ABSTRACT

Taxation remains a vital instrument for sustainable development and economic growth in Sub-Saharan Africa. This study investigated the impact of tax revenue on economic growth in Nigeria from 1981 to 2018. The research classified tax revenue into oil and non-oil components to better understand their individual and combined effects on growth. Oil tax revenue was represented by petroleum profit tax, while non-oil revenue consisted of company income tax, value-added tax, and customs and excise duties. The study relied entirely on secondary data obtained from reliable government and institutional publications.

The results revealed that tax revenue accounted for an average of 4 percent of Nigeria’s GDP during the 38-year period. Both oil and non-oil taxes had positive but minimal effects on economic growth. In addition, government expenditure showed a positive yet insignificant impact on growth. Overall, the combined influence of tax receipts and government spending, representing fiscal policy, produced a negligible effect on Nigeria’s economic performance.

Therefore, the study concluded that developing friendly tax policies for businesses and investors, improving infrastructure, and formalizing the informal sector would significantly enhance tax revenue in Nigeria. It recommended that all tiers of government intensify efforts to increase tax collection and enforce strict penalties for tax evasion. Furthermore, taxpayers’ funds should be used transparently to improve infrastructure and public services. Regular review of tax laws, similar to practices in advanced economies, was also advised to ensure they align with economic realities. Finally, diversification beyond oil into sectors such as agriculture and manufacturing remains essential to make tax revenue a sustainable pillar of national income (OECD, 2021).

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Economic growth in Sub-Saharan Africa continues to face significant challenges. For example, the region’s growth rate slowed to 2.3 percent in 2018, compared to an average of 3.3 percent over the previous five years (Lockhart, 2019). Countries such as Nigeria and Angola experienced declines in oil production during this period, which consequently reduced their major revenue streams. When oil income falls, overall government revenue decreases sharply, limiting economic development. Hence, enhancing other sources of revenue becomes necessary. One of the most sustainable alternatives is taxation.

Taxation refers to the compulsory levy imposed by government authorities on individuals and corporate entities to fund public expenditure (OECD, 2020). In developing nations, including Nigeria and other Sub-Saharan African countries, taxation serves as both a revenue source and a fiscal policy tool for economic management. Through appropriate tax rates and efficient administration, governments can promote economic stability and stimulate development. Moreover, tax rates influence savings, investments, innovation, and job creation (OECD, 2009).

In Sub-Saharan Africa, different types of taxes and rates affect revenue generation in various ways. For instance, an increase in value-added tax (VAT) may lead to higher revenue, while a rise in withholding tax could discourage investment and reduce total revenue. Many countries in the region rely heavily on non-tax revenues such as oil, foreign aid, and mineral exports, making their economies unstable. Therefore, diversifying revenue through effective taxation remains a strategic priority (Ugwunta & Ugwuanyi, 2015; Dasalegn, 2014).

There are several forms of taxation—such as value-added tax, company income tax, petroleum profit tax, and education tax—each contributing differently to national income. The key question, therefore, is how various tax rates influence revenue generation. This becomes particularly important given the fluctuations in commodity prices, which directly affect fiscal stability in Sub-Saharan Africa.

1.2 Statement of the Research Problem

Despite numerous reforms, tax systems in Sub-Saharan Africa remain weak. Many countries still depend on oil and foreign aid instead of maximizing their tax potential. As Gate (2016) observed, governments often underestimate the importance of efficient income taxation in revenue generation. The central challenge lies in finding a tax rate that balances affordability for citizens with revenue adequacy for governments.

Debate continues on whether lower tax rates stimulate economic growth, leading to higher wages, more jobs, and greater profits. Some scholars argue that reducing taxes can be partly self-financing, as it encourages productivity and compliance (Samwick, 2016). However, others contend that such measures can cause inflation or fiscal deficits if not properly managed. Consequently, understanding the effect of different tax rates on government revenue in Sub-Saharan Africa remains essential for achieving fiscal stability and economic growth.

1.3 Research Questions

This study is guided by the following questions:

1. What is the effect of the withholding tax rate on revenue generation in Sub-Saharan African countries?

2. To what extent does the company income tax rate influence revenue generation in Sub-Saharan Africa?

3. What is the impact of the personal income tax rate on government revenue in Sub-Saharan African countries?

4. How does the value-added tax rate affect revenue generation in Sub-Saharan Africa?

1.4 Research Objectives

The objectives of this study are to:

1. Examine the effect of the withholding tax rate on revenue generation in Sub-Saharan Africa.

2. Determine the impact of the company income tax rate on total government revenue.

3. Assess the influence of personal income tax rates on revenue generation.

4. Evaluate how value-added tax rates affect government revenue in Sub-Saharan African countries.

1.5 Research Hypotheses

H1: The withholding tax rate significantly affects revenue generation in Sub-Saharan African countries.
H0: The withholding tax rate does not significantly affect revenue generation in Sub-Saharan African countries.

H1: The company income tax rate significantly affects revenue generation in Sub-Saharan African countries.
H0: The company income tax rate does not significantly affect revenue generation in Sub-Saharan African countries.

H1: The personal income tax rate significantly affects revenue generation in Sub-Saharan African countries.
H0: The personal income tax rate does not significantly affect revenue generation in Sub-Saharan African countries.

H1: The value-added tax rate significantly affects revenue generation in Sub-Saharan African countries.
H0: The value-added tax rate does not significantly affect revenue generation in Sub-Saharan African countries.

1.6 Significance of the Study

This study provides valuable insight into the relationship between tax rates and revenue generation in Sub-Saharan Africa. Specifically, it will help governments understand the importance of setting optimal tax rates that enhance compliance without discouraging investment. Furthermore, it contributes to existing literature on taxation and fiscal management in developing economies. Policymakers will benefit from the study by identifying strategies for strengthening tax administration and diversifying revenue sources. In addition, researchers and students will find the study useful for future academic inquiries related to public finance and economic growth.

1.7 Scope of the Study

The research focuses on selected Sub-Saharan African countries—Nigeria, South Africa, Cameroon, Senegal, and Togo. These countries were chosen through judgmental sampling to provide a fair representation of the region within the available time and resources. Consequently, the study examines the impact of tax rates on revenue generation, emphasizing the differences across the selected nations.

1.8 Research Methodology

This study relies on secondary data, eliminating the need for primary data collection. Therefore, it draws from existing records, publications, and databases that provide credible tax and revenue statistics for Sub-Saharan Africa. The analysis focuses on how various tax rates influence revenue outcomes, helping to identify patterns and policy implications.

1.9 Sources of Data

The study uses secondary data obtained from academic journals, textbooks, research reports, government documents, online databases, and institutional websites. These sources provide reliable and relevant information necessary for accurate analysis and conclusions.

1.10 Definition of Terms

Taxation: The compulsory levy imposed by governments on individuals and corporations to generate revenue (OECD, 2020).
Tax Rate: The percentage at which an individual or organization is taxed.
Revenue: The total income generated from taxes and other sources, used to finance public expenditure.
Income Tax: A levy imposed on the income of individuals and businesses.
Economy: A system of production and consumption activities that determines how resources are allocated.
Withholding Tax: A tax deducted at source from payments such as salaries, dividends, or interest.
Value-Added Tax (VAT): A consumption tax applied at each stage of the production and distribution process.
Capital Gain Tax: A tax levied on profits made from the sale of assets.
Petroleum Profit Tax: A levy on the profits of companies engaged in petroleum exploration and production (Mintz, 2010).
Education Tax: A small percentage of company profits allocated to educational development.
Investor: A person or institution that allocates capital with the expectation of future financial returns.
Tax Cut: A deliberate reduction in the rate of taxation, often used to stimulate economic activity.