Indirect Tax and Economic Growth

Abstract

The main thrust of this study is to investigate the indirect tax-economic growth dynamics against the backdrop of the paucity of empirical literature in developing countries with Nigeria as a reference point. The study adopted a combination of cointegration and error correction mechanism after series of dagnostic tests which helped to check the adequacy of the specified model. The Engel-Granger two step procedure was used to test the short run dynamic behaviour of the model while the Autoregressive Distributed Lag (ARDL) was used to correct the discrepancies between short and longrun impact of the explanatory variables. The result of the diagnostic tests shows the adequacy of the specified model. The study found a negative and an insignificant relationship between indirect tax and economic growth in Nigeria. The ratio of total indirect tax to total tax revenue reported a negative coefficient of (0.5817). The ratio of total tax to total federal revenue reported a robust t-value of (19.9276) and a positive coefficient of (2.0886) at the 1% level of significance. Against the above result, it was recommended that emphasis should be shifted from indirect tax as a growth driver in Nigeria.

Keywords: Indirect Tax, Custom and Excise Duties, Value Added Tax, Total Federal Revenue, Diagnostic tests, Cointegration statistics.