TAXATION, SOCIAL SPENDING AND INCOME INEQUALITY

ABSTRACT

The broad objective of this study was to investigate the relationship between taxation, social spending and income inequality in Nigeria. The study was undertaken against the backdrop of the growing concern for the widening gap between the rich and the poor. Archival data were sourced from the Central Bank of Nigeria Statistical Bulletin (tax revenue data, public education and health expenditure, unemployment rate, Gross Domestic Product Per Capita, trade openness), the World Income Inequality Database/World Development Indicators database (Gini Coefficient, secondary school enrolment rate), International Country Risk Guide (Law & Order Index), and Federal Inland Revenue Service audited accounts and quarterly publications (tax revenue data). Data collected for the period between 1981 and 2018 were subjected to econometric analysis using the fully modified Ordinary Least Square (FMOLS) and the Dynamic Ordinary Least Square (DOLS) to correct for the likely problem of endogeneity. The results of the analyses showed that the explanatory variables of tax revenue, direct tax, and health spending were progressively redistributive having reported statistically significant negative relationship with income inequality. The independent variables of indirect tax and education expenditure were found to be regressive with a significant positive relationship with income inequality. The relationship between personal income tax progressivity and income inequality was negative and significant and also remain statistically significant when moderated with tax evasion. It is, therefore, recommended that government should improve tax administration in Nigeria so as to generate more tax revenue and by implication reduce income inequality. It is also recommended that there should be increased emphasis on direct taxation as against indirect taxation which is the focus of the new Nigerian National Tax Policy. This is because direct tax is progressive and indirect tax isxvi regressive. It is further recommended that increased government allocation to health sector as well as greater emphasis on the education of the poor through increased allocative efficiency and improved governance will help to empower the poor and consequently reduce the level of income inequality in Nigeria.