Tax Policy, Inflation and Unemployment in Nigeria (1970 – 2008)

Abstract

This study is concerned with the use of tax policy in the management of a real-world economy, the Nigerian Economy. It examines the attempts by successive Nigerian governments to use taxation to influence macroeconomic aggregates, especially inflation and unemployment, and covers the period 1970 to 2008. It is largely a secondary data study, focussing on the extent to which these variables responded to changes in government’s tax measures. Data on these variables for the thirty-nine year period were analysed using both descriptive and inferential statistical techniques. The Ordinary Least Square (OLS) method was used for the estimations. The analysis shows that the historical trends in inflation and unemployment showed no significant response to tax policy between the period 1970 and 2008. Periods of lower taxes recorded lower inflation rate in some years and higher inflation rates in some years. Unemployment rates increased steadily in some years whether taxes were raised or lowered. Government in some years lowered taxes amidst high inflation rates in the economy. Taxes have a negative effect on the inflation rate in line with the theory, but with insignificant coefficient. In the case of unemployment rate, the regression results show a negative relationship between tax policy and unemployment, but with insignificant coefficient, which is contrary to the theory. The analysis shows that tax policy was not effective in controlling inflation, and tackling unemployment problems in the economy during the period of study largely because of inconsistency in the use of tax measures. It is recommended that government apply tax measures much more carefully than was observed over the period studied.

Keywords: Tax Policy, Inflation, Unemployment, Economic Management and Nigeria.