Impact of some Macroeconomic Variables on Tax Revenue in Nigeria

Abstract

The knowledge of the relationship between tax revenue and the interplay of macroeconomic factors is necessary to maximize the gains of the proposed elimination of non-tariff barriers by the African Union. This study was carried out to investigate the impact of trade liberalization and six macroeconomic variables on tax revenue in Nigeria from 1981-2019, using the autoregressive distributed lag (ARDL) approach to cointegration and the Error Correction Model (ECM). The unrestricted error-correction model was specified in the study by modifying ARDL model. Total tax and domestic tax revenues were predicted by trade liberalization and most macroeconomic variables examined. A unit increase in trade liberalization triggered an increase of 3% in both total and domestic tax revenues when all other variables in the model were held constant. The results of ECM showed that short run and long run equilibrium were present in the system. The macroeconomic variables found to be predictors of both domestic and external tax revenues are share of petroleum and mining in GDP, foreign direct investment, share of agriculture in GDP, per capita income, exchange rate and inflation rate. These are therefore important to explain tax revenue in Nigeria. The key policy recommendation for improved and sustained tax revenue is to embark on comprehensive trade liberalization policies as well as regulate changes in macroeconomic variables.