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Welfare Implication of Tax Rates Increase in a Recessionary Economy

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  • Ibrahim, Umar Bambale
  • Abubakar, Isah Funtua

Abstract

In this work, we compare the welfare cost of the two tax policy options in Nigeria, by applying a small-open economy within the New-Keynesian Dynamic Stochastic General Equilibrium Model (NKDSGE) of Nigeria augmented by a robust fiscal sector with several tax rules. Increase in tax rates has different welfare implications in a recessive economy. Increase in Consumption tax VAT rate is welfare superior compared to increase in CIT rate, which harms private agents’ incentive to invest in either new or existing venture. Hence, data does not support tax reform in the form of increase in Company Income Tax rate. Our finding implies that the current Nigerian tax reform in the form of an increase in VAT rate while allowing other tax rates unchanged is the right policy direction.

Suggested Citation

  • Ibrahim, Umar Bambale & Abubakar, Isah Funtua, 2020. "Welfare Implication of Tax Rates Increase in a Recessionary Economy," MPRA Paper 111132, University Library of Munich, Germany, revised 13 Dec 2021.
    • Handle: RePEc:pra:mprapa:111132
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    References listed on IDEAS

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    More about this item

    Keywords

    DSGE Models; Fiscal Policy; Welfare;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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