Tax Revenue and Economic Growth: An In-Depth Analysis of Nigeria's Fiscal Activities

Abstract

This study investigates the impact of a regime switch on the relationship between tax revenue and economic growth in Nigeria using time series data from 1981 to 2021. Employing statistical tests, including the CUSUM of Squares test and the Chow test, the study identifies a structural break in 1999 coinciding with the transition from military to civilian rule. In order to address this break, a dummy variable is introduced into the model, and its stability is assessed. Notably, stability is achieved only when the dummy variable is interacted with each regressor. Recognising the non-stationarity of the time series data, the study employs a breakpoint unit root test, revealing that all variables become stationary at order one. Contingent upon the co-integration among variables, the Fully Modified Least Squares (FMOLS) technique is applied. The result indicates a significant positive effect of tax revenue on economic growth. Additionally, the impacts of exchange rate, inflation rate, and interest rate on economic growth revealed mixed results. The diagnostic tests affirm the robustness of the model, with no evidence of autocorrelation in the residuals. Overall, the study contributes to the understanding of the dynamics between tax revenue and economic growth in Nigeria, emphasising the importance of accounting for structural breaks in time series modeling.