/TV transmitter) licences and vehicle radio
licence (to be imposed by the local government in which the car is registered);
(14) Wrong parking charges;
(15) Public convenience, sewage and refuse disposal fees;
(16) Customary, burial ground and religious places permits; and
(17) Signboard/advertisement permits.

2.4.6 The Laffer Curve and the Tax Reforms in Nigeria
Following the instability of tax policies in Nigeria, it is expected that the government
may wake up one day and increase the tax rates without considering the economic
implications of the action on the nations revenue. When this happens, the Laffer Curve
experience may occur. In economics, the Laffer curve is a theoretical representation of
the relationship between government revenue raised from taxation and all possible rates
of taxation. It is used to illustrate the concept of taxable income elasticity. The Laffer

curve assumes that at 0% tax rate no revenue is generated and at 100% tax rate, no
revenue is also generated. This is because, at 100% tax rate, there is no incentives for a
taxpayer to earn any income, thus the revenue raised will be 100% of nothing. According
to Laffer curve, if both a 0% and a 100% rate of taxation generate no revenue, then, there
is an intermediate tax rate that generates some tax revenue. It follows from the extreme
value theorem that, there must exist at least one tax rate where tax revenue would be a
non-zero maximum. Therefore, the Laffer curve is typically represented as a graph,
which starts at 0% tax with zero revenue, and rises to a maximum rate of revenue at an
intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate.

In the Laffer curve below, r* represents the rate of taxation at which maximum revenue is
generated by government. One potential result of the Laffer curve is that increasing tax
rates beyond a certain point will be counterproductive for raising further tax revenue.
Therefore, a hypothetical Laffer Curve for any given economy can only be estimated and
such estimates are sometimes controversial.


Fig. 2. 1: The Laffer Curve


However, Laffer was criticized in the sense that it assumes that the government would
collect no income tax at a 100% tax rate because there would be no incentive to earn
income, but researches have shown that it is possible for a Laffer curve to continuously
slope upwards all the way to 100%. Additionally, the Laffer curve depends on the
assumption that tax revenue is used to provide a public good that is separable in utility
and separate from labor supply, which may not be true in practice.

2.5 The Concept of Productivity of a Tax System
Productivity studies analyze technical processes and engineering relationships such as
how much of an output can be produced in a specified period of time. Relating that
definition, it implies that productivity of a tax system is the amount of revenue generated
Tax Rate (Percent)

Maximum Tax Revenue

by the government, given a tax system. Tax productivity relates to the concept of
efficiency in tax administration and collection. Therefore, a tax system is said to be
productive if and only if the revenue generated is able to achieve the purpose for which
the tax is being collected. However, tax productivity is distinct from allocative
efficiency, which takes into account both the monetary value (price) of what the revenue
generated and the cost of generating the revenue. Similarly, it is also distinct from
profitability, which addresses the difference between the revenues obtained from the tax
system and the expense associated with consumption of use of the taxed revenue.

2.5.1 Theoretical Framework
According to Mansfield (1992), in considering criteria for a tax system in a developing
country, the response of tax revenue to changes in income has often been singled out as a
vital ingredient. He thus opines that this response is measured by the concept of tax
elasticity and tax buoyancy. Hence, in evaluating the productivity of a tax system, two
approaches have been considered. These approaches were identified by Asher, (1989)
and Osoro, (1991) as; (1) the income elasticity and (2) the buoyancy of tax revenue.

2.5.2 Tax Buoyancy
Tax buoyancy is the measure of the total response of tax revenue to changes in income.
In fact, Ariyo (1997) opines that, tax buoyancy is the changes in tax revenue due to
changes not only in income but also in other discretionary changes in tax policy. The
various methods for deriving these measures and the required modifications to the
underlying data have been elaborated upon by Prest (1982) and Singer (1988). These

various methods have also been adapted by several researchers, including Mansfield
(1992), Rao (1980), Osoro (1991) and Haughton, (1998).

Haughton, (1998) defines tax or revenue buoyancy as the ratio of the percentage change
in tax revenue and percentage change in the base, using numbers for the revenue and base
actually observed. That is, tax buoyancy (TB) is given as;
Base %
Revenue %
= TB

According to him, the base is taken to be GDP, although other bases such as are possible.
For example, consumption can be used as the base for sales taxes and import as the base
for tariffs.

Similarly, Rao, (1980), Osoro (1991) and Murithi and Moyi (2003) indicate that
buoyancy can be measured by the following equation:
TR = aY
................................................................................................... (2)
Where; TR = Total tax revenue, Y = Gross Domestic Product (GDP) at current prices,
and e
= the error term.

Okpara (2010) concluded that the buoyancy of taxes is derived from logarithmic
regressions of unadjusted tax revenue on their bases (or GDP). The log-transformation of
Equation 1 enables us to derive the elasticity coefficient. This is represented as:
logTR = loga + b
Y + e

b provides an estimate of tax buoyancy. It measures in percentage terms the changes in
total tax revenue due to a change in GDP and the effect of discretionary changes in tax

Haughton (1998) also recounts that the measures of tax buoyancy tend to vary a lot from
year to year, and that this is not very helpful. He therefore suggested that it is more useful
to measure tax buoyancy over a longer period of time, perhaps five or ten years. He
identifies five different techniques that could be used to measure tax buoyancy over a
longer period as:
a) Calculate buoyancy for each year and then take the average.
b) Calculate the growth of tax revenue and the base (GDP), between the end years
and use this to calculate buoyancy.
c) Calculate the growth of tax revenue, and the base (GDP) between the average and
d) Regress the log of tax revenue on the year, to get the average rate of tax revenue
does the same for the base (GDP). The growth rate is the independent variable (the
year) and these growth rate is used to calculate tax buoyancy.
e) Regress the log of tax revenue on the log of the base (GDP). The coefficient of the
log of the base is a measure of the tax buoyancy. This research work shall adopt
this last option to estimate the tax buoyancy.

2.5.3 Tax Elasticity
Haughton, (1998) also defines tax elasticity as the ratio between the percentage change in
revenue and the percentage change in the base year. That is,

Base %
Revenue %
= TE

Equation 4 looks like equation 1 (tax buoyancy equation), but the difference is that,
revenue is calculated as it would have been if there had not been any change in the tax
laws, including the tax rates or bases. This implies that in using the tax elasticity
approach, revenue change exclude the effect of discretionary changes. It is base on this
that, Ariyo (1997) opines that to measure tax elasticity, it is necessary to isolate the effect
of discretionary changes in tax policy on tax revenue.

Different approaches have been suggested by Prest (1982) and applied by Ariyo (1997),
Mansfield (1992), Murithi and Moyi (2003) in involves isolating the data on
discretionary effects from revenue changes based on data provided by the Treasury
Department of the government. Mansfield (1992) describes this approach as follows:
, T
, .... T
= Actual tax yields for a number of years
, D
, .... D
= Measures the effect of a discretionary tax change in the i

year on the j
years revenue outturn
= Indicates the j
years actual tax yield adjusted to the tax structure that existed in
year i
Let i = 1 represent the reference year. Hence, the series T
.... T
depict the tax
receipts attainable if the tax structure remained unchanged, coupled with the removal of
the effect of all discretionary changes introduced over the period following year 1.

Three problems were said to be associated with the above. First, there was the problem of
lack of data on revenue receipts directly and strictly attributable to discretionary changes

in tax policy. Secondly, there was the problem of the assumption that the discretionary
changes are as progressive as the underlying tax structure. Thirdly, the approach is highly
aggregative, whereas, there are other methods that decompose the elements of
productivity measurement and thereby provide a better insight into how each component
affects the overall productivity of a tax system.

This approach, which was applied by Omoruyi (1983), and shows that tax elasticity, can
be measured as:
..................................................................................................... (5)
and for any given tax, K, by
k x
................................................................................................... (6)
, the tax revenue, includes discretionary changes in the tax base and rate schedule and
Y refers to GDP at current prices.

The income elasticity of a given tax represented by Equation 2 can be decomposed into
two elements; (a) the elasticity of the tax to the base year and (b) the elasticity of the base
year to income. In other words, Equation 2 is decomposable into tax-to-base elasticity:
k x
................................................................................................. (7)
and into base-to-income elasticity
k x
................................................................................................. (8)

The relationship is expressed in the following identity:


k x
= ....................................................... (9)

Equation 5, decomposes any tax system as the product of elasticity of tax-to-base and of
base to-income.

One potential hindrance to the use of this method is the non-availability of required data.
This is the problem that compelled Omoruyi (1983) into adopting an aggregative measure
of tax buoyancy for Nigeria. These problems gave rise to a consideration of other
techniques suggested by Singer (1988), usually referred to as the Dummy Variable
Technique (DVT). This technique introduces a dummy variable into Equation 2 for each
year in which there was an exogenous tax policy change. The resulted to a model as:
log T
= a
+ a
log Y + E
+ e

(i = 1, 2) takes a value of 1 for each year in which there is an exogenous change in
tax policy and a value of zero (0) otherwise. According to Singer, a potential major
problem with this approach relates to inadequate number of observations when
exogenous tax policy changes are too frequent.

2.5.4 Tax Stability
Haughton (1998) noted that the revenue from different taxes varied from year to
year. He opined that taxes whose revenue is relatively stable or whose revenue is
negatively correlated with the revenue from other taxes are likely to be particularly

helpful in giving stability to the over stream of revenue. The stability of revenue is
desirable at least from the governments perspective in that it makes it easier to put
together plausible spending and borrowing plans for the year head.
Haughton, stated that a simple measure of the stability of tax revenue is the
coefficient of variation (CV). The coefficient of variation is defined as the standard
deviation of the tax revenue as a fraction of GDP divided by its mean. It is
mathematically expressed as:
.. (11)

He further noted that the coefficient of variation may be calculated for tax revenue as a
whole or for individual sources of revenue and that, the measure is most useful when
comparing across countries.

Deviation Standard
CV =

3.0 Introduction
This Chapter presents the methodology used in analysing the data collected as well as the
description of the nature and types of data. In addition, it presents the models to be used
and the justification of the variables used.

3.1 Materials and Methods
The data used for this study were collected from the secondary sources. As a result, the
research gathered materials from the Central Bank of Nigeria (CBN), the Federal Offices
of Statistics (FOS), and National Bureau of Statistics (NBS) for the period under
consideration. The researcher employed econometrics technique to establish the
regression equations and the E-view Econometric Package (Augmented Dunkey Fulley
and the Philips Perron) to establish the stationarity of the data with the objective of using
co-integration technique rather than only the simple Ordinary Least Square (OLS)

In carrying out this study, data on the following variables were collected from the
publications of the Central Bank of Nigeria (Various issues), The Federal Office of
Statistics and the National Bureaux of Statistics. The variables are:
GTR = Total Tax Revenue
GDP = Gross Domestic Product
NGDP = Non-Oil Gross Domestic Product
NOR = Non-oil Total Revenue

CEXD = Custom and Excise Duties
PPT = Petroleum Profit Tax
TOR = Total Oil Revenue
CIT = Company Income Tax
TEXD = Total Export Duties

The researcher has adopted the regression analysis in analysing the productivity of the
Nigeria Tax System. In view of that, the multiple regression technique was employed as
numerous variables are involved. But considering the environment under which research
is being conducted, it was desirable to isolate the impact of some variables on the
productivity of the Nigerian tax system. As a result, we first performed a regression
analysis of the Gross Domestic Product (GDP) and the yield of Aggregate Tax-Based
Revenue (ATBR), as well as by each tax source, over the 1960 2010 periods. This
according to Ariyo (1997), provides an index of the buoyancy of the tax system as a
whole and for each tax source. Secondly, Ariyo further opined that, the oil boom would
have affected the productivity of the tax system in view of the behavioural explanation
discussed in the context of the Dutch Disease Syndrome.

Hence, a priori, the oil boom is expected to affect negatively the yield from non-oil tax
sources. The extent of this effect, however, depends upon the perception of policy makers
regarding the permanence or otherwise of the oil wealth. Third, the Federal Government
of Nigeria (FGN) commenced the implementation of a SAP in 1986 that amounted to a
significant structural change in the macroeconomic management framework for the
country. One of the core objectives of the SAP is to enhance the degree of self-reliance

within the economy. Of equal importance is the need to diversify the countrys revenue
base in order to minimize the extent of dependence on oil as the major source of revenue.

All these have potential implications for the yield of non-oil tax revenue sources. For
example, one major consequence of SAP is the rekindled interest in export of cash crops
such as cocoa. Ordinarily, this should have resulted in a significant upsurge in revenue
from export duties, but as part of the reform, the Federal Government of Nigeria scrapped
export duties as an element of the package of incentives meant to promote exports. There
were significant downward revisions in tax rates and import tariffs as well. The corporate
tax rate was reduced from 45% to 40% in 1987 in order to encourage reinvestment
activities by existing organizations and to encourage new investments.

Similarly, import duties on certain categories of imports were reviewed. Among these
was the elimination of duties on trucks and commercial vehicles to ease the transportation
problem in the country. Also, duty exemptions were granted on items required on some
public sector projects. Generous tariff concessions were also allowed on machinery and
raw materials that could not be sourced locally, at least not in the short run.

Several policies have implications for the yields of specific tax sources were also initiated
to mitigate the negative effects of SAP on the populace. For example, tax reliefs and
allowances were granted on personal income tax to enhance the real income of workers,
although this particular tax source is not covered in this study for reasons stated earlier.
The introduction of SAP generated several changes in tax-related policies, so that any

growth in GDP during this period might not necessarily translate into higher tax yield.
The determination of the net effect is therefore an empirical question.

Therefore, the analysis was arranged to highlight developments during each of the
following periods.
1970 2010, for an overall trend analysis.
1974 1985 represents Oil boom period.
1986 2010, Sap and Post-Sap period.

In addition, we disaggregated the analysis as much as possible for a number of reasons.
For example, we are aware of the dominance of the oil sector on total government
revenue, and its inclusion in the GDP may distort developments in the non-oil sector.
Consequently, we also regressed non-oil government revenue against non-oil GDP. This
modification based on non-oil GDP was extended to excise duties since we have no
authentic data on the relevant tax base such as total value of production or manufacturing
activities. The same applies to company income tax, because we had no reliable data on
corporate profits. Since this constraint does not apply to imports and sales of petroleum
oil, we regressed import duties against imports, while oil revenue was regressed against
reported oil sales.

3.2 Method of Data Analysis
The data that used for this study were analysed starting with the Ordinary Least Square
(OLS) method after checking for Unit Root Test, with the Augmented Ducker Fuller
(ADF) and the Philip Peron (PP).

3.2.1 Model Specification
Based on our data availability, the following multiple regression equation is specified for
analysis to determine the productivity of the Nigeria Tax system. The OLS method was
used to analyze the various equations.

GTR = f( GDP, NGDP, TOS, NOR, CEXD, PPT, CIT, TEXP ) ............................. (12)

The regression equation for our trend analysis for the period under consideration is as
shown below:

GTR = a
+ a
GDP + a
TOR + a
NOR + a
CEXD + a
PPT + a

However, in order to assess the revenue elasticity for individual variables used in this
study, we also specified one variable model, which was also estimated by OLS method.
Based on that, the following equations were formulated and analyzed.

log GTR = a
+ a
log GDP (i) ............................................... (14)
log NOR = b
+ b
log NGDP (ii)
log CEXD = c
+ c
log GDP (iii)
log CEXD = d
+ d
log NGDP (iv)
log PPT = e
+ e
log TOR (v)
log PPT =f
log GDP (vi)
log TOR = g
+ g
log GDP (vii)
log CIT = h
+ h
log GDP (viii)
log CIT = i
+ i
log NGDP (ix)
log TEXP = j
+ j
log GDP (x)

In order to capture the period of the oil boom and SAP, the slope dummy equations were
used for this period. The reason for adopting the slope dummy are expressed in Gujarati
and Porter, (2009), and Wonnacott and Wonnacott, (1980) that over long periods of time
or under unusual circumstances (like the oil boom and SAP in Nigeria), not only do the
functions (intercept) change but also their slopes may as well be expected to change. We
believe this situation might have applied to the Nigerian situation for both the oil boom
and SAP. However, the empirical evidence relating to this will be more reassuring,
hence the desirability of using the slope dummy function for our analysis.

3.2.2 The Slope Dummy Functions
Dummy variables refer to the technique of using two variables usually coded 0 or 1 to
represent the separate categories of a nominal level measure. The term dummy appears
to refer to the fact that the presence of the trait indicated by the code of 1 represents a
factor or collection of factors that are not measurable by any better means within the
context of our analysis. The Dummies can affect the model in two ways, first it either
shift the intercept up or down, or shift the slope shallower or deeper.

Interpretation of the dummy variable is usually quite straightforward. The intercept term
represents the intercept for the omitted category. The slope coefficient for the dummy
variable represents the change in the intercept for the category coded 1. Now, lets use
the GTR equation to demonstrate the difference between the shift (intercept) and the
slope dummy functions. For example, the shift (intercept) dummy variable function is
represented by:
logGTR = a
+ a
logGDP + a

Dum = the dummy variable taking on values (0, 1).

To derive the slope dummy function, we introduce a second dummy variable D
equal to
the product of the explanatory variable and the first dummy D
. Applying this to the total
government revenue function (eq. 10) as an example, we have the slope dummy variable
equation as follows:
Log GTR = a
+ a
logGDP + a
+ a
= Dum
x TOR.
This function was applied to SAP and oil boom variables for all the equations in this

Additional modifications were made to the preceding equations to enable us reasonably
capture the budgetary process in Nigeria as it relates to each of the revenue sources. In
practice, policy proposals in the annual budget are based on the performance of each
revenue source in the preceding period. For example, revenue sources that performed
above expectation in the out-going fiscal year are given more ambitious targets in the
new fiscal year, and are put under greater surveillance. This practice became prevalent
with the steady decline in oil revenue.

Administrative lag is another major factor. New policy guidelines announced in the
budget speech may not be implemented until the relevant circulars are issued. It may take
up to six months, however, from budget announcement before the content of such

circulars are implemented. This scenario applies particularly to customs and excise
duties. For company taxation, most companies do not discharge their tax liabilities until
long after the annual general meeting. To capture the potential effects of these issues, a
one-year lag of the explanatory variable was added to each equation. This will show not
only the relevance of this lagged value, but also its relative influence compared with
current years values. If there are pronounced administrative lags or delayed remittances,
for example, the lagged value will be more significantly associated with the dependent
variable in each equation.

Hence, the following represent the final equations used for non-dummy and dummy
based scenarios:
= a
+ a
log GDP
+ a
log GDP
................................................... (17)
= a
+ a
log GDP + a
log GDP
+ a
+ a
............... (18)
This is consistent with the logarithmic autoregressive model suggested by Pindyck and
Rubinfeld, (1998).


4.0 Introduction
This chapter deals with the estimation and presentation of the regression result. It
therefore involves an estimation of the short run dynamic and long run relationship
models. Apart from that, the rest of the chapter will deal with presentation of regression
estimate and the policy implication of the results.

4.1 The Absolute Regression Model
The absolute values for the general model and the individual models are presented below.
The absolute regression model specified is given as:
GTR = a
+ a
GDP + a
TOR + a
NOR + a
PPT + a
CEXD + a
CIT + a
NGDP + a
Thus, when the above regression equation was analyzed using the E-views, the resulting
model of the absolute values of all the variables for the entire period is presented below

GTR = - 0.00337 + 0.051GDP + 0.140TOR - 0.124NOR - 0.141CEXD + 0.330PPT +
0.024CIT + 0.421NGDP + 0.285TEXP
t = -0.1358 0.9946 3.9812 -0.8100 -1.7675 7.1438
0.3098 2.6773 5.0190
S.E = 0.0249 0.0514 0.0351 0.1525 0.0798 0.0461 0.0760
0.1573 0.0568
= 0.939219 F = 59.87820 DW = 2.035461
Similarly, the regression equation for the oil boom period as:

GTR = -0.0291 + 0.0242GDP + 0.305TOR + 0.755NOR - 0.0335CEXD + 0.019PPT +
0.028CIT - 0.0002NGDP + 0.440TEXP + 0.319DUM1 - 0.000DUM2
t = -0.5500 0.5052 5.0244 8.9426 -1.4437 0.7458
1.0895 -5.5385 5.0350 1.5645 -1.2323
S.E = 0.5283 0.0480 0.06 06 0.0845 0.0232 0.0257
0 .0259 0.0000 0.0000 0.2042 0.0002
= 0.916687 F = 53.87820 DW = 2.247095

Also, the regression model obtained for the sap period is also presented below as:
GTR = -0.5316 + 0.0756GDP + 0.110TOR - 0.00007NOR - 0.0724CEXD - 0.0010PPT +
0.05197CIT + 0.000005NGDP + 0.5883TEXP 0.0042DUM1 + 0.0000DUM2
t = -1.3100 0.8267 2.6412 -0.3037 -0.3353 6.8050
0.8944 0.9108 2.6532
S.E = 0.0654 0.1275 0.0413 0.5214 -0.1243 0.0579
0.1865 0.4924 0.2408
= 0.857858 F = 83.1345 DW = 1.699191

From the regression models above, it is revealed that for the entire period, GDP, TOR,
CIT, PPT, NGDP and TEXP have positive impact on government total revenue (GTR)
while NOR and CEXD have negative influence on GTR. The regression also revealed
that GDP and CIT have the most insignificant influence of 0.050 and 0.024 on GTR,
which may be due to low level of economic activities in the country. From the result
also it is observed that, a percentage change in TOR, PPT, NGDP and TEXP will
increase GTR by 0.140, 0.330, 0.421 and 0.285 respectively while a percentage

change in NOR and CEXD will decrease GTR by 0.124 and 0.141. The t-values show
that four of the estimated parameters (TOR, PPT, NGDP and TEXP) are statistically
significant, while the other four (GDP, NOR, CIT and CEXD) are not significant and
they are statistically assumed to be zero because; their t-calculated is less than t-
tabulated 2.00. Therefore, the null hypothesis is accepted for each of the parameters of
the explanatory variables. However, the result of the F-statistic reveals that the
estimated parameters are simultaneously significant since their F-calculated value
(59.87820) is greater than F-tabulated. The coefficient of determination (R
) for the
entire period shows that the data fit the model well because about 85% of the total
variation in GTR is explained by the variation in all the variables used for the
analysis. The DW statistic value of 2.035461 shows that there is the no presence of
positive autocorrelation. The dependent variable (GTR) and the explanatory variables
are highly correlated and the overall regression is significant except for the NOR and

The oil boom period in model two also revealed a positive linear relationship between
the variables and GTR except PPT which ironically exhibit a negative impact,
contrary to the a priori that a percentage change in PPT should lead to a positive
change in GTR. The t-statistic revealed that only TOR and TEXP that are statistically
significant while all other variables are not. However, an R
value shows that about
91% of the variation in GTR is explained by the variables used for the regression. On
the other hand, the DW statistic of 2.096311 shows that there is the absence of

positive autocorrelation and the F-statistic of 54.71380 indicates that the parameters
are simultaneously significant.

The model for the sap period presented above also did not reveal anything different,
as only CEXD have a negative (-0.042) and insignificant impact on GTR while all
other variables have positive impact on GTR. The R
value shows that about 96% of
the variation in GTR is explained by the variables used for the regression. Similarly,
the DW statistic value of 1.699191 which approximate 2 shows that there is the
absence of positive autocorrelation and the F-statistic of 39.77586 indicates that the
parameters are simultaneously significant.

4.2 The Unit Root Test Result
In order to assess stationarity and investigate the time series characteristics of the
variables (TGR, GDP, NGDP, TOR, NOR, CEXD, PPT, TEXP and CIT) were
subjected to the Unit Root Test using the Augmented Ducker Fuller (ADF) and the
Phillip Perron. A variable is stationary when it has no unit root and is denoted by 1(0)
while a non-stationary variable can have one or more unit roots. Stationarity is often
attained through differencing.
The Unit Root and the Philip Perron Test results summary for the various
categories of variables used for this study are therefore presented in tables 4.1 and 4.2
respectively below:

Table 4.1: ADF Unit Root Test Result with Intercept and Trend
ADF t-Statistic Value at Level ADF t-Statistics Value at First Difference
Variable None Intercept Trend & Intercept None Intercept Trend & Intercept No. of
Order of
GTR -10.29653 -10.88665 -11.63914 -17.85301 -17.57916 -17.31226 0 1(0)
GDP -3.940024 -4.505510 -4.776480 -6.866134 -6.767508 -6.660519 0 1(0)
TOR -10.64548 -10.96877 -11.27708 -20.27067 -19.98805 -19.75980 0 1(0)
NOR -4.893444 -5.627478 -7.988800 -17.33985 -17.26769 -17.26626 0 1(0)
CEXD -5.357864 -6.133567 -7.370466 -11.00532 -10.85922 -10.70750 0 1(0)
PPT -11.57182 -11.76901 -11.96985 -17.98466 -17.74717 -17.56840 0 1(0)
CIT -0.424396 -0.853814 -1.995121 -7.308456 -7.598434 -8.607207 0 1(1)
TEXP -4.848081 -5.600022 -7.420805 -12.19534 -11.99642 -11.96112 0 1(0)
NGDP -3.954616 -4.654526 -6.991366 -17.15379 -17.16474 -17.28982 0 1(0)
ADF Unit Root Test Critical Values
At Level At 1
Percent None Intersect Trend & Intercept None Intersect Trend & Intercept
1 -2.6227 -3.6067 -4.2092 -2.6243 -3.6117 -4.2165
5 -1.9495 -2.9378 -3.5279 -1.9498 -2.9399 -3.5312
10 -1.6202 -2.6069 -3.1949 -1.6204 -2.6080 -3.1968

Table 4.2: Philip Perron Test Result with Intercept and Trend
ADF t-Statistics Value at Level ADF t-Statistics Value at First Difference
Variable None Intercept Trend & Intercept None Intercept Trend & Intercept
TGR -10.29653 -10.88665 -11.63914 -17.85301 -17.57916 -17.31226
GDP -3.940024 -4.505510 -4.778480 -6.866134 -6.767508 -6.660519
TOR -10.64548 -10.96877 -11.27708 -20.27067 -19.98805 -19.75980
NOR -4.893444 -5.627478 -7.988800 -17.33985 -17.26769 -17.26626
CEXD -5.357864 -6.133597 -7.370466 -11.00532 -10.85922 -10.70750
PPT -11.57182 -11.76901 -11.96985 -17.98466 -17.74717 -17.56840
CIT -0.424396 -0.853814 -1.995121 -7.308456 -7.598434 -8.607207
TEXP -4.848081 -5.600022 -7.420805 -12.19534 -11.99642 -11.96112
NGDP -3.954616 -4.654526 -6.991366 -17.15379 -17.16474 -17.28982
Philip Perron Test Critical Values
At Level At 1
Percent None Intersect Trend & Intercept None Intersect Trend & Intercept
1 -2.6227 -3.6067 -4.2092 -2.6243 -3.6117 -4.2165
5 -1.9495 -2.9378 -3.5279 -1.9498 -2.9399 -3.5312
10 -1.6202 -2.6069 -3.1949 -1.6204 -2.6080 -3.1968

Source: Researchers Computation 2010.

The result from both the ADF unit root and the Phillip Perron tests revealed that all
the variables are stationary at the levels except CIT which was stationary after
taking the first difference. It is also revealed that all the variables are stationary are
1%, 5% and 10% critical levels while CIT observed to be stationary at 1%, 5% and
10% only after first difference at none. Since the variables used are characterised as
1(0), the OLS regression analysis was at levels.

4.3 Regression Result for the Entire Period
Table 4.3
Dependent Variable: LOG(GTR)
Method: Least Squares
Date: 12/29/11 Time: 21:21
Sample(adjusted): 1971 2010
Included observations: 40 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
LOG(GDP) 0.051125 0.051400 0.994647 0.3276
LOG(TOR) 0.139909 0.035142 3.981217 0.0004
LOG(NOR) -0.123532 0.152504 -0.810024 0.4241
LOG(CEXD) -0.141003 0.079773 -1.767549 0.0870
LOG(PPT) 0.329586 0.046136 7.143812 0.0000
LOG(CIT) 0.023551 0.076029 0.309768 0.7588
LOG(NGDP) 0.421156 0.157304 2.677344 0.0118
LOG(TEXP) 0.285136 0.056811 5.019032 0.0000
C -0.003374 0.024855 -0.135762 0.8929
R-squared 0.939219 Mean dependent var 0.233796
Adjusted R-squared 0.923533 S.D. dependent var 0.346518
S.E. of regression 0.095821 Akaike info criterion -1.657557
Sum squared resid 0.284633 Schwarz criterion -1.277559
Log likelihood 42.15113 F-statistic 53.87820
Durbin-Watson stat 2.035461 Prob(F-statistic) 0.000000

Sources: E-View Output 2010

The table shows that all the variables used for the analysis except NOR and CEXD
have positive linear relationship with GTR. This is indicated by the positive
coefficients exhibited by the variables. The coefficient of determinations given as
0.939219 suggests that about 94% of the variations in GTR is explained by the

behaviour of the explanatory variables. The Durbin-Watson statistic is 2.035461 is
an evidence of the absence of serial correlation among the residuals in the model.

4.3.1 Regression Result for the Oil Boom Period
Table 4.4
Dependent Variable: LOG(GTR)
Method: Least Squares
Date: 05/07/12 Time: 22:45
Sample: 1970 2010
Included observations: 41

Coefficient Std. Error t-Statistic Prob.
C -0.029054 0.528267 -0.054998 0.9565
LOG(GDP) 0.024258 0.048016 0.505211 0.6171
LOG(NOR) 0.755226 0.084452 8.942645 0.0000
LOG(NGDP) -1.52E-06 2.75E-07 -5.538483 0.0000
LOG(CEXD) -0.033536 0.023229 -1.443681 0.1592
LOG(TOR) 0.304507 0.060606 5.024384 0.0000
LOG(PPT) 0.019174 0.025709 0.745830 0.4616
LOG(CIT) 0.028200 0.025883 1.089483 0.2846
LOG(TEXP) 2.21E-07 4.39E-08 5.034968 0.0000
DUM1 0.319209 0.204161 1.563517 0.1284
DUM2 -2.13E-05 1.73E-05 -1.232192 0.2274
R-squared 0.926687 Mean dependent var 11.49892
Adjusted R-squared 0.905583 S.D. dependent var 2.851569
S.E. of regression 0.189523 Akaike info criterion -0.264398
Sum squared resid 1.077573 Schwarz criterion 0.195341
Log likelihood
Durbin-Watson stat

Sources: E-View Output 2010

Similarly, the ADF result shown in table 4.2 above indicated that all the variables
used for the analysis except NGDP and CEXD have positive linear relationship
with GTR. This is indicated by the positive coefficients exhibited by the variables.
The coefficient of determinations given as 0.926687 suggests that about 99% of the
variations in GTR is explained by the behaviour of the explanatory variables during
the oil boom period. The Durbin-Watson statistic of 2.047095 is an evidence of the
absence of serial correlation among the residuals in the model.

The ADF result for the SAP period shown in table 4.3 below reveals the same result
with the entire period, in which all the variables used for the analysis except NOR,
CEXD and PPT have positive linear relationship with GTR. The coefficient of
determinations (R
) given as 0.897769 suggests that about 100% of the variations in
GTR is explained by the behaviour of the explanatory variables. The Durbin-
Watson statistic of 1.855296 is an evidence of the absence of serial correlation
among the residuals in the model. From the ADF also, the variables show that they
are statistically significance as indicated by their low probability except PPT.

4.3.2 Regression Result for the SAP Period
Table 4.5:
Dependent Variable: LOG(GTR)
Method: Least Squares
Date: 05/07/12 Time: 22:23
Sample: 1970 2010
Included observations: 41

Coefficient Std. Error t-Statistic Prob.
C 0.531644 0.574738 0.925020 0.3623
LOG(GDP) 0.075602 0.038631 1.957047 0.0097
LOG(NOR) -5.64E-06 2.50E-06 -2.255959 0.0115
LOG(NGDP) 5.41E-06 2.58E-06 2.097136 0.0445
LOG(CEXD) -0.072434 0.019578 -3.699700 0.0009
LOG(PPT) -0.000984 0.022192 -0.044320 0.9649
LOG(TOR) 0.309532 0.079822 3.877792 0.0005
LOG(CIT) 0.051967 0.022852 2.274110 0.0003
LOG(TEXP) 0.588321 0.093006 6.325627 0.0000
DUM1 -0.004189 0.115214 -0.036358 0.9712
DUM2 8.12E-08 3.88E-08 2.093812 0.0448
R-squared 0.897769 Mean dependent var 11.49892
Adjusted R-squared 0.867025 S.D. dependent var 2.851569
S.E. of regression 0.155541 Akaike info criterion -0.659607
Sum squared resid 0.725788 Schwarz criterion -0.199868
Log likelihood
Durbin-Watson stat
Prob (F-statistic)

Sources: E-view Output 2010


4.4 Productivity of Nigerian Tax System (1970-2010)
Table 4.4 below shows the productivity indexes for the overall and individual
revenue sources for the period 1970 2010. From the table productivity indexes
for the whole and the individual revenue sources for the period 1970-2010 are
presented. The results indicate that out of the ten equations, 7 equations are
statistically significant with a t-value greater than 2. But the elasticity indexes for
all the tax sources lies below unity, as NOR (Eq.2) has elasticity coefficient of
0.927 in relation to NGDP while TOR (Eq. 7) has elasticity coefficient of 0.595 in
relation to GDP. However, since all equations shows positive elasticity coefficient,
it implies that all revenue sources can contribute positively to government total
revenue if properly managed.

The lagged values (LV) of the explanatory variables (column 4) also showed that
the 70% of the ten equations had lower elasticity indexes of the tax sources relative
to their respective tax bases, while the other three equations had elasticity indexes
relatively higher than what was obtained in their current values (column 3). The
finding from the lag values also indicates that 70% of the ten equations are
statistically significant with a t-value greater than 2. Thus, from the finding, it could
be ascertained that there should be need to capture the effect of policy lags on tax
yield. This was confirmed by Ariyo, (1997) when he opined that apart from
administrative lags, the enabling regulations allow for grace periods between the
due date of a tax liability and the actual time to remit.

The reports from the oil boom period as presented in table 4.7 indicate significant
variation from what obtained during the entire period. Only three of the ten
equations that are statistically significant both for current and lag values. This
means that for all variables, the t-values indicate that only NOR, CEXD and PPT
are statistically significant at the 95% confidence level. The coefficients of
determination (R
) show that, NOR, CEXD and PPT could explain over 80% of the
pattern of the behaviour of each dependent variable. This is not unexpected as the
neglect of the non-oil revenue (NOR) sources, had significant impact on GTR. This
also significantly affects CEXD and PPT respectively.

Table 4.6: Productivity Indexes of the Nigerian Tax System
Equations Constant Elasticity
(Lag Values)
F-stat R
1 0.159
81.489 0.87 2.377406 0.150
2 0.015
256.364 0.88 3.101980 0.054
3 0.156
36.499 0.72 2.366269 0.122
4 0.063
225.409 0.80 2.282466 0.105
5 0.119
224.847 0.77 2.637976 0.104
6 0.197
165.611 0.74 2.106599 0.226
7 0.156
149.209 0.97 2.409109 0.268
8 0.216
94.068 0.82 2.532980 0.101
9 0.248
127.071 0.60 2.459585 0.114
10 0.163
51.413 0.71 2.393816 0.182

Source: Researchers Computation, 2010
The lagged values (LV) of the explanatory variables for oil period also revealed
that only one of the equations (10%) had elasticity indexes greater than 1, while the

other 9 of the equations had elasticity indexes relatively below unity with equations
2 and 4 having elasticity indexes of 0.861 and 0.725 respectively.

The result of the SAP period reported in table 4.6 below also revealed that all the
variables have positive linear relationship with GTR. The result revealed that equations
1, 2, 4, 5, 7, 9 and 10 are statistically significant while equations 3, 6 and 8 with t-
values of 1.890, 1.031 and 1.429 are not statistically significant for both current and
lagged values.

Table 4.7 revealed the effect of the oil boom on the productivity of these revenue
sources, using a slope dummy function. The result is not significantly different
from the general result except that the oil boom led to a significant shift in non-oil
revenue base due to interaction effect of the oil boom and the non-oil sector. The
elasticity index for GTR during the oil boom was very significant for both current
and lagged values of GDP. This same was revealed for CEXD, TOR and TEXP for
both the current and lagged values of GDP.

The result of the Sap period as reported in table 4.6 revealed that all the variables
have positive linear relationship with GTR except for PPT on TOR and CIT on
NGP which exhibits negative relationship. The result revealed that equations i, ii,
iv, v, vii and x are statistically significant while equations iii, vi and viii are
statistically significant for both current and lag values. Since the non-oil revenue
(NOR) is statistically significant in explaining GTR, it further suggests that during

the SAP period, the administration and collection of taxes from the non-oil revenue
sources had some positive effect. This is in line with Ariyo (1997) work when he
opined that, during the SAP period the government emphasizes the efficiency in the
administration and collection of non-oil revenue tax sources, which led to the
positive impact

Table 4.7: The Oil Boom and the Tax Yield (1970 2010)
Constant Elasticity
Shift F-Stat R
1 -3.8634
42.27 0.89 1.6338 0.153
2 0.018
119.13 0.95 2.5547 0.005
3 9.470
270.59 0.93 2.2072 0.101
4 14.323
134.53 0.87 2.4741 0.630
5 13.675
149.46 0.91 1.8830 0.823
6 15.570
106.16 0.58 1.6216 0.433
7 -5.531
114.33 0.74 1.9219 0.619
8 -11.362
135.91 0.55 2.4122 0.046
9 3.014
126.71 0.80 2.0101 0.091
10 -4.081
63.59 0.72 1.8501 0.000

Source: Result Computed by Researcher (2011)


Table 4.8: SAP and Tax Yield 1970 2010
Constant Elasticity
Shift F-stat R
1 -3.357
174.14 0.66 2.01776 0.061
2 0.004
208.91 0.98 2.31187 0.020
3 6.191
222.47 0.97 1.89794 0.306
4 13.100
230.98 0.88 1.76143 0.207
5 5.431
248.12 0.96 1.7562 0.376
6 12.920
171.05 0.94 1.6923 0.051
7 -5.329
127.20 0.45 2.386 0.001
8 6.983
107.39 0.51 2.3401 0.269
9 15.421
327.77 0.97 1.7467 0.136
10 -3.068
181.07 0.54 2.0706 0.001

Source: Result Computed by Researcher (2011)

The elasticity indexes for all the tax sources showed positive elasticity coefficient
except equations v and ix. This finding is also in line with Ariyo (1997) who
established a significant relationship between GTR and the various tax sources and
a leakage between the variables and the magnitude of the revenue involved. Also
revealed in the table is the effect of SAP using the slope dummy function. It is
revealed that there is no relative difference between the results obtained for the

periods. That is, in our analysis, 6 of the equations are statistically significant
indicating that the results obtained from the general equation are not different from
what is obtained during the SAP period.

4.5 Analysis of Tax Legislative Control in Nigeria
The table below shows that the federal government exercises legislative control
over the first 14 tax sources, while the states are in charge of the remaining 6
sources. It is noteworthy that the local government has no legislative power over
any revenue source, although it can initiate bylaws subject to the approval of the
state government. The Federal Government of Nigeria (FGN) also dominates tax
administration and collection. For example, the FGN directly collects revenue for
the first 7 items, which accounted for over 80% of total tax-based revenue in the

From the table also, the state government is responsible for the collection of
revenue for items 8 to 18, which cumulatively account for an insignificant
proportion of the total tax-based revenue. The local government controls only two
items. It does appear that administrative efficiency is the overriding criterion
guiding the assignment of tax sources to the different tiers of government.
Consequently, all the major tax sources have been assigned to the federal
government. This observation provides a valuable guide as to the appropriate focus
for this study, in two respects. First, it is cost-effective to focus on tax sources that
are both legislatively and administratively under the control of the FGN. Second,

on a close study, only four or five of these sources account for about 80% of total
tax-based revenue: these are customs and excise duties, mining and royalties,
petroleum profits tax, and companies income tax. Consequently, the study focuses
on these major tax sources. We believe that the findings emanating from the study
are validly generalizable to the Nigerian environment within the context of this
studys objectives.

Table 4.9: Nigerias Major Taxes, Since 1990
Types of Tax Jurisdiction
Legislation Administrative

Import Duties
Excise Duties
Export Duties
Mining Rent and Royalties
Petroleum profit tax
Company income tax
Personal income tax
Armed Forces, External Affairs officers and
Federal Capital Territory
Capital gain tax
Personal income tax
License fees on television and wireless radio
Stamp duties
Estate duties
Gift tax
Sales of purchase tax
Football pools and other betting taxes
Motor vehicle tax and drivers license fees
Entertainment tax



Land registration and survey
Property tax
Market and trading license fees

Source: Adopted from Ariyo (1997)

4.6 Structural Changes in Some Federal Tax Sources, 1989-2010
The table below revealed the changes in some tax sources between 1989 -2010. From
the table it is revealed that there is a decreasing trend in income from the non-oil
sector, as the oil sector contributed as high as 86.2% in 1992 and 88.3% in 2006. In
2010, the oil sector still contributes 73.9% of total revenue while the non-oil sector
contributes 26.1%. By this, it implies that the country depends on the oil sector for
almost all revenue generated as against other sectors. The trend of decreasing
income from non-oil sector and increasing income from the oil sector makes the
Nigeria economy to suffer a Dependence Syndrome. An examination of most
countrys sources of revenue profile implies that taxation generates a larger
proportion of their national revenue, which is efficiently used for economy planning
and regulates the economic activities of the country. This is not the case in Nigeria,
as the opposite operates.
Table 4.10: Structural Changes in Some Federal Tax Sources, 1989-2010 (Percent)
Oil Non-OIL
1989 21.1 61.1 82.2 3.9 11.8 2.0 17.8 100.0
1990 36.1 45.7 81.8 5.3 12.9 0.0 18.2 100.0
1991 38.2 43.6 81.9 6.8 11.3 0.0 18.1 100.0
1992 27.0 59.1 86.2 5.4 8.4 0.0 13.8 100.0
1993 30.7 53.4 84.1 5.0 8.0 2.9 15.9 100.0

1994 21.2 58.1 79.3 6.1 9.1 5.5 20.7 100.0
1995 9.3 61.2 70.6 4.8 8.1 16.6 29.4 100.0
1996 14.7 56.2 71.0 4.2 10.6 14.2 29.0 100.0
1997 11.8 59.8 71.5 4.5 10.8 13.2 28.5 100.0
1998 14.7 55.3 70.0 7.2 12.4 10.4 30.0 100.0
1999 17.3 59.0 76.3 4.9 9.3 9.5 23.7 100.0
2000 27.5 56.0 83.5 2.7 5.3 8.5 16.5 100.0
2001 28.6 47.9 76.5 3.1 8.0 12.4 23.5 100.0
2002 22.6 48.4 71.1 5.7 10.5 12.8 28.9 100.0
2003 26.5 54.0 80.6 4.5 7.6 7.4 19.4 100.0
2004 30.2 55.4 85.6 3.3 5.5 5.6 14.4 100.0
2005 34.3 51.5 85.8 2.9 4.2 7.0 14.2 100.0
2006 34.2 54.1 88.3 4.1 3.0 4.6 11.7 100.0
2007 26.3 51.8 78.1 5.7 4.2 12.0 21.9 100.0
2008 35.7 47.3 83.0 5.3 3.6 8.1 17.0 100.0
2009 45.6 20.3 65.9 11.7 6.1 16.2 34.1 100.0
2010 36.0 37.9 73.9 9.0 4.2 12.9 26.1 100.0

Source: Central Bank of Nigeria Annual Report and Statement of Account, various Issues.
Percentages Computed by Researcher.

For a clearer understanding, the percentages changes in revenue generated from the
oil and Non-oil sources of revenue are presented graphically below. It is clearer
from the graph that more revenue are collected from the oil sources while less revenue
is collected from the non-oil sources.


Fig.4.1: Percentage Changes in Revenue Generation in Oil and Non-Oil Sectors
(1989 -2010) (Minitab Output)

Revenue from Oil Sources
Revenue from Non-Oil Sources

4.7 Analysis of Federal Government Fiscal Operation (1970-2010)
The analysis of Federal Government Fiscal Operation from 1970 2010) is
presented in the tables 4.10(a) to 4.10(d) below. From the tables, it is revealed that
Nigeria experiences recurrent fiscal deficit throughout the period under
consideration except for the years 1995 and 1996 that experiences fiscal surplus.
Source: Graphed by Researcher (2011)

Even at those years, Anyanwu (1991) opined the fiscal the fiscal surplus of 1995
and 1996 were mere arithmetical manipulations to conceive the international world
that Nigeria is financial buoyant to qualify them for another loan.

Table 4.10 (a ): Federal Governments Fiscal Operation (1970-1989) (N million)
Items/Year 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979
Total Federally
Retained Revenue

448.8 1,168.8 1,404.8 1,695.3 4,537.0 5,514.7 6,765.9 8,042.4


Total Federal
Govt. Expenditure

903.9 997.2 1,463.6 1,529.2 2,740.6 5,942.6 7,856.7 8,823.8


Overall Surplus
(+) /Deficit (-) (455.1) 171.6 (58.8) 166.1 1,796.4

(427.9) (1,090.8) (781.4)



Items/Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
Total Federally
Retained Revenue

12,993.3 7,511.6 5,819.1 6,272.0 7,267.2 10,001.4 7,969.4 16,129.0


Total Federal Govt.

14,968.5 11,413.7 11,923.2 9,636.5 9,927.6 13,041.1 16,223.7 22,018.7


Overall Surplus (+)
/Deficit (-)




(3,364.5) (2,660.4)

(3,039.7) (8,254.3)




Sources: Central Bank of Nigeria: Annual Report and Statements of Accounts (various years); Federal Office of Statistics;
Annual Digest of Statistics (various years).


Table 4.10(b): Federal Governments Fiscal Operation:1990-2010 (N million)
Items/Year 1990 1991 1992 1993 1994 1995 1996 1997 1998
Total Federally
Retained Revenue 38152 30829 53265 126071 90623 249768 369267 423215 353724
Total Federal Govt.
Expenditure 60268 66584 92797 233807 160893 248768 337218 428215 487113
Overall Surplus (+)
/Deficit (-) (22,116.1) (35,755.2) (39,532.5) (107,735.3) (70,270.6) 1,000.0 32,049.4 (5,000.0) (133,389.3)

Items/Year 2001 2002 2003 2004 2005 2006 2007 2008 2009
Total Federally
Retained Revenue 79696.7 716754.2 1023241.2 1253600.0 1660700.0 1836605.0 2333659.6 3193440.0 2646904.7
Total Federal Govt.
Expenditure 10108025.6 1018155.8 1225965.9 1426201.3 1822100.0 1938002.0 2450896.7 3240818.5 3456925.4
Overall Surplus (+)
/Deficit (-) (221,048.9) (301,401.6) (202,724.7) (172,601.3) (161,400.0) (101,397.5) (117237.1) (47,378.5) (810,.20.7)

Sources: Central Bank of Nigeria: Annual Report and Statements of Accounts (various years); Federal Office of Statistics;
Digest of Statistics (various years).

Note: All figures in parenthesis are negative indicating deficit for the years under consideration.


Table 4.10(c): Nigerian Fiscal Deficit Operation: 1990-2000 (N millions)

Item/Year 1990 1991 1992 1993 1994 1995 1996 1997 1998
TR 38,152.10 30,829.20 53,264.90 126,071.20 90,622.60 249,768.10 369,267.00 423,215.20 353,724.10
nB -181,352.02 -171,624.96 -118,597.50 -290,885.31 -91,351.78 2,200.00 108,967.96 -19,000.00 -306,795.39
Subtotal -143,199.92 -140,795.76 -65,332.60 -164,814.11 -729.18 251,968.10 478,234.96 404,215.20 46,928.71
Less (G - C) 36,219.60 38,243.50 53,034.10 136,727.10 89,974.90 127,629.80 124,291.30 158,563.50 178,097.80
Sub-Total -106,980.32 -102,552.26 -12,298.50 -28,087.01 89,245.72 379,597.90 602,526.26 562,778.70 225,026.51
Less D 6,092.60 32,112.40 46,716.70 91,136.00 60,247.60 7,102.20 -143,189.50 -60,637.10 103,885.70
Subtotal -100,887.72 -70,439.86 34,418.20 63,048.99 149,493.32 386,700.10 459,336.76 502,141.60 328,912.21
External Assets -187,900.00 2,972.60 -11,859.60 16,963.50 8,390.80 22,455.40 7,825.40 13,382.60 16,600.60
Overall Balance -288,787.72
67,467.26 22,558.60 80,012.49 57,884.12 409,155.50 467,162.16 515,524.20 345,512.81

Source: Computed from CBN Annual Reports and Statements of Accounts (1970 2009) various issues.
Interpretations of Symbols: TR = Federal Government Retained Revenue G = Total Government Expenditure
D = Total Domestic Debt n = Growth rate of gross Domestic Product C = Total Government Capital Expenditure
B = Budget Deficit NW = Net worth


Table 4.10(d): Nigerian Fiscal Deficit Operation: 2001-2010 (N millions)

Item 2001 2002 2003 2004 2005 2006 2007 2008
TR 796,976.70 716,754.20 1,023,241.20 1,253,600.00 1,660,700.00 1,836,605.00 233,659.60 3,193,400.00
nB -150,171.84 -130,457.25 -700,279.45 -463,785.96 6,200.00 221,140.86 -16,500.00 -853,691.52
Subtotal 646,804.86 586,296.95 322,961.75 789,814.04 1,666,900.00 2,057,745.86 217,159.60 2,339,708.48
Less (G - C) 579,330.10 696,777.70 984,277.60 1,074,901.30 1,302,600.00 1,385,616.70 1,691,573.70 2,117,362.50
Subtotal (NW) 1,226,134.96 1,283,074.65 1,307,239.35 1,864,715.34 2,969,500.00 3,443,362.56 1,908,733.30 4,457,070.98
Less D 118,720.00 149,026.70 163,746.40 46,481.30 143,500.00 45,146.10 212,300.00 150,700.00
Subtotal 1,344,854.96 1,432,101.35 1,470,985.75 1,911,196.64 3,113,000.00 3,488,508.66 2,121,033.30 4,607,770.98
External Assets
(NET) 1,472,101.80 1,414,330.70 1,502,358.50 2,962,522.20 4,277,730.10 6,258,033.00 7,482,040.00 8,616,524.60
Balance 2,816,956.76 2,846,432.05 2,973,344.25 4,873,718.84 7,390,730.10 9,746,541.66 9,603,073.30 13,224,295.58

Source: Computed from CBN Annual Reports and Statements of Accounts (1970 2010) various issues.
Interpretations of Symbols: TR = Federal Government Retained Revenue G = Total Government Expenditure
D = Total Domestic Debt n = Growth rate of gross Domestic Product C = Total Government Capital Expenditure
B = Budget Deficit NW = Net worth

4.8 Discussion of Research Findings
To provide further evidence on the productivity of the tax system on the index of tax
buoyancy of the tax system was computed from equations i x. In the computation,
the data were divided into three groups and the results are recorded in table 5 below.
Group A shows the overall tax buoyancy, group B is for the Oil boom period while
Group C recorded the SAP period.

For the entire period covered by this study, there was a buoyancy of 1.230 for GDP
relative to GTR and 1.155 for CEXD relative to NGDP. In fact, contrary to our
expectations, the non-oil component however performed slightly lower with a
buoyancy of 1.000, 1.002 and 1.004 respectively for the three periods. The result
further revealed that the Nigeria tax structure is buoyant for about five of the tax
sources while it is not buoyant for other five tax sources for the period under
consideration. This fact was supported by Okpara (2010) when he opines that, a tax
structure is said to be buoyant if the buoyancy index is greater than unity implying
that as national income or the proxy base changes, tax revenue changes by a larger
proportion as a result of built-in elasticity and discretionary changes.

There was no significant change in the buoyancy for CEXD both in relation to GDP
and NGDP respectively as they exhibited a buoyancy of approximately 1 as shown in
table 4.12 below. Generally, the results show the effect of administrative lags and
lapses in the implementation of tax-related policies. This lag could have resulted from
the time in tax collection and remittance of proceed to government.

Column B of table 4.12 (Oil Boom Period) shows that a buoyancy of 1.401 and 1.338
for GDP and TOR, were recorded. Although, the coefficient of buoyancy for PPT in
relation to TOR remains high and this was attributable to improvement in the prices of
oil after 1985, and the deregulation of the oil sector.

Table 4.11: Index of Tax Buoyancy 1970 2010
Equation Overall Tax
Sap/Post Sap
1 1.230 1.401 1.133
2 1.000 1.002 1.004
3 1.007 1.338 0.871
4 1.155 1.122 1.202
5 1.127 1.090 1.045
6 0.878 0.702 0.722
7 0.893 0.644 0.691
8 0.815 0.704 0.671
9 0.934 0.828 0.926
10 0.779 0.887 0.670
Source: Result Computed by Researcher (2011)

However, there was a downward trend when compared to Ariyo (1997) report, which
establish a buoyancy coefficient of 2.60 and 1.88 for the same components. This
downward trend may not be surprising phenomenon as the crises in the Niger Delta

may have significantly affected oil production. The buoyancy of 0.644 for TOR
during the oil boom was not encouraging compare with the previous, which has a
buoyancy of 0.893. This downward trend in the buoyancy for TOR however is a case
that required further investigation.

4.9 Policy Implications
The results of the findings suggest that deficit financing is a recurrent feature of
government fiscal activity not in Nigeria but in the world as a whole. Thus, while it is
inevitable to stop the government from engaging in the fiscal deficit option, there is
no gain saying that this has some policy implications on the economy. Firstly,
according to Obi, and Nurudeem (2009) deficit financing leads to huge debt stock and
tends to crowing-out of private sector investment, by reducing the access of investors
to adequate funds. This reduces investment in the economy, which creates
unemployment, reduces import and export as well as Company Income Tax (CIT).
Similarly, Anyanwu (1997) opined that fiscal deficit leads to unfavourable effect on
productive capital stock, and that persistent large government deficit would inevitably
result in increase government debt as a ratio of GDP.


5.0 Introduction
In the preceding Chapter, a detailed discussion of methodological issues that are
essential for the achievement of the aim and objectives of this study was carried out.
Therefore, the chapter was devoted to refinement of findings from this research work
and discussion of the policy implications. In this concluding Chapter however, the
study endeavours to provide a closing summary of the research work, followed by
recommendations, to address some of the problems highlighted in the preceding
Chapter and conclusion. An attempt is also made to highlight relevant areas for future

5.1 Summary
This study evaluated the productivity of the Nigerias tax system over a period 41
years (1970-2010). The overall work was based on the critical examination of some of
the key variables that are related to revenue generation and hence to determine the
productivity of the tax system. Some of these variables are government total revenue
(GTR), total oil revenue (TOR), company income tax (CIT), petroleum profit tax
(PPT), non-oil revenue (NOR) and the gross domestic product (GDP). Based on the
empirical analysis of the result, we summarized the findings and made some

The main objective of the research work is to assess the productivity of the Nigeria
tax system from 1970 2010. However, the following specific objectives were state:
1. To review the Nigeria tax system since the attainment of independence in 1960

2. To investigate whether an increase in tax revenue leads to the same
proportionate increase in Gross Domestic Product in Nigeria
3. To examine the index of tax buoyancy 1970 2009
4. To examine the deficit profile of the country
5. To examine the consequences of the neglect of the non-oil tax sources over
6. To investigate the financing options of the Nigeria fiscal deficit
7. To highlight as much as possible the various tax reforms and their objectives.
8. To examine the structure of the Nigerian tax based revenue between
1970 2010.

In order to achieve the objectives, hypotheses were formulated and tested using the
Augmented Dickey Fuller to test the stationarity of the variables. The drift of the
variables form the normal were established with the cointegration test and the error
correction model.

Although the productivity level appears satisfactory overall, the results indicate wide
variations in the level of productivity by tax source. This was attributable to laxity in
the administration of non-oil tax sources during the oil boom periods, which suggests
the effect of the Dutch-diseases syndrome discussed earlier. Some of this laxness was
mopped up at the end of the honeymoon, however, especially with the
commencement of SAP in 1986.

In the context of this studys objectives, it appears the current revenue profile of the
nation is sustainable. Further, opportunities for improvement exist especially in

import duty collection. Better monitoring and transparency of operations within the
petroleum oil industry will also ensure a significant increase in total government
revenue. The government should also desist from revenue bursting activities such as
unbridled granting of both the prohibition and duty waiver for public sector projects
and few privileged individuals within the society.

5.2 Conclusion
This study was conducted to determine the productivity of the Nigerias tax system
during the 1970 2010. Ten models were formulated for the study and the ordinary
least square method was used to analyze the data. As a preliminary check, the ADF
unit root test was used to determine the presence of unit roots. The variables were
characterized as 1(0). The regression in logs was done using the data at levels.

To assess the productivity of the Nigeria tax system, two measures - index of tax
efficiency and index of tax buoyancy developed by Houghton (1998) were adopted. In
carrying out the analysis, the data set was disaggregated into sub-periods to enable us
trace the effects of changes in the macroeconomic environment. The analysis was
done at three levels of aggregation i.e. using the entire data set (Period A) at one level
(1970-2010), the oil boom period (B) at another level (1970-1984) and the SAP and
Post SAP period (C) at another (1986-2010).

The results of the analysis indicate that overall i.e. (Period A) 7 out of the 10
equations recorded elasticity index of less than 0.5 while the remaining 3 had
elasticity of between 0.5 and 0.9. The analysis for the oil boom period shows that the
PPT has elasticity of 1.01, which indicates that the petroleum profit tax (PPT) is

productive during the oil boom period. During this period, only 4 out of the 10
equations came out with elasticity of between 0.5 - 0.9 while the remaining 6
equations had elasticity of below 0.5. This suggests that even during the oil boom
period, the tax system was not productive. The analysis for the period of SAP was not
significantly different from the preceding two analyses. It therefore follows that the
Nigeria tax system is less productive irrespective of the level of data aggregation.

Therefore, of greater concern to this research work is the findings of a study reported
by Ariyo and Raheem, (1990) that shows that the level of fiscal deficit in Nigeria is
no longer sustainable, given the identified lack of co-integration between its revenue
and expenditure profiles. Ariyo (1993) also used the litmus test developed by Zee
(1988), Blinder and Solow (1983), and Buiter (1983), and modified by Rutayasire
(1990), to assess the sustainability of the Nigerian fiscal deficit between 1970 and
1990. Their findings indicate that the fiscal deficit profile in Nigeria has become non-
sustainable since 1970. They also provide policy and relevant information about the
causes, structure and severity of the deficit problem. Observation of table 2.2 shows
available evidence and researches indicates that, this deficit-prone policy orientation
continues unabated, in spite of its negative effect on the economy. In the light of the
above, the World Bank (1995) once opines that it is precisely a conviction that the
government is shortsighted in its policies, and that it is biased towards overspending
because of the nature of our political economy, and that makes sustainability an issue.
This fiscal deficit problem suggests the need for concrete steps to bring Nigerias
fiscal profile back on course. To achieve this, the country needs to either expand their

revenue generation sources in other to increase revenue or reduce the level of
expenditure or embark on an appropriate combination of both.

All over the world, a productive tax system provides sufficient revenue for
government spending. From our analysis, this is not the case for Nigeria. The options
open to government for closing the gap between revenue from the tax system and
expenditure is to embark on fiscal deficit financing. This study has established that the
persistent fiscal deficit financing in Nigeria is due to the unproductive tax system.

5.3 Recommendations
The findings from thus study shows that the situation of the buoyancy of the
Nigeria tax system is not too encouraging as there are opportunities for improvement
in administration and collection of taxes from the existing tax sources. The study
therefore recommends as follows:

First, the government has to broaden the tax base by providing the enabling
environment for private enterprises to thrive. In support of Ariyos (1997) report, the
government should withdraw from several economic activities that the private sector
is able and willing to provide more efficiently. This would control and significantly
reduce public expenditure, which is evidenced by the large number of projects that are
abandoned in the country. When this is done, huge sum of money would be saved to
reduce fiscal deficit in the country.

Secondly, the government should improve on tax administration in order to narrow
the gap between tax collection and remittance to government coffers.

Thirdly, government should also ensure that the leakages in the administration of tax
collection and tax revenue remittance are effectively checked.
Fourthly, government should deregulate system substantially so as to enable the
private sector to thrive. This will reduce the level of government expenditure such that
revenue and expenditure are synchronized. This was in line with Ariyo (1997) when
he recommends that government should design meaningful programmes that would
reduce significantly government expenditure thereby curbing the problem of fiscal
deficit and inefficient tax administration. The present administrative structure seems
to be too expensive hence the need for prudent management and productive use of the
nations financial resources.

5.4 Contribution to Knowledge
Several researches such as that of Ariyo and Raheem (1990), Ariyo, (1993), Ariyo,
(1997) have established the non-sustainability of the Nigeria tax System. In doing, so
eight variables (GTR, NOR, IMD, ED, PPT, TOS, NGDP and CIT) were employed to
explain the link between GTR and the various tax sources employed. But in this
research, nine variables (GTR, NOR, CEXD, PPT, TOR, GDP, NGDP, CIT and
TEXP) were used to establish the link between fiscal deficit and the productivity of
the Nigerias tax system. Secondly, none of these researches linked the non-
sustainability of the Nigerias tax system with the increasing fiscal deficit in spite of
the increasing revenue generation attempt by the government. Thus, these two cases
are additional knowledge contributed by this research.

Omoruyi (1983) so far represents the most comprehensive assessment of the
productivity of the Nigeria tax system. He evaluated the buoyancy of the tax system

as defined by Sahota (1981) and Ghai (1980) for the period 1960 to 1979. He focused
on both the indirect taxes such as import, export and excise duties, as well as direct
taxes such as personal income tax (federally collected) and petroleum profit tax. Our
study improves upon Omoruyi (1983) in the following respects. First, our study
captures the impact of the structural changes in the macroeconomic management
framework introduced since 1970.

Second, Omoruyi (1983) disaggregated his analysis in terms of decades (1960 1967,
1970 1980, etc.) but we believe that such disaggregation could not provide an
adequate guide for policy decisions, which are of interest to this study. Hence, we
disaggregated our analysis around notable economic events such as the pre-and post-
oil boom era, as well as the impact of SAP on the buoyancy of Nigerias tax system.


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