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This research work evaluates the Impact of Taxation on Inequality in Nigeria from (1980-2010). From our finding, we found out that taxation does not have a statistical significant effect on inequality in Nigeria. Taxation is one of the most important and easy source of revenue to any government as the government possesses inherent power to impose taxes and levies. Inequality can be reduces in Nigeria if the government will take a special look at the rural areas than in the urban areas and help to bridge the gap between the have and the have not (rich and the poor). Finally, a tax reduce inequality if it lightens the tax burden on the poor and ensures a greater burden on the better –off.


Title page

Approval page




Table of Contents



1.1 Background of the Study

1.2 Statement of the Problem

1.3 Objective of the Study

1.4 Statement of Research Hypothesis

1.5 Scope and Limitation of Study

1.6 Significance of the Study



2.1 Theoretical Literature

2.2 Empirical Literature

2.3 Limitation of Previous Studies

2.4 Current Taxation Reforms in Nigerian

2.5 Challenges of the Draft National Tax Policy

2.2.4 Principles of Taxation



3.1 Analytical Framework

3.2 Model Specification

3.3 Methods of Evaluations 3.3.1 Economic Theoretical Test

3.3.2 Statistical Criteria (First Order Test)

3.3.3. F-ratio Test:

3.3.4 R2 and Adjusted R2 Test (Coefficient of Determination): 3.3.5 Standard Error Test:

3.3.6 t-Statistic Test:

3.4 Econometric Criteria

3.4.1 Autocorrelation Test

3.4.2 Multicollinearity Test

3.4.3 Heteroscedasticity Test

3.4.4 Normality Test

3.4.5 Reset Test

3.4.6 Stationarity Test


4.1 Presentation of Regression Results

4.2 Evaluation of Results

4.2.1 Evaluation Based on Economic Criteria “LOG (CED)”

4.2.2 Evaluation Based on statistical criteria (first-order Tests)

4.2.3 Evaluation Based on econometrics criteria


5.1 Research Finding

5.2 Policy Recommendation

5.3 Conclusion





1.1 Background of the Study

Taxation is a form of compulsory levy imposed by government on individuals, corporate bodies, goods and services in order to finance its expenditure and create condition for the economic well being of the society. Taxation is a compulsory levy imposed on a subject or upon his property by the government to provide security, social amenities and create condition for the economic well being of the people (Appah and Oyandonghan, 2011). Anyanwu (1997) stated that tax are imposed to regulate the production of certain goods and services, protection of infant industries, control business and curb inflation, reduce income inequalities etc.

According to Anyanfo (1996), the principle of taxation means the appropriate criteria to be applied in the development and evaluation of the tax structure. Such principles are essentially on application of some concepts derived from welfare economists, in order to achieve the broader objectives

of social justice. The tax system of a country should be based on sound principle. Ihingan (2004), and Osiegbu et al., (2010) listed the principles of taxation as equality, certainty, convenience etc. Anyanfo (1996) convenience principle of taxation states that the time and manner should be convenience to the tax payer. Nevertheless, principle of taxation provides the rationale for pay-as-you earn (PAYE) system of tax payable system of tax collection certainty principle of taxation states that a tax which each individual is bound to pay ought to be certain, and not arbitrary (Bhartia, 2009).

Jhingan (2004) equity principles of taxation states that every tax payers should pay the taxing proportion to his income. The rich should pay more and at a higher rate than the other person whose income is less. However, these sagacious and magnanimous intention of the government are dedevited by a number of draw backs ranging from unfairness of tax payments to tax payers, arbitrary importation of taxes, show tax law development, inaccurate presentation of income figure for assessment, indirect taxation, poverty, illiteracy, poor vehicle as a tool for tax collection etc indeed the above short coming engender inequality taxation in Nigeria (HalimAli2010).

The term inequality according to Longman dictionary of contemporary English (2000), Third edition, is an unfair situation, in which some groups in

society have less money influence or opportunity than others. In the same view inequality means “the unfair difference between groups of people in society when some have more wealth, status, or opportunities than others (Oxford Advanced Learners Dictionary 2001) sixth edition inequality with respect to taxation is the unfairness and disparity resulting from the way and manner Nigerians and inhabitants from the way also individuals pay taxes. It is not out of place to say that taxes causing inequality in Nigeria is as old as the Nigerian tax system. In so far there was a time variance between when the North, West and the eastern pan began tax payment while the Northern and Western regions began payment of taxes before 1904 through the already defined way of leadership of the Emires and Obas respectively.

The eastern regions which believed in family head syndrome had no such constituted leaders and resultantly lagged behind for about 23 years later before taxation was planted in the area. But the bottom line is that while some Nigerians paid tax to them, others never paid, this increasing inequality level in Nigeria. On the same vain the evil of inequality taxation was still unleashed on those Nigerians and resident tax payers between 1904 and 1957 when taxes were collected at various times from individuals and companies without distinctions. The basic of assessment allowable deduction and tax

rates were the same. The period under review was be deviled by show tax law development, arbitrary imposition of taxes and multiplicity of tax liability and protests by tax payers were examples. They were actually engendered by inequality taxation.

Widening income inequality in Nigeria has triggered a debate over the extent to which taxes are to used as a means of curbing inequality. Generally taxes can cause inequality as well as being used to reduce inequality. According to Black et al., 1999 Taxation are considered as the dominant way of reducing inequality. Taxes are imposed for a variety of purpose, they can be used to correct distortion in the market, they can raise revenue for the government, taxes can also be used for redistribution of income, thus in this work we will concentrate on taxes as a tool for income distribution in the country. In Nigeria federal income tax is administered by the federal inland revenue service (FIRS). In Nigeria inequality which exist in arrange of dimension like mortality rate, poverty rate, life expectancy and so on has been on the increase. In fact, inequality in Nigeria is multifaceted and has manifested inform of inadequate shelter, lack of access to other basic needs of life, such as good food, water, good health etc. Argbokhan (1999) found that income inequality worsened after structural adjustment programme

(SAP) of 1986. Also a high level of inequality exist between Nigeria’s rural and urban areas. This is because most communities depend on Agriculture while urban engage mostly in paid jobs.

The Nigerian government in a way to reduce income inequality has introduced policies like (PAP) poverty alleviation programme, NEEDs – National economic empowerment and development programme etc also taxation policies like PAYE (pay as you earn) and all forms of progressive tax system like inheritance tax, property tax etc. All these policies and programmers have not yet achieved its main objective. Using the head count index the study found that an increasing number of Nigerians were living or absolute poverty over the study periods: 38% in 1985, 43% in 1992, 47% in 1996, 35% and 37% in urban areas, and 41%, 49% and 51% in rural areas. The depth and security of poverty generally increased over the study period, but the trend was not uniform over geopolitical zones. During the 1990s the depth of poverty increased in the middle belt, Northeast and northwest while it declined in other areas. The increase was more pronounced in rural areas than in the urban areas.

1.2 Statement of the Problem

A tax reduces inequality if it lightens the tax burden on the poor and ensures a greater burden on the better-off. The relationship between a country’s income distribution and taxation is not far from consensus that is to a large extent; the method of income distribution in a country can enhance or reduce inequality. In Nigeria, inequality which exists in a range of dimension like mortality rate, poverty, life expectancy and so on has been on the increase. In fact, inequality in Nigeria is multifaceted and has manifested inform of outbreak of diseases such as Aids, measles, small pox, chicken pox and so on. Inequality has also manifested inform of inadequate shelter (poor home) lack of access to other basics needs of life, such as food, water etc.

The Nigerian government in a view to solve or reduce this inequality had adopted a lot of policies like SAP-structural adjustment programme of 1986, poverty alleviation programme (PAP), Needs-National Economic Improvement and development Strategy etc. Also some taxation policies that the government adopted include PAYE (pay as you Earn) property and inheritance taxes as well as other progressive tax systems. All these programmes and policies has not yet achieve its desired objective which is to curb inequality, maybe due to implementation problem thus leading to high rate of inequality.

The aim of this research work is as follows:

– To determine the nature of relationship between taxation and Inequality

– To test whether there is a causal relationship between inequality and Taxation in Nigeria.

– To determine the extent in which taxes affects inequality.

1.3 Objective of the Study

Our interest in this research work is to know the impact taxation has on

inequality. The specific objective includes;

1) To ascertain the nature of relationship between taxes and inequality.

2) To determine the extent in which taxes can be used in curbing inequality.

3) To find out whether there is any causal relationship between taxes and inequality.

1.4 Statement of Research Hypothesis

For the purpose of answering the questions raised at the end of our

statement of problem the following working hypothesis were employed. H0: There is no casual relationship between taxes and inequality

HI: There is casual relationship between taxes and inequality. H0: Taxes cannot be used in solving inequality problem

Hi: Taxes are used in solving inequality problem.

1.5 Scope and Limitation of Study

The scope of study is from 1980 to 2010. Basically, this study focuses.

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