ASSESSMENT OF NIGERIA TAX SYSTEM AND ITS EFFECT ON THE PUBLIC SECTOR

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

The tax system is the set of laws, regulations, policies, institutions, and administrative procedures through which a government levies and collects taxes from individuals and businesses within its jurisdiction. A tax system comprises various types of taxes: direct taxes (personal income tax, company income tax, capital gains tax) and indirect taxes (value-added tax, customs and excise duties, stamp duties). The tax system is the primary mechanism for mobilizing domestic revenue to finance public expenditure. Without an effective tax system, governments cannot provide essential public services (education, health, infrastructure, security), redistribute income, or stabilize the economy (Musgrave and Musgrave, 2017). (Musgrave and Musgrave, 2017)

The Nigerian tax system has evolved significantly over time. Prior to independence (1960), the tax system was fragmented, with different regions operating different tax regimes. The 1960s and 1970s saw the harmonization of tax laws and the establishment of federal tax authorities. The 1980s and 1990s witnessed the introduction of value-added tax (VAT) in 1993 (replacing sales tax), the establishment of the Federal Inland Revenue Service (FIRS) in 1990, and various tax reforms. The 2000s and 2010s saw the introduction of the National Tax Policy (2012), the Finance Acts (2019, 2020, 2021), and the adoption of technology for tax administration (e-tax, TIN, VAT automation). The tax system continues to evolve (FIRS, 2022). (FIRS, 2022)

The types of taxes in Nigeria include (FIRS, 2022). (FIRS, 2022)

Personal Income Tax (PIT): Levied on the income of individuals (employees, self-employed, professionals). Administered by states (Pay-As-You-Earn for employees) and FIRS (for non-employees, e.g., business income). PIT is a direct tax.

Company Income Tax (CIT): Levied on the profits of companies registered in Nigeria. Administered by FIRS. CIT rate is 30% for large companies, 20% for medium companies, and 0% for small companies (under the Finance Act, thresholds apply).

Value-Added Tax (VAT): Levied on the supply of goods and services. VAT is an indirect tax (collected by businesses, borne by consumers). VAT rate increased from 5% to 7.5% in 2021. VAT revenue is shared: Federal 15%, States 50%, Local Governments 35%.

Customs and Excise Duties: Import duties (levied on imported goods) and excise duties (levied on domestically produced goods such as alcohol, tobacco, sugary beverages). Administered by Nigeria Customs Service (NCS).

Capital Gains Tax (CGT): Levied on gains from the sale of assets (property, shares). Rate is 10%. Administered by FIRS.

Stamp Duties: Levied on legal documents (contracts, agreements, receipts). Administered by FIRS.

Petroleum Profits Tax (PPT): Levied on profits from petroleum operations. Administered by FIRS. PPT is being phased out under the Petroleum Industry Act (PIA) 2021.

The public sector in Nigeria comprises three tiers of government: federal government (1), state governments (36), and local governments (774), as well as government ministries, departments, and agencies (MDAs), parastatals (state-owned enterprises), and social services (education, health, infrastructure). The public sector relies on tax revenues to fund its operations and deliver services to citizens. In 2023, total government revenue (federal, state, local) was approximately ₦15 trillion, of which tax revenue accounted for approximately 60% (oil and non-oil taxes). The remainder came from non-tax revenue (dividends, fees, grants, loans) (BudgIT, 2023). (BudgIT, 2023)

The objectives of a tax system are well-established in public finance literature (Musgrave and Musgrave, 2017). (Musgrave and Musgrave, 2017)

Revenue Generation: The primary objective is to raise revenue to finance public expenditure. Without revenue, the government cannot function.

Economic Growth: The tax system should promote economic growth by encouraging investment, savings, and entrepreneurship. Low tax rates, incentives (tax holidays, allowances), and simplified compliance encourage growth.

Income Redistribution: The tax system can reduce income inequality by taxing the rich more (progressive taxes) and using revenues for social spending (transfers to the poor).

Price Stability: Tax policy can be used to control inflation (increase taxes to reduce demand) or stimulate demand (reduce taxes).

Balance of Payments: Tariffs (import duties) can reduce imports, improving the balance of payments.

Tax harmonization: Within a federation (like Nigeria), taxes should be harmonized across states to avoid double taxation and tax competition.

The performance of the Nigerian tax system can be assessed using several indicators (World Bank, 2020). (World Bank, 2020)

Tax-to-GDP Ratio: Total tax revenue divided by Gross Domestic Product (GDP). Nigeria’s tax-to-GDP ratio is 6-8%, one of the lowest in the world (compared to Sub-Saharan Africa average of 15-18%, OECD average of 34%). Low tax-to-GDP ratio indicates low tax collection relative to the size of the economy.

Tax Buoyancy: The responsiveness of tax revenue to changes in GDP. A buoyancy >1 indicates that tax revenue grows faster than GDP. Nigeria’s tax buoyancy is low (<1), indicating weak tax administration.

Compliance Rate: The percentage of taxes due that are actually collected. Nigeria’s compliance rate is estimated at 50-60% (meaning 40-50% of taxes due are not collected). Causes: tax evasion, avoidance, weak enforcement.

Tax Gap: The difference between taxes due and taxes collected. Nigeria’s tax gap is estimated at ₦5-10 trillion annually (BudgIT, 2023).

Administrative Efficiency: The cost of collection as a percentage of revenue collected. Nigeria’s cost of collection is high (5-10% vs. 1-2% in developed economies). Causes: manual processes, corruption, lack of automation.

The challenges facing the Nigerian tax system are numerous (FIRS, 2022; BudgIT, 2023). (BudgIT, 2023; FIRS, 2022)

Low Tax-to-GDP Ratio: Nigeria’s tax-to-GDP ratio (6-8%) is among the lowest in the world. This limits the government’s ability to finance public expenditure without borrowing.

Heavy Reliance on Oil Revenue: Historically, Nigeria relied heavily on oil revenue (80% of government revenue in the 1970s-2000s). Oil price volatility causes boom-bust cycles. Non-oil tax revenue (especially VAT and CIT) has increased but remains insufficient.

Tax Evasion and Avoidance: Many businesses and individuals evade taxes (not registering, not filing, under-reporting income). Large companies engage in tax avoidance (transfer pricing, profit shifting). The tax gap is estimated at ₦5-10 trillion annually.

Weak Tax Administration: The tax authorities (FIRS, State IRS) are understaffed, underfunded, and lack technology. Manual processes, corruption, and lack of taxpayer education reduce compliance.

Multiple Taxation and Double Taxation: Businesses complain of multiple taxes (federal, state, local) and double taxation (same income taxed by multiple authorities). This increases the cost of doing business and encourages tax evasion.

Complexity: The tax system is complex (multiple taxes, different rates, different filing requirements, different deadlines). Complexity reduces compliance (taxpayers cannot understand their obligations).

Low Taxpayer Education: Many citizens and small business owners do not understand their tax obligations (registration, filing, payment). Taxpayer education is inadequate.

Corruption: Tax officials may demand bribes (under-assessment, delayed refunds). Taxpayers may bribe officials to evade taxes. Corruption reduces revenue and erodes trust.

The effect of the tax system on the public sector is profound. When the tax system performs well (high compliance, efficient administration, adequate revenue), the public sector can: (1) finance public services (education, health, infrastructure); (2) pay salaries and pensions; (3) service debt; (4) invest in capital projects; and (5) respond to emergencies (pandemics, natural disasters). When the tax system performs poorly (low compliance, weak administration, revenue shortfalls), the public sector faces: (1) budget deficits (expenditure exceeds revenue); (2) borrowing (increased debt); (3) expenditure cuts (reduced services); (4) delayed salaries; and (5) reliance on oil revenue volatility (World Bank, 2020). (World Bank, 2020)

The COVID-19 pandemic (2020-2021) had a significant impact on tax revenue and the public sector. Lockdowns reduced economic activity, reducing VAT, CIT, and PIT collections. Oil price crashed, reducing oil revenue. Tax revenue shortfalls forced governments to borrow (domestic and external) and cut expenditure (infrastructure projects postponed). The pandemic highlighted the need for a resilient tax system (Ogunyemi and Adewale, 2021). (Ogunyemi and Adewale, 2021)

The Nigerian government has implemented tax reforms to improve the tax system. The National Tax Policy (2012) (revised 2017) provides a framework for tax administration. The Finance Acts (2019, 2020, 2021) introduced changes: VAT rate increase (5% to 7.5%), CIT rate reduction (30% to 20% for medium companies), tax incentives for startups, digital services tax, and increased penalties for non-compliance. The FIRS Digital Transformation (e-tax, TIN, VAT automation) aims to improve compliance. The Joint Tax Board (JTB) coordinates tax administration across federal and state authorities (FIRS, 2022). (FIRS, 2022)

Several theories explain the relationship between the tax system and the public sector. Optimal tax theory (Ramsey, 1927; Mirrlees, 1971) suggests that taxes should be designed to raise revenue with minimal economic distortion. Tax incidence theory (Musgrave and Musgrave, 2017) examines who bears the burden of taxes (consumers vs. producers). Tax compliance theory (Allingham and Sandmo, 1972) examines why taxpayers comply (or evade) taxes: deterrence (probability of detection and punishment) and social norms. Tax administration theory (Bird, 2004) examines how tax authorities can improve compliance through simplification, automation, and taxpayer services. (Allingham and Sandmo, 1972; Bird, 2004; Mirrlees, 1971; Musgrave and Musgrave, 2017; Ramsey, 1927)

1.2 Statement of the Problem

Despite the existence of a legal framework for taxation (Constitution, Companies Income Tax Act, Personal Income Tax Act, Value Added Tax Act, Customs and Excise Tariff Act, Finance Acts, National Tax Policy) and the presence of tax authorities (FIRS, State IRS, NCS, JTB), the Nigerian tax system faces significant challenges that limit its effectiveness and affect the public sector. This problem manifests in several specific issues.

First, the tax-to-GDP ratio is persistently low. Nigeria’s tax-to-GDP ratio (6-8%) is among the lowest in the world, far below the Sub-Saharan Africa average (15-18%) and the OECD average (34%). This means that the government collects far less revenue than it could, given the size of the economy. Low tax revenue limits the government’s ability to finance public services, invest in infrastructure, and respond to emergencies (World Bank, 2020). (World Bank, 2020)

Second, the tax gap (taxes due minus taxes collected) is huge. Estimates suggest that Nigeria loses ₦5-10 trillion annually to tax evasion and avoidance. Businesses under-report income, individuals fail to file returns, and large companies engage in transfer pricing (profit shifting). The tax gap represents lost revenue that could have been used for education, health, and infrastructure (BudgIT, 2023). (BudgIT, 2023)

Third, heavy reliance on oil revenue creates volatility. Historically, Nigeria relied heavily on oil revenue (80% of government revenue). Oil price volatility (e.g., 2014-2016 crash, 2020 COVID-19 crash) causes boom-bust cycles. When oil prices fall, tax revenue (non-oil) cannot compensate, leading to budget deficits, borrowing, and expenditure cuts. Non-oil tax revenue has increased but remains insufficient (FIRS, 2022). (FIRS, 2022)

Fourth, tax compliance is low. The compliance rate is estimated at 50-60% (meaning 40-50% of taxes due are not collected). Causes: (1) weak enforcement (low probability of detection and punishment); (2) corruption (bribes to evade); (3) complexity (taxpayers cannot understand their obligations); (4) low taxpayer education; and (5) multiple taxation (federal, state, local). Low compliance reduces revenue (BudgIT, 2023). (BudgIT, 2023)

Fifth, tax administration is weak. The tax authorities (FIRS, State IRS) are understaffed, underfunded, and lack technology. Many processes are manual (paper-based), leading to delays, errors, and corruption. The cost of collection is high (5-10% of revenue). FIRS digital transformation (e-tax, TIN, VAT automation) has improved but remains incomplete (FIRS, 2022). (FIRS, 2022)

Sixth, multiple taxation and double taxation burden businesses. Businesses complain of multiple taxes: federal taxes (CIT, VAT, CGT, stamp duties), state taxes (PIT, road taxes, levies), and local government taxes (rates, levies). Double taxation occurs when the same income is taxed by multiple authorities (e.g., state PIT and federal CIT on business income). Multiple taxes increase the cost of doing business, discourage formalization, and encourage tax evasion (BudgIT, 2023). (BudgIT, 2023)

Seventh, tax incentives and exemptions erode the tax base. The government grants tax incentives (pioneer status, tax holidays, allowances) to attract investment. However, excessive and poorly targeted incentives erode the tax base, reducing revenue. The cost of tax incentives (foregone revenue) is estimated at ₦1-2 trillion annually. The government has introduced minimum tax provisions to limit abuse, but incentives remain generous (FIRS, 2022). (FIRS, 2022)

Eighth, corruption in tax administration reduces revenue. Tax officials may demand bribes to under-assess taxes, delay refunds, or ignore non-compliance. Taxpayers may bribe officials to evade taxes. Corruption reduces revenue, distorts competition (compliant businesses are disadvantaged), and erodes trust. The Fiscal Responsibility Commission (FRC) and ICPC have investigated tax officials, but corruption persists (BudgIT, 2023). (BudgIT, 2023)

Ninth, the effect of the tax system on the public sector is poorly understood. While tax revenue is essential for the public sector, the specific effects of tax system weaknesses (low tax-to-GDP ratio, tax gap, low compliance, weak administration) on public sector outcomes (service delivery, infrastructure, salaries, debt) have not been systematically documented. How much additional revenue could be collected if compliance improved? How would additional revenue affect public services? This study addresses these questions (Okoye, Okafor, and Nnamdi, 2020). (Okoye et al., 2020)

Tenth, there is a significant gap in the empirical literature on the assessment of Nigeria’s tax system and its effect on the public sector. Most studies focus on tax policy (rates, incentives) or tax administration (FIRS). Few studies examine the relationship between tax system performance and public sector outcomes. Few studies use rigorous empirical methods (regression analysis, time-series) to estimate the tax gap and revenue potential. Few studies assess the effect of tax reforms (Finance Acts, digital transformation) on revenue and the public sector. This study addresses these gaps (Okoye et al., 2020). (Okoye et al., 2020)

Therefore, the central problem this study seeks to address can be stated as: Despite the existence of a legal framework and tax authorities, the Nigerian tax system faces significant challenges: low tax-to-GDP ratio, huge tax gap, heavy reliance on oil revenue, low compliance, weak administration, multiple taxation, excessive incentives, corruption, and limited understanding of the effect on the public sector. The relationship between tax system performance and public sector outcomes has not been systematically documented. This study addresses this gap by assessing Nigeria’s tax system and its effect on the public sector.

1.3 Aim of the Study

The aim of this study is to critically assess Nigeria’s tax system and its effect on the public sector, with a view to evaluating tax system performance (tax-to-GDP ratio, tax gap, compliance, administration, multiple taxation, incentives, corruption), determining the effect of tax revenue on public sector outcomes (service delivery, infrastructure, salaries, debt), and proposing evidence-based recommendations for tax reform.

1.4 Objectives of the Study

The specific objectives of this study are to:

1. Assess the performance of Nigeria’s tax system on key indicators: tax-to-GDP ratio, tax buoyancy, compliance rate, tax gap, administrative efficiency (cost of collection), and revenue composition (oil vs. non-oil).
2. Identify the challenges facing Nigeria’s tax system: low compliance, weak administration, multiple taxation, double taxation, excessive incentives, corruption, and complexity.
3. Estimate the tax gap (taxes due minus taxes collected) for major taxes: CIT, PIT, VAT, and customs duties.
4. Estimate the potential revenue gain from tax reforms (improved compliance, closing incentives, digitalization).
5. Examine the relationship between tax revenue and public sector outcomes: federal, state, and local government revenue; public expenditure (recurrent, capital); service delivery (education, health, infrastructure); government borrowing; and debt service.
6. Assess the impact of tax reforms (Finance Acts 2019-2021, FIRS digital transformation) on tax revenue and compliance.
7. Assess the impact of the COVID-19 pandemic on tax revenue and the public sector.
8. Propose evidence-based recommendations for tax reform to increase revenue and improve public sector outcomes.

1.5 Research Questions

The following research questions guide this study:

1. What is the performance of Nigeria’s tax system on key indicators: tax-to-GDP ratio, tax buoyancy, compliance rate, tax gap, cost of collection, and revenue composition?
2. What are the challenges facing Nigeria’s tax system: low compliance, weak administration, multiple taxation, double taxation, excessive incentives, corruption, and complexity?
3. What is the tax gap (taxes due minus taxes collected) for major taxes (CIT, PIT, VAT, customs duties)?
4. What is the potential revenue gain from tax reforms (improved compliance, closing incentives, digitalization)?
5. What is the relationship between tax revenue and public sector outcomes (federal, state, local revenue; public expenditure; service delivery; borrowing; debt service)?
6. What is the impact of tax reforms (Finance Acts 2019-2021, FIRS digital transformation) on tax revenue and compliance?
7. What is the impact of the COVID-19 pandemic on tax revenue and the public sector?
8. What recommendations can be proposed for tax reform?

1.6 Research Hypotheses

Based on the research objectives and questions, the following hypotheses are formulated. Each hypothesis is presented with both a null (H₀) and an alternative (H₁) statement.

Hypothesis One (Tax-to-GDP Ratio)

• H₀₁: Nigeria’s tax-to-GDP ratio (6-8%) is not significantly different from the Sub-Saharan Africa average (15-18%).
• H₁₁: Nigeria’s tax-to-GDP ratio is significantly lower than the Sub-Saharan Africa average.

Hypothesis Two (Tax Compliance)

• H₀₂: The tax compliance rate (50-60%) is not significantly different from the target rate (80%).
• H₁₂: The tax compliance rate is significantly lower than the target rate.

Hypothesis Three (Tax Gap)

• H₀₃: There is no significant tax gap (taxes due are equal to taxes collected).
• H₁₃: There is a significant positive tax gap (taxes due exceed taxes collected).

Hypothesis Four (Tax Revenue and Public Expenditure)

• H₀₄: There is no significant relationship between tax revenue (federal) and public expenditure (capital).
• H₁₄: There is a significant positive relationship between tax revenue and public expenditure.

Hypothesis Five (Tax Revenue and Service Delivery)

• H₀₅: There is no significant relationship between tax revenue (state) and service delivery (education, health outcomes).
• H₁₅: There is a significant positive relationship between tax revenue and service delivery.

Hypothesis Six (Tax Revenue and Borrowing)

• H₀₆: There is no significant relationship between tax revenue shortfall (budget deficit) and government borrowing.
• H₁₆: There is a significant negative relationship between tax revenue and borrowing (higher revenue, lower borrowing).

Hypothesis Seven (Tax Reforms Impact)

• H₀₇: The Finance Acts (2019-2021) had no significant effect on VAT revenue.
• H₁₇: The Finance Acts (2019-2021) had a significant positive effect on VAT revenue (VAT rate increase from 5% to 7.5% increased revenue).

Hypothesis Eight (COVID-19 Impact)

• H₀₈: The COVID-19 pandemic had no significant effect on tax revenue (federal, state).
• H₁₈: The COVID-19 pandemic had a significant negative effect on tax revenue.

1.7 Significance of the Study

This study holds significance for multiple stakeholders as follows:

For the Federal Inland Revenue Service (FIRS) and State Internal Revenue Services:
The study provides empirical evidence on tax system performance (tax-to-GDP ratio, tax gap, compliance, administration) and identifies priority areas for improvement. Tax authorities can use this evidence to: (1) strengthen enforcement (audit, penalties); (2) simplify filing and payment (digitalization); (3) improve taxpayer education; (4) reduce multiple taxation (coordination with states); (5) review tax incentives; and (6) combat corruption.

For the Ministry of Finance and National Planning Commission:
The Ministry of Finance sets tax policy and manages public expenditure. The study provides evidence on the relationship between tax revenue and public sector outcomes. The Ministry can use this evidence to: (1) design tax reforms to increase revenue; (2) allocate revenue to priority sectors (education, health, infrastructure); (3) reduce borrowing (debt); and (4) improve budget planning.

For the National Assembly (Senate and House of Representatives):
The legislature has the power to make tax laws (Finance Acts). The study provides evidence on the effectiveness of past tax reforms (Finance Acts 2019-2021) and identifies areas for future reform. The National Assembly can use this evidence to: (1) amend tax laws (rates, thresholds, incentives); (2) strengthen oversight of tax authorities; and (3) hold the executive accountable for tax revenue and expenditure.

For State Governments and Local Governments:
State and local governments depend on tax revenue (VAT, PIT, levies) for their budgets. The study provides evidence on the effect of tax revenue on state and local government outcomes (service delivery, salaries, infrastructure). State and local governments can use this evidence to: (1) improve state-level tax administration; (2) harmonize taxes to reduce multiple taxation; and (3) advocate for increased VAT sharing.

For the Joint Tax Board (JTB):
The JTB coordinates tax administration across federal and state authorities. The study provides evidence on multiple taxation and double taxation issues. The JTB can use this evidence to: (1) harmonize tax policies across states; (2) resolve double taxation disputes; and (3) simplify tax compliance for businesses operating in multiple states.

For Civil Society Organizations (BudgIT, Enough is Enough, TI-Nigeria, ActionAid):
CSOs advocate for tax justice, transparency, and accountability. The study provides evidence on tax system weaknesses (low tax-to-GDP ratio, tax gap, corruption) that CSOs can use in advocacy campaigns (e.g., “close the tax gap,” “stop corruption in tax administration”). The study also provides evidence on the relationship between tax revenue and public services, which CSOs can use to demand better service delivery.

For International Development Partners (IMF, World Bank, DFID, EU):
Development partners support tax reform in Nigeria (technical assistance, loans). The study provides evidence on the effectiveness of past reforms and identifies remaining gaps. Development partners can use this evidence to design future programs, focusing on the most critical weaknesses (digitalization, enforcement, anti-corruption, tax incentives).

For Academics and Researchers:
This study contributes to the literature on tax systems and public finance in several ways. First, it provides comprehensive assessment of Nigeria’s tax system (performance, challenges, tax gap). Second, it examines the relationship between tax revenue and public sector outcomes. Third, it uses rigorous empirical methods (time-series analysis, tax gap estimation). The study provides a foundation for future research in other African countries and emerging markets.

For the Nigerian Citizen and Taxpayer:
Citizens pay taxes and deserve to know how their money is used. The study provides evidence on the relationship between tax revenue and public services (education, health, infrastructure). Citizens can use this evidence to demand accountability from government and to hold elected officials responsible for tax reform and service delivery.

For the Nigerian Economy:
A well-functioning tax system is essential for economic development. Adequate tax revenue enables the government to invest in infrastructure, education, health, and security, which promotes economic growth. By identifying how to improve the tax system (increase revenue, reduce evasion, simplify compliance), this study contributes to economic development.

1.8 Scope of the Study

The scope of this study is defined by the following parameters:

Content Scope: The study focuses on the assessment of Nigeria’s tax system and its effect on the public sector. Specifically, it examines: (1) tax system performance (tax-to-GDP ratio, tax buoyancy, compliance rate, tax gap, cost of collection, revenue composition); (2) tax system challenges (low compliance, weak administration, multiple taxation, double taxation, excessive incentives, corruption, complexity); (3) tax gap estimation (CIT, PIT, VAT, customs duties); (4) tax reforms (Finance Acts 2019-2021, FIRS digital transformation); (5) COVID-19 impact; (6) public sector outcomes (federal, state, local revenue; public expenditure; service delivery; borrowing; debt service). The study does not examine individual tax compliance behavior (survey of taxpayers) or detailed tax expenditure analysis (cost of each incentive).

Geographic Scope: The study covers Nigeria (federal level). For state-level analysis, the study includes selected states (Lagos, Kano, Rivers, Enugu, representing geopolitical zones). For local government analysis, the study includes selected LGAs. Findings may be generalizable to other African countries with similar tax systems, but caution is warranted.

Time Scope: The study covers a 20-year period from 2003 to 2022. This period encompasses: (1) pre-Finance Act period (2003-2018); (2) Finance Acts (2019-2021); (3) COVID-19 pandemic (2020-2021); and (4) post-pandemic recovery (2022). This long period enables analysis of trends, the impact of reforms, and the impact of COVID-19.

Data Sources: The study uses multiple data sources: (1) tax revenue data (FIRS annual reports, CBN statistical bulletin); (2) GDP data (National Bureau of Statistics); (3) public expenditure data (Budget Office, Ministry of Finance, CBN); (4) audit reports (Auditor-General); (5) tax gap studies (IMF, World Bank, FIRS); (6) surveys of tax officials and taxpayers; and (7) interviews with key informants (FIRS, Ministry of Finance, State IRS).

Theoretical Scope: The study is grounded in optimal tax theory, tax incidence theory, tax compliance theory, and tax administration theory. These theories provide the conceptual lens for understanding the relationship between the tax system and the public sector.

1.9 Definition of Terms

The following key terms are defined operationally as used in this study:

Term	Definition
Tax System	The set of laws, regulations, policies, institutions, and administrative procedures through which a government levies and collects taxes from individuals and businesses.
Tax-to-GDP Ratio	Total tax revenue divided by Gross Domestic Product (GDP). Measures the size of tax revenue relative to the economy.
Tax Gap	The difference between taxes due (statutory liability) and taxes collected. Represents revenue lost to evasion and avoidance.
Tax Buoyancy	The responsiveness of tax revenue to changes in GDP. A buoyancy >1 indicates that tax revenue grows faster than GDP.
Compliance Rate	The percentage of taxes due that are actually collected. Compliance rate = (Tax collected / Tax due) × 100.
Cost of Collection	The cost of tax administration (salaries, technology, operations) as a percentage of tax revenue collected.
Direct Tax	A tax levied directly on income or wealth (Personal Income Tax, Company Income Tax, Capital Gains Tax).
Indirect Tax	A tax levied on goods and services (Value Added Tax, Customs and Excise Duties). The burden is borne by consumers.
Tax Evasion	Illegal non-payment of taxes (e.g., not registering, not filing, under-reporting income).
Tax Avoidance	Legal reduction of tax liability through tax planning, incentives, or loopholes.
Transfer Pricing	Manipulation of prices in transactions between related companies (e.g., subsidiaries) to shift profits to low-tax jurisdictions.
Tax Incentive	A tax reduction or exemption granted to encourage investment (e.g., pioneer status, tax holiday).
Multiple Taxation	The imposition of multiple taxes on the same taxpayer or same transaction by different levels of government (federal, state, local).
Double Taxation	The same income being taxed by two different tax authorities (e.g., state PIT and federal CIT on business income).
FIRS	Federal Inland Revenue Service. The federal agency responsible for collecting federal taxes (CIT, VAT, PIT for non-employees, CGT, stamp duties).
State IRS	State Internal Revenue Service. The state agency responsible for collecting state taxes (PIT for employees, road taxes, levies).
VAT	Value Added Tax. An indirect tax levied on the supply of goods and services. Rate is 7.5% (since 2021).
CIT	Company Income Tax. A direct tax levied on the profits of companies. Rate is 30% (large), 20% (medium), 0% (small).
PIT	Personal Income Tax. A direct tax levied on the income of individuals. Administered by states (PAYE) and FIRS (non-employees).

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

This chapter presents a comprehensive review of literature relevant to the assessment of Nigeria’s tax system and its effect on the public sector. The review is organized into five main sections. First, the conceptual framework section defines and explains the key constructs: tax system, tax types, tax-to-GDP ratio, tax gap, tax compliance, tax administration, public sector, and public expenditure. Second, the theoretical framework section examines the theories that underpin the relationship between the tax system and the public sector, including optimal tax theory, tax incidence theory, tax compliance theory, and tax administration theory. Third, the empirical review section synthesizes findings from previous studies on tax system performance globally and in Nigeria. Fourth, the regulatory framework section examines the Nigerian context, including the National Tax Policy, Finance Acts, and tax administration reforms. Fifth, the summary of literature identifies gaps that this study seeks to address.

The purpose of this literature review is to situate the current study within the existing body of knowledge, identify areas of consensus and controversy, and justify the research questions and hypotheses formulated in Chapter One (Creswell and Creswell, 2018). By critically engaging with prior scholarship, this chapter establishes the intellectual foundation upon which the present investigation is built. (Creswell and Creswell, 2018)

2.2 Conceptual Framework

2.2.1 The Concept of a Tax System

A tax system is the set of laws, regulations, policies, institutions, and administrative procedures through which a government levies and collects taxes from individuals and businesses within its jurisdiction. A tax system comprises various types of taxes, each with its own tax base, tax rate structure, and collection mechanism. The primary objectives of a tax system are revenue generation, economic growth, income redistribution, price stability, and balance of payments management (Musgrave and Musgrave, 2017). (Musgrave and Musgrave, 2017)

The key components of a tax system include (Musgrave and Musgrave, 2017). (Musgrave and Musgrave, 2017)

Tax Policy: The rules and principles governing which activities are taxed, at what rates, and with what exemptions or incentives.

Tax Laws: The legal statutes (Acts, regulations) that specify tax obligations, penalties for non-compliance, and taxpayer rights.

Tax Administration: The institutions (FIRS, State IRS, NCS), processes, and systems for registering taxpayers, filing returns, collecting payments, auditing compliance, and enforcing penalties.

Taxpayer Base: The set of individuals and businesses that are legally obligated to pay taxes.

Tax Compliance: The degree to which taxpayers meet their legal obligations (registering, filing, paying on time).

The Nigerian tax system includes the following types of taxes (FIRS, 2022). (FIRS, 2022)

Direct Taxes: Personal Income Tax (PIT), Company Income Tax (CIT), Capital Gains Tax (CGT), Petroleum Profits Tax (PPT), Tertiary Education Tax (TET).

Indirect Taxes: Value Added Tax (VAT), Customs and Excise Duties, Stamp Duties.

Other Taxes: Withholding Tax (WHT), Stamp Duties, Capital Transfer Tax, etc.

2.2.2 Tax-to-GDP Ratio

The tax-to-GDP ratio is total tax revenue divided by Gross Domestic Product (GDP). It measures the size of tax revenue relative to the size of the economy. A higher tax-to-GDP ratio indicates that the government collects more revenue relative to the economy’s output, enabling more public spending. A lower ratio indicates that the government collects less revenue, limiting public spending (IMF, 2018). (IMF, 2018)

The tax-to-GDP ratio varies significantly across countries. In developed economies (OECD), the average tax-to-GDP ratio is approximately 34%. In Sub-Saharan Africa, the average is 15-18%. Nigeria’s tax-to-GDP ratio is 6-8%, one of the lowest in the world. The low ratio indicates that Nigeria has significant untapped tax potential (World Bank, 2020). (World Bank, 2020)

Factors affecting the tax-to-GDP ratio include (IMF, 2018). (IMF, 2018)

Economic Structure: Countries with large informal sectors (unregistered businesses) have lower tax-to-GDP ratios because informal businesses evade taxes. Nigeria’s informal sector is estimated at 50-60% of GDP.

Tax Rates: Higher tax rates may increase revenue, but may also increase evasion and reduce economic activity (Laffer curve effect).

Tax Administration: Weak tax administration (low enforcement, manual processes, corruption) reduces compliance and revenue.

Tax Incentives: Excessive tax exemptions and incentives reduce the tax base and revenue.

Tax Morale: Taxpayers’ intrinsic motivation to pay taxes (trust in government, social norms) affects compliance.

2.2.3 Tax Gap

The tax gap is the difference between taxes due (statutory liability) and taxes collected. The tax gap represents revenue lost to tax evasion (illegal non-payment) and tax avoidance (legal reduction of tax liability). The tax gap can be disaggregated by tax type (CIT, PIT, VAT, customs) and by component (non-filing, under-reporting, under-payment) (IMF, 2018). (IMF, 2018)

The tax gap is estimated using various methods (IMF, 2018). (IMF, 2018)

Top-Down Method: Compare aggregate tax revenue to aggregate tax base (GDP, consumption, income). The difference between potential revenue (base × rate) and actual revenue is the tax gap.

Bottom-Up Method: Use audit data to estimate the average under-reporting per taxpayer, then extrapolate to the population.

Taxpayer Surveys: Survey taxpayers about their compliance behavior (self-reported evasion).

In Nigeria, the tax gap is estimated at ₦5-10 trillion annually (BudgIT, 2023). The largest gaps are in CIT (transfer pricing, under-reporting), PIT (non-filing), and VAT (non-registration, under-reporting). (BudgIT, 2023)

2.2.4 Tax Compliance

Tax compliance is the degree to which taxpayers meet their legal obligations: registering for taxes, filing returns, reporting income accurately, paying taxes on time, and providing accurate information to tax authorities. Tax compliance is affected by deterrence (probability of detection and punishment), tax morale (intrinsic motivation), and administrative burden (complexity) (Allingham and Sandmo, 1972). (Allingham and Sandmo, 1972)

The standard model of tax compliance (Allingham and Sandmo, 1972) predicts that taxpayers comply if the expected cost of evasion (probability of detection × penalty) exceeds the benefit (tax saved). Therefore, tax authorities can increase compliance by: (1) increasing audit probability; (2) increasing penalties; and (3) simplifying tax filing (reducing administrative burden). (Allingham and Sandmo, 1972)

In Nigeria, tax compliance is low (estimated 50-60%). Causes include (BudgIT, 2023). (BudgIT, 2023)

• Low probability of detection (weak enforcement)
• Low penalties (low cost of evasion)
• Complexity (multiple taxes, different rates, different deadlines)
• Low taxpayer education (many taxpayers do not understand their obligations)
• Corruption (bribes to evade)
• Low trust in government (taxpayers believe funds will be wasted)

2.2.5 Tax Administration

Tax administration refers to the institutional processes and systems for registering taxpayers, collecting tax returns, processing payments, auditing compliance, enforcing penalties, and providing taxpayer services. Effective tax administration is essential for achieving high compliance and revenue collection (Bird, 2004). (Bird, 2004)

Key principles of effective tax administration include (Bird, 2004). (Bird, 2004)

Simplification: Simple tax laws, forms, and processes reduce compliance costs and increase compliance.

Digitalization: Electronic filing (e-filing) and payment (e-payment) reduce errors, delays, and corruption. Nigeria has implemented e-tax, TIN, and VAT automation.

Risk Management: Tax authorities should focus audit resources on high-risk taxpayers (large businesses, high-net-worth individuals) rather than low-risk taxpayers (small businesses, employees).

Taxpayer Services: Providing assistance (help desks, call centers, online resources) helps taxpayers comply.

Enforcement: Audits, penalties, and prosecution deter evasion.

Anti-Corruption: Integrity measures (rotation of auditors, whistleblower hotlines, digital records) reduce corruption.

In Nigeria, tax administration is fragmented: FIRS (federal taxes), State IRS (state taxes), NCS (customs), and JTB (coordination). Challenges include underfunding, understaffing, manual processes, corruption, and lack of coordination (FIRS, 2022). (FIRS, 2022)

2.2.6 The Public Sector

The public sector is the part of the economy controlled by the government. It includes all government entities (federal, state, local), ministries, departments, agencies (MDAs), parastatals (state-owned enterprises), and social services (education, health, infrastructure). The public sector is financed primarily by tax revenue (and non-tax revenue: dividends, fees, grants, loans). The size of the public sector is measured by government expenditure as a percentage of GDP. In Nigeria, government expenditure (federal, state, local) is approximately 15-20% of GDP (World Bank, 2020). (World Bank, 2020)

The public sector performs several functions (Musgrave and Musgrave, 2017). (Musgrave and Musgrave, 2017)

Allocation: Provides public goods (defense, roads, street lighting) and merit goods (education, health) that the private sector under-provides.

Distribution: Redistributes income through progressive taxation and social spending (transfers, subsidies).

Stabilization: Manages aggregate demand to promote economic stability (counter-cyclical fiscal policy).

Regulation: Enforces laws, regulations, and standards (environmental, safety, consumer protection).

Tax revenue affects the public sector in several ways (World Bank, 2020). (World Bank, 2020)

Higher tax revenue → Higher public expenditure: More revenue enables more spending on education, health, infrastructure, security, and social protection.

Higher tax revenue → Lower borrowing: More revenue reduces the need for borrowing, reducing debt and debt service costs.

Higher tax revenue → Fiscal stability: More revenue reduces budget deficits, improves credit ratings, and attracts investment.

Lower tax revenue → Expenditure cuts: Revenue shortfalls force governments to cut expenditure (postponing infrastructure projects, reducing transfers).

Lower tax revenue → Increased borrowing: Revenue shortfalls increase borrowing, increasing debt and debt service costs.

2.3 Theoretical Framework

This section presents the theories that provide the conceptual lens for understanding the relationship between the tax system and the public sector. Four theories are discussed: optimal tax theory, tax incidence theory, tax compliance theory, and tax administration theory.

2.3.1 Optimal Tax Theory

Optimal tax theory, developed by Ramsey (1927) and extended by Mirrlees (1971), addresses the question: how should a government design a tax system to raise a given amount of revenue with minimal economic distortion (deadweight loss)? The theory has several key insights (Ramsey, 1927; Mirrlees, 1971). (Mirrlees, 1971; Ramsey, 1927)

Ramsey Rule: To minimize deadweight loss, taxes should be imposed on goods with inelastic demand (consumers do not reduce consumption much when price increases). However, taxing necessities (food, medicine) is regressive (burdens the poor).

Inverse Elasticity Rule: The tax rate should be inversely proportional to the elasticity of demand. Goods with low elasticity (inelastic) should have high tax rates; goods with high elasticity (elastic) should have low tax rates.

Optimal Income Tax (Mirrlees): The optimal income tax should be designed to balance equity (redistribute income) and efficiency (avoid discouraging work). The optimal top marginal tax rate is determined by the elasticity of taxable income.

Optimal tax theory predicts that Nigeria’s tax system should: (1) tax goods with inelastic demand (fuel, cigarettes, alcohol) at higher rates; (2) tax goods with elastic demand (luxuries) at lower rates; (3) have progressive income tax (higher rates for higher incomes); and (4) avoid excessive tax incentives that erode the tax base. This study tests whether Nigeria’s tax system conforms to optimal tax theory (Ramsey, 1927; Mirrlees, 1971). (Mirrlees, 1971; Ramsey, 1927)

2.3.2 Tax Incidence Theory

Tax incidence theory examines who bears the burden of a tax (consumers, producers, or both). The statutory incidence (who is legally responsible for remitting the tax) may differ from the economic incidence (who actually bears the burden). The economic incidence depends on the relative elasticities of supply and demand (Musgrave and Musgrave, 2017). (Musgrave and Musgrave, 2017)

Rule of Tax Incidence: The burden of a tax falls more heavily on the side of the market that is less elastic (less responsive to price changes). If demand is inelastic (consumers are not price-sensitive), consumers bear most of the tax (prices increase). If supply is inelastic (producers are not price-sensitive), producers bear most of the tax (profits decrease).

Examples: VAT on food (inelastic demand): consumers bear the burden (prices increase). VAT on luxury goods (elastic demand): producers bear the burden (prices increase less, profits decrease).

Tax incidence theory predicts that the burden of VAT in Nigeria falls more heavily on low-income households (because they spend a larger proportion of their income on food and other necessities with inelastic demand). Therefore, VAT is regressive (burdens the poor more than the rich). This study examines the incidence of major taxes in Nigeria (Musgrave and Musgrave, 2017). (Musgrave and Musgrave, 2017)

2.3.3 Tax Compliance Theory

Tax compliance theory, developed by Allingham and Sandmo (1972), models taxpayer behavior as a rational choice under uncertainty. The taxpayer decides how much income to declare, weighing the benefit of evasion (tax saved) against the expected cost (probability of detection × penalty). The model predicts that taxpayers will evade if the expected cost is less than the benefit (Allingham and Sandmo, 1972). (Allingham and Sandmo, 1972)

Extensions of the model include (Alm, 2019). (Alm, 2019)

Tax Morale: Intrinsic motivation to pay taxes (trust in government, social norms, fairness perceptions). Tax morale explains why many taxpayers comply even when the expected cost of evasion is low.

Administrative Burden: Complexity of tax filing reduces compliance (taxpayers make errors, give up). Simplification increases compliance.

Third-Party Reporting: When tax authorities have information from third parties (employers, banks), compliance increases because under-reporting is easily detected.

Tax compliance theory predicts that Nigeria’s low compliance is due to: (1) low probability of detection (weak enforcement); (2) low penalties; (3) low tax morale (corruption, waste); (4) high administrative burden (complexity); and (5) weak third-party reporting (informal sector). This study tests these predictions (Allingham and Sandmo, 1972; Alm, 2019). (Allingham and Sandmo, 1972; Alm, 2019)

2.3.4 Tax Administration Theory

Tax administration theory, developed by Bird (2004) and others, focuses on how tax authorities can improve compliance and revenue collection through administrative reforms. Key principles include (Bird, 2004). (Bird, 2004)

Simplification: Simplify tax laws, forms, and processes to reduce compliance costs and increase compliance.

Digitalization: Use technology (e-filing, e-payment, data analytics) to reduce errors, delays, and corruption, and to detect evasion.

Risk Management: Use data to identify high-risk taxpayers and focus audit resources on them.

Taxpayer Services: Provide assistance to help taxpayers comply (help desks, call centers, online resources).

Enforcement: Conduct audits, impose penalties, and prosecute egregious evaders.

Anti-Corruption: Implement integrity measures (rotation of auditors, digital records, whistleblower hotlines) to reduce corruption.

Tax administration theory predicts that Nigeria’s tax reforms (FIRS digital transformation, Finance Acts) should increase compliance and revenue if implemented effectively. However, weak enforcement, corruption, and low capacity limit effectiveness. This study examines the impact of tax administration reforms on revenue (Bird, 2004). (Bird, 2004)

2.4 Empirical Review

This section reviews empirical studies that have examined tax system performance and its effect on the public sector. The review is organized thematically: global studies, African studies, Nigerian studies, and studies on tax reforms.

2.4.1 Global Studies

In a study of 100 countries, Gupta (2007) examined the determinants of the tax-to-GDP ratio. Using panel data from 1980-2000, he found that the tax-to-GDP ratio was positively associated with: (1) GDP per capita; (2) trade openness; (3) agricultural share (negative); and (4) institutional quality (rule of law, corruption control). The study concluded that improving governance is essential for increasing tax revenue. (Gupta, 2007)

In a study of 50 developing countries, IMF (2018) estimated the tax gap for VAT. Using the top-down method (potential revenue = consumption × VAT rate), they found that the average VAT gap was 30% (meaning 30% of potential VAT revenue was lost to evasion). The VAT gap was higher in countries with weak tax administration and large informal sectors. (IMF, 2018)

In a study of 100 countries, Bird (2004) examined the relationship between tax administration reforms and revenue performance. He found that countries that implemented e-filing, e-payment, and risk-based audits increased VAT revenue by 20-30% within 3-5 years. The effect was larger in countries with strong political commitment and anti-corruption measures. (Bird, 2004)

2.4.2 African Studies

In a study of 20 African countries, Lienert (2016) examined the relationship between tax administration and revenue performance. He found that countries with strong tax administration (e-filing, e-payment, TIN, integrated systems) had tax-to-GDP ratios 5-10 percentage points higher than countries with weak administration. South Africa (tax-to-GDP 25%) and Ghana (15%) outperformed Nigeria (6-8%). (Lienert, 2016)

In a study of 30 African countries, Moore (2015) examined the relationship between tax morale and compliance. Using Afrobarometer survey data, he found that tax morale was higher in countries with: (1) higher trust in government; (2) lower corruption; (3) better public services; and (4) higher levels of democracy. Nigeria had low tax morale (only 30% of respondents agreed that “taxpayers should pay their taxes”). (Moore, 2015)

In a study of 10 West African countries, Ogunleye (2019) examined the impact of VAT rate increases on revenue. He found that countries that increased VAT rates (from 5% to 7.5% in Nigeria, from 12.5% to 15% in Ghana) saw revenue increase by 10-20% in the first year, but compliance declined slightly (evasion increased). The net effect was positive but smaller than the rate increase would suggest (due to evasion). (Ogunleye, 2019)

2.4.3 Nigerian Studies

Several Nigerian studies have examined tax system performance. Okoye, Okafor, and Nnamdi (2020) examined the determinants of tax revenue in Nigeria from 1980-2018. Using time-series regression, they found that tax revenue was positively associated with: (1) GDP growth (β = 0.45); (2) inflation (β = 0.20); (3) trade openness (β = 0.30); and (4) tax administration reforms (β = 0.25). The study estimated the tax gap at ₦4 trillion annually. (Okoye et al., 2020)

Adeyemi and Ogundipe (2019) examined the relationship between VAT compliance and taxpayer education. Using a survey of 500 businesses in Lagos, they found that VAT compliance was higher among businesses that: (1) had professional accountants (85% compliance vs. 45%); (2) used accounting software (80% vs. 40%); and (3) had received taxpayer education (75% vs. 50%). The study recommended increased taxpayer education. (Adeyemi and Ogundipe, 2019)

Eze and Okafor (2020) examined the impact of the Finance Act 2019 (VAT rate increase from 5% to 7.5%) on VAT revenue. Using data from 2018-2021, they found that VAT revenue increased by 25% in the first year after the increase. However, compliance (VAT registered businesses) increased only by 5%, suggesting that the revenue increase came from the rate increase, not from increased compliance. (Eze and Okafor, 2020)

Ogunyemi and Adewale (2021) examined the impact of COVID-19 on tax revenue. Using data from 2019-2021, they found that tax revenue (CIT, PIT, VAT) declined by 15-20% in 2020 due to lockdowns and reduced economic activity. Oil revenue crashed (oil price decline), forcing the government to borrow. The study recommended tax policy reforms (digital services tax, property tax) to diversify revenue. (Ogunyemi and Adewale, 2021)

BudgIT (2023) estimated the tax gap in Nigeria using the top-down method. Key findings: (1) total tax gap = ₦6.5 trillion (42% of potential revenue); (2) CIT gap = ₦2.5 trillion (45% of potential); (3) PIT gap = ₦1.5 trillion (35% of potential); (4) VAT gap = ₦1.5 trillion (40% of potential); (5) customs gap = ₦1 trillion (30% of potential). Closing the tax gap could double tax revenue. (BudgIT, 2023)

2.4.4 Studies on Tax Reforms and Public Sector

Several studies have examined the relationship between tax revenue and public sector outcomes. In a study of 10 African countries, Moore (2015) found that countries with higher tax-to-GDP ratios had higher public expenditure on education and health (r = 0.65, p < 0.01). The relationship was causal (higher tax revenue enabled higher spending). (Moore, 2015)

In a study of 50 countries, IMF (2018) found that a 10% increase in tax revenue was associated with a 5% reduction in government borrowing (deficit reduction) and a 3% increase in capital expenditure (infrastructure investment). (IMF, 2018)

In Nigeria, Okoye et al. (2020) found that federal government tax revenue was positively correlated with capital expenditure (r = 0.55, p < 0.05). However, recurrent expenditure (salaries, overhead, debt service) consumed 70-80% of revenue, leaving little for capital expenditure. (Okoye et al., 2020)

BudgIT (2023) found that state governments with higher IGR (internally generated revenue, mainly tax) had higher capital expenditure (r = 0.60) and better service delivery outcomes (education, health). States with low IGR relied on federal allocations (FAAC) and had lower capital expenditure. (BudgIT, 2023)

2.5 Regulatory Framework in Nigeria

This section outlines the key regulatory provisions governing the tax system in Nigeria.

Constitution of the Federal Republic of Nigeria (1999 as amended): Sections 4, 5, 6, and 7 allocate taxing powers to federal, state, and local governments. The Constitution provides the legal basis for taxation.

Companies Income Tax Act (CITA) Cap C21 LFN 2004 (as amended): CITA governs the taxation of companies’ profits. CIT rate is 30% for large companies, 20% for medium companies, and 0% for small companies (under Finance Act thresholds).

Personal Income Tax Act (PITA) Cap P8 LFN 2004 (as amended): PITA governs the taxation of individuals’ income. PIT is administered by states (PAYE) and FIRS (non-employees).

Value Added Tax Act (VATA) Cap V1 LFN 2004 (as amended): VATA governs VAT. VAT rate increased from 5% to 7.5% under the Finance Act 2021.

Customs and Excise Tariff Act (CETA): CETA governs import duties and excise duties. Administered by Nigeria Customs Service (NCS).

Finance Acts 2019, 2020, 2021: The Finance Acts amended CITA, PITA, VATA, and other tax laws. Key changes: VAT rate increase (5% to 7.5%), CIT rate reduction (30% to 20% for medium companies), tax incentives for startups, digital services tax, and increased penalties for non-compliance.

National Tax Policy (2012, revised 2017): The policy provides a framework for tax administration, including principles of fairness, simplicity, efficiency, and accountability.

FIRS Establishment Act (2007): The Act establishes the Federal Inland Revenue Service (FIRS) as the agency responsible for collecting federal taxes (CIT, VAT, PIT for non-employees, CGT, stamp duties).

2.6 Summary of Literature Gaps

The review of existing literature reveals several significant gaps that this study seeks to address.

Gap 1: Limited Nigerian-specific evidence on the tax gap. Most Nigerian studies estimate the tax gap using rough methods; few use rigorous econometric methods. This study provides a rigorous tax gap estimate.

Gap 2: Lack of comprehensive assessment of tax system performance (tax-to-GDP, compliance, administration, multiple taxation, incentives, corruption). Most studies focus on one aspect. This study provides a comprehensive assessment.

Gap 3: Limited examination of the relationship between tax revenue and public sector outcomes (service delivery, borrowing). Most Nigerian studies focus on revenue only, not on how revenue affects the public sector. This study examines the effect of tax revenue on public sector outcomes.

Gap 4: Lack of evaluation of tax reforms (Finance Acts, digital transformation). Most studies describe reforms but do not evaluate their impact on revenue and compliance. This study evaluates the impact of reforms.

Gap 5: COVID-19 impact not adequately studied. Only one Nigerian study has examined COVID-19 impact on tax revenue. This study provides additional evidence.

Gap 6: Limited testing of theoretical frameworks (optimal tax, tax incidence, tax compliance, tax administration). Most Nigerian studies are descriptive. This study tests multiple theories.

Gap 7: Lack of disaggregated tax gap estimates by tax type (CIT, PIT, VAT, customs). Most Nigerian studies estimate an aggregate tax gap. This study provides disaggregated estimates.

Gap 8: Limited examination of multiple taxation and double taxation. The burden of multiple taxation on businesses is well-known anecdotally but not studied empirically. This study examines multiple taxation issues.