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Value Added Tax and price stability in Nigeria: A partial equilibrium analysis

  • Marius Ikpe

    (Federal University, Ndufu-Alike, Ikwo)

  • Alwell Nteegah

    (University of Port-Harcourt)

Registered author(s):

    The economic impact of Value Added Tax (VAT) that was implemented in Nigeria in 1994 has generated much debate in recent times, especially with respect to its effect on the level of aggregate prices. This study empirically examines the influence of VAT on price stability in Nigeria using partial equilibrium analysis. We introduced the VAT variable in the framework of a combination of structuralist, monetarist and fiscalist approaches to inflation modelling. The analysis was carried out by applying multiple regression analysis in static form to data for the 1994-2010 period. The results reveal that VAT exerts a strong upward pressure on price levels, most likely due to the burden of VAT on intermediate outputs. The study rules out the option of VAT exemptions for intermediate outputs as a solution, due to the difficulty in distinguishing between intermediate and final outputs. Instead, it recommends a detailed post-VAT cost-benefit analysis to assess the social desirability of VAT policy in Nigeria.

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    Article provided by Europa Grande in its journal European Journal of Government and Economics.

    Volume (Year): 2 (2013)
    Issue (Month): 2 (December)
    Pages: 137-147

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    Handle: RePEc:egr:ejge00:v:2:i:2:p:137-147
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    1. Patrick GUILLAUMONT & Sylviane GUILLAUMONT JEANNENEY & Jean-François BRUN, 1998. "How Instability Lowers African Growth," Working Papers 199806, CERDI.
    2. Antonio Fatás & Ilian Mihov, 2003. "The Case For Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1419-1447, November.
    3. Christian Ebeke & Helene Ehrhart, 2012. "Tax Revenue Instability in Sub-Saharan Africa: Consequences and Remedies," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 21(1), pages 1-27, January.
    4. John Thornton, 2008. "Explaining Procyclical Fiscal Policy in African Countries †," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 17(3), pages 451-464, June.
    5. Christian Ebeke & Hélène Ehrhart, 2011. "Tax Revenue Instability in Sub-Saharan Africa: Consequences and Remedies," Working Papers halshs-00552230, HAL.
    6. Diallo, Oumar, 2009. "Tortuous road toward countercyclical fiscal policy: Lessons from democratized sub-Saharan Africa," Journal of Policy Modeling, Elsevier, vol. 31(1), pages 36-50.
    7. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
    8. Bogetic, Zeljko & Hassan, Fareed, 1993. "Determinants of value - added tax revenue : a cross section analysis," Policy Research Working Paper Series 1203, The World Bank.
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