Household welfare and poverty impact of domestic revenue mobilisation strategies in Nigeria: a Computable General Equilibrium (CGE) analysis

Abstract

This study aims to simulate the household welfare and poverty impact of Nigeria's recent increase in the Value Added Tax (VAT) rate policy from 5 per cent to 7.5 per cent relative to an increase in either the Company Income Tax (CIT) rate or Personal Income Tax (PIT) rate. These increases in the tax rate policies were examined. This is done by linking a Standard Computable General Equilibrium (CGE) framework to Micro-simulation (MS) models. Within this framework, the choice of a Domestic Revenue Mobilisation (DRM) strategy is based on the criteria of maximum revenue generation with minimum welfare loss as well as a tolerable poverty state. Findings from this study rule out the public perception that an increase in the CIT rate from 30 per cent to 35 per cent will result in more government revenue. Specifically, the study revealed that the choice of a DRM strategy in Nigeria involves a tradeoff between maximum revenue generation and minimum welfare loss as well as a tolerable poverty state.