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Optimal tax rate and economic growth. Evidence from Nigeria and South Africa

Author

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  • Olufemi Muibi SAIBU

    (University of Lagos)

Abstract

The recent economic crisis had made developing countries to look inward for financial resources to finance development. The readily alternative is the tax revenues however, the possible adverse direct and indirect effects of tax on productivity and work efforts as well as on aggregate consumption had make some African countries (especially Nigeria and South Africa) reluctant in implementing far reaching tax policy reform. This paper examines optimal tax burden and real output growth Nigeria and South Africa, two of the top four economies in Africa. The paper empirically determined what should be the optimal tax rate for Nigeria and South Africa-the two leading economies in Africa. The paper found that nonlinearity hypothesis in the effects of tax in the case of South Africa is rejected while a significant nonlinear relationship is found in the case of Nigeria. The results suggest that the growth-maximizing tax rate is about 15% of per capita GDP for South Africa and 30% for Nigeria. At that tax rate, the economic growth rate would be around 6% and 8% instead of the actual mean growth rate of 2.84% and 4.51% for South Africa and Nigeria respectively. The paper concluded the current tax burden in the two countries may be sub-optimal and may hurt long term sustainable growth process in the two countries.

Suggested Citation

  • Olufemi Muibi SAIBU, 2015. "Optimal tax rate and economic growth. Evidence from Nigeria and South Africa," EuroEconomica, Danubius University of Galati, issue 1(34), pages 41-50, May.
    • Handle: RePEc:dug:journl:y:2015:i:1:p:41-50
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    File URL: http://journals.univ-danubius.ro/index.php/euroeconomica/article/view/2586/2446
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    References listed on IDEAS

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    Cited by:

    1. Jean C. Kouam & Simplice A. Asongu, 2022. "Effects of Taxation on Social Innovation and Implications for Achieving Sustainable Development Goals in Developing Countries: A Literature Review," Working Papers of the African Governance and Development Institute. 22/046, African Governance and Development Institute..
    2. Andrew Phiri, 2016. "The Growth Trade-off between Direct and Indirect Taxes in South Africa: Evidence from a STR Model," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 14(3 (Fall)), pages 233-250.
    3. Yawovi Mawussé Isaac Amedanou, 2019. "Optimal Taxation and Economic Growth in Togo: Empirical Investigation in Time Series [Taxation Optimale et Croissance Economique au Togo : une Evidence Empirique en Séries Temporelles]," Post-Print hal-01990213, HAL.
    4. Andre Gbato, 2017. "Impact of Taxation on Growth in Sub-Saharan Africa: New Evidence Based on a New Data Set," Post-Print hal-01673738, HAL.
    5. Maganya Mnaku Honest, 2020. "Tax revenue and economic growth in developing country: an autoregressive distribution lags approach," Central European Economic Journal, Sciendo, vol. 7(54), pages 205-217, January.
    6. Jeeban Amgain, 2017. "Estimating Optimal Level of Taxation for Growth Maximization in Asia," Applied Economics and Finance, Redfame publishing, vol. 4(3), pages 47-55, May.
    7. AMEDANOU, Yawovi M. Isaac, 2018. "Examen de l'optimalité de la performance fiscale dans les pays en développement : le cas de l’UEMOA [Review of the optimality of tax performance in developing countries: evidence from WAEMU]," MPRA Paper 89513, University Library of Munich, Germany.
    8. ONAKOYA, Adegbemi Babatunde & AFINTINNI, Oluwatobi Ibukun, 2016. "Taxation and Economic Growth in Nigeria," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 4(4), pages 199-210, December.
    9. Andre Gbato, 2017. "Impact of Taxation on Growth in Sub-Saharan Africa: New Evidence Based on a New Data Set," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(11), pages 173-193, November.
    10. AMEDANOU, Yawovi M. Isaac, 2019. "Taxation Optimale et Croissance Economique au Togo : une Evidence Empirique en Séries Temporelles [Optimal Taxation and Economic Growth in Togo: Empirical Investigation in Time Series]," MPRA Paper 92003, University Library of Munich, Germany.

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