Analyzing the Impact of Value Added Tax (VAT) on Economic Growth in Nigeria

Abstract

This study investigates the relative impact of value added tax on economic growth in Nigeria. We used Johansen cointegration test. The result of cointegration test does not provide any evidence of long-run equilibrium relationship among the variables.  An unrestricted vector autoregressions (VARs) technique were employed to analyze and draw policy inferences. Impulse response functions (IRFs) and Forecast error Variance decompositions (FEVDs) were compute through 1000 Monte Carlo simulations. The results derived from the impulse response function (IRF) and forecast error variance decomposition ( FEVD) imply that value added tax have positive impact on economic growth in Nigeria , where variation in this variables growth rate will causes variation in real economic activity with  about 50 percent in the near future. We conclude that the policy makers in Nigeria should continues this fiscal policy with other macroeconomic indicators. Per suing this policy will enhance the Nigerian economy positively, more specifically in this time of economic crisis in the world.

Keywords: VAT, unrestricted VAR, impulse response, forecast error variance decomposition