The impact of Value-Added Tax on unemployment in Nigeria

Abstract

Since the Finance Act 2020 became effective, there have been scholarly debates regarding the impact of the hike in the value-added tax (VAT) rate from 5% to 7.5% on the general economy of Nigeria. One of the macroeconomic variables that often features in academic discussions is unemployment. Therefore, this study was aimed at examining the impact of the new VAT regime on the situation of unemployment in Nigeria. Autoregressive distributed lag (ARDL) framework was employed in the analysis. Thus, unemployment rate is the dynamic dependent variable while VAT revenue is the dynamic regressor. For robustness purposes, inflation rate and manufacturing output, which are commonly-discussed drivers of unemployment, are included as the control variables. Data on the macro variables were sourced from the World Bank’s World Development Indicators, Central Bank of Nigeria’s Statistical Bulletins and the Federal Inland Revenue Service’s Financial Reports. The data covered the period 1994−2021. Empirical findings revealed that the VAT revenues have a positive relationship with the unemployment rate, suggesting that the hike in VAT rate might have a contractionary impact on employment. Furthermore, the unemployment and inflation appear to have positive relationship over the long run. The proposition of Phillips curve is therefore rejected using data sourced from the Nigerian economy

Keywords

• unemployment rate
• inflation rate
• manufacturing output
• VAT
• ARDL
• Nigeria