Effect of Value Added Tax and Capital Gains Tax on Economic Growth in Nigeria: Traditional Versus Buoyancy Approach

Olaniyi Taiwo Azeez, Bello Nurat, Funmilayo,Yunus Bolaji AbdulRasheed

Abstract

This paper evaluates the effect of Value Added Tax (VAT) and Capital Gains Tax (CGT) on
economic growth in Nigeria using both the traditional method of raw data analysis and a more
robust buoyancy method of measuring performance of tax systems. Secondary data used relating
to main variables (VAT, CGT) and control variables Company Income Tax (CIT) and Petroleum
Profit Tax (PPT) covering 1994-2014 were obtained from reports of Federal Inland Revenue
Service (FIRS) and Central Bank of Nigeria (CBN) and these data were analysed using Ordinary
Least Square regression analysis with robust standard error. The result of the study at 5%
significant level using traditional method reveals positive significant effect of PPT and CIT on
Nigeria’s Economic growth (p-values = 0.0000, 0.0000), while VAT is also significant at 5%
(p=0.0002). However, CGT was insignificant (p=0.220). Contrarily, the buoyancy approach
reveals mixed and oscillating performance of VAT and CGT on an annual basis but such
performance were satisfactory in 13 years out of the 20 years covered (tax buoyancy ≥1). The
study concludes that the use of buoyancy approach in evaluating the performance of tax systems
is preferred to the traditional method for policy direction and is recommended to be used in
conjunction with the traditional approach. More so, VAT and CGT should be adequately
exploited as alternative revenue sources to support the dwindling oil revenue to sustain
economic growth vision of Nigeria government.