TAXES AND INCOME INEQUALITY IN NIGERIA: COINTEGRATION AND ERROR CORRECTION MECHANISMS EVIDENCE FROM 1980 – 2018

1Omesi, Israel (PhD) and 2Appah, Ebimobowei (FCA)

1 & 2Department of Accounting, Faculty f Business Studies, Ignatius Ajuru University of Education, Port Harcourt, Rivers State, Nigeria

2Corresponding Author: Appah, Ebimobowei (FCA)

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ABSTRACT

This study investigated the effects of taxes on income inequality in Nigeria for the period 1980 to 2018. The data for this research was obtained from the Central Bank of Nigeria, Federal Inland Revenue Service and National Bureau of Statistics. The data obtained were analysed using econometric methods such as augmented dickey fuller, cointegration and error correction mechanisms. The results revealed a significant negative relationship exists between personal income tax, company income tax and inequality; a negative but statistically insignificant relationship exist between value added tax and income inequality; a positive but statistically insignificant relationship exist between value added tax, government spending on education, government spending on health and income inequality. Hence the study concludes that taxes play a major role in income redistribution in Nigeria. The paper recommends amongst others that government should ensure compliance to tax payments because taxes provide a powerful policy tool effectively used for curing economic and social ills and should not to be set too high, as this would discourage investments and savings.  

 

Keywords: Taxes, Income Inequality, Gini Coefficient, Error Correction Model

 

INTRODUCTION

There has been increasing debate in the study of income inequality over recent years in developed and developing economies. Piketty (2014) and Chen, Lee and Tsai (2019) reported that the rising income inequality globally is one of the most significant challenges facing nations in the 21st century and interest in this topic has increased significantly since the 2008–2009 Global Recession. Atkinson and Piketty (2010) and Cano (2017) stated that the long-run history of income and wealth inequality in most developed countries has primarily examined the role of income taxes in reducing inequality. Awe and Rufus (2012), Ogbeide and Agu (2015) also noted that inequitable distribution of income and its impact on poverty and human development is one of the most debated topics in economic issues in sub-Saharan Africa, especially in Nigeria.  Bird and Zolt (2013) maintain that the role of taxes and its effectiveness to influence income inequality in developing economies is one of the most discussed issues in economics and public finance. Piketty (2014), Atkinson (2015) and Martorano (2016) were of the view that taxes is back at the centre of the policy and research agenda of several nations. This is because while both developed and developing economies strategically reduced tax rates, income inequality has increased during the last decades, generating global outrage. Some prominent economists have advocated that taxes are a more powerful solution to promote a more equal income distribution among nations (Piketty, 2014; Atkinson, 2015).  

 

Tax is a compulsory contribution made by the citizens of any given country to the state or even an alien, subject to the jurisdiction of the government, for reasons of residence or property and this contribution is for the provision of social amenities for the well-being of that given society (Appah & Zibaghafa 2018; Appah, 2019). Anyaduba and Otubugbu (2019) state that the major objective of taxes in any given society is to ensure that government uses the revenue derived for the facilitation of economic growth, economic stabilization, income redistribution, promoting fairness and equity, fiscal responsibility and accountability, as well as for the provision of national goods and services. Similarly, Maina (2017) noted that the major objective of taxes is to raise sufficient revenue to finance government expenditure that seeks to maximize social welfare that determines its redistribution ability.

 

Inequality is a circumstance where people have different levels of income. Oboh and Eromonsele (2018) noted that income inequality is basically concerned with the relative position of diverse individuals within the income distribution. Okatch, Siddique and Rammohan, (2013) similarly stated that it is a summary statistic of the difference of income among individuals. Also Oboh and Eromonsele (2018) noted that it is a way of comparing the gap in individuals incomes in a given society or country.  The nexus between taxes and income inequality in countries has been studied for a long time. Hanni, Martner-Fanta and Podesta (2015) are of the view that the vast majority of studies concluded that taxes have a modest effect on income distribution. According to Goñi, Lopez and Serven (2011), this is because of the neutrality of the taxes on the poor performance in collecting revenue. However, only few researches have tried to examine whether and how the recent tax changes have contributed to the recent decline of inequality in countries. Tsounta & Osueke (2014) revealed that higher tax revenue is related with more equality. Cornia, Gomez-Sabaini and Martorano (2011) provided that the greater reliance on taxes has significantly contributed to the reduction of inequality on average by 0.4–0.8 points. read more>>>

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