TAX EFFORT AND TAX CAPACITY: EVIDENCE FROM NIGERIA

Chidebelu C. Orji, & John U. Ihendinihu
Department of Accounting, College of Management Sciences,
Michael Okpara University of Agriculture, Umudike,
Abia State, Nigeria.
1 orjichidebelu@yahoo.com
2 ihendinihu.john@gmail.com

Abstract
The objective of the paper was to empirical estimate Nigeria taxable capacity and tax effort. It employed a time series data from 1970–2017. Data were obtained from International Centre for Tax Development Data (ICTD) and World Development Indicator (WDI). Ordinary regression least square were used for regression. The result showed that the share of agriculture in GDP, share of industry in GDP, the share of service in GDP are positive and insignificant while exchange rate is positive and significant with tax ratio. On the other hand, trade openness and foreign direct investment are negative and insignificant while population growth is negative and significant with tax ratio. Further results show that Nigeria’s actual tax collection is still below the tax capacity. The average tax effort is 1.02 which means that Nigeria is overtaxing. Looking at tax effort for all years out of 47 years, Nigeria was over taxing in eighteen (18) years, under taxing in twenty-six (26) years and had optimal tax in three (3) years. This indicates that over the years tax effort has been less than 1. The combination of optimal and over taxing years are still far less than the number of years for under taxing by five (5) years. The study recommends that optimal taxation as over taxation can lead to tax evasion, under declaration of taxes and also growth of underground economy.
Key words: Tax effort, Tax capacity, tax ratio, underground economy, GDP

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