Impact of tax effort ratio on economic growth in Nigeria: An application of Vector Autoregressive Model

Abstract

This study examines the relationship between tax effort ratio and economic growth in Nigeria from 1972 to 2021. The base year was chosen based on availability of dat. Using various techniques such as unit root test which all the variables are stationary at first difference, lag selection, VAR estimation, LM test, normality test, and variance decomposition, the study analyzes the data and presents the results. The study found that a model with 2 lags had the best balance between goodness of fit and model complexity. The results from the VAR estimation showed a positive relationship between tax effort ratio and economic growth in
Nigeria, indicating that an increase in tax effort ratio leads to an increase in economic growth. Additionally, the study found that government expenditure had a positive impact on economic growth, while foreign direct investment did not have a significant relationship with economic growth. The study provides valuable insights into the analyzed data, highlighting the need for
the Nigerian government to improve tax collection efforts and direct government expenditure towards programs that can contribute to economic growth. The study provides valuable insights for policymakers and stakeholders in the Nigerian economy. It highlights the importance of improving tax collection efforts and directing government expenditure towards projects that contribute to economic growth. which recommends that the government should focus on investing in capital projects that have a positive impact on the economy. Policymakers should consider the findings of the study when making decisions about tax policies, government expenditures, and strategies for attracting foreign investment into the country.