Taxation and Economic Growth in a Resource-Rich Country: The Case of Nigeria

In this chapter, we examine the relationship between taxation and economic growth in a resource rich country, using Nigeria as a case study. We explore the linkages between availability of higher resource revenue and lower taxation effort of other revenue categories and the effects of these on growth. Ordinary least square (OLS) estimation technique is employed in estimating the specified model. Also, descriptive analysis is carried out regarding tax trends and tax efforts in Nigeria to determine the effectiveness of existing tax structures, as well to as examine relevant national and cross-country data. Empirical results reveal that taxation has a significant impact on Real GDP growth rates. However, the proportion of tax contribution to the growth rate falls short of the optimal level in terms of the volume of economic activities and value of total output. Nigeria also lags other African countries with respect to tax effort and as such has a huge untapped potential for enhanced revenue mobilisation. We recommend therefore, that the Government should institute an appropriate tax system with an emphasis on broadening the tax base and in some cases, reviewing upwards the tax rates in order to increase the tax effort as well as ensure optimal contribution of taxation towards economic growth and development.