The Nigerian Value Added Tax Rate had been increased from 5% to 7.5%. The rate of inflation in the country had also increased. Do you think that increment in the VAT rate in Nigeria will enhance economic growth in the country?
Hello
If you are looking for some empirical evidence, following materials could be useful-
https://www.ajol.info/index.php/star/article/view/104065
https://www.journaljemt.com/index.php/JEMT/article/view/11744
More so increase in VAT would increase and unintentional increase in government expenditure would also fuel inflation. Also, the value of disposable income has been reduced as a result of the increase in VAT. So basically it doesn't translate to economic growth
No because the GDP will still be accounted for inflation. Increase in VAT its a way of the GOVT to boost revenue collection. It will have a negative impact especially on the price of commodities but a positive corresponding impact on GOVT revenue collection without affecting the GDP growth.
Idirect taxes, part of which is VAT, cause distortion. More VAT rates means more distortion. Distortion by itself, i.e. other things remaining the same, has a negative impact on economic growth. Spending the resulting increase in government revenue on enhancement of production environment is expected to have a positive impact on economic growth. The net result of these two impacts needs empirical research.
It is similar to Indonesia now. They increase VAT to 11 and 12 percent in the future while reduce income tax rate. Mainly the reasons is that they try to shift the revenue from income tax to consumption tax. Lets see what happens.
But some papers argue, base on empirical evidence, that consumption taxes is less distortion than income tax to economic growth. It may need future research.
VAT is borne by the final consumer. This implies that VAT is neutral for enterprises through the mechanism of upstream deductions. The ultimate result of this is that any increase in VAT rate will push the market price up. Of course the immediate and short term effects may be increase in tax revenue. Medium and long term effects are less apparent as all will depend on the trade off between on the hand, the advantages in the form of increase in revenue and the corresponding impact of this increase on the economy and on the other hand, the the effect of a drop in effective demand (purchasing power) of the consumers. It be interesting to read the analysis and simulations that preceded the bill. It will be equally helpful to follow the arguments put forward during the adoption of the bill in parliament to convince the house.
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