Social Development

NG-Journal of Social Development, VOL. 5, No. 4, August 2016

Journal homepage:www.arabianjbmr.com/NGJSD_index.php

EFFECT OF TAX EVASION AND AVOIDANCE ON NIGERIA'S

ECONOMIC GROWTH

DR. (Mrs) Obinabo, Chinyere Rose

Department of Accountancy, Banking and Finance, Ebonyi State University, Abakaliki, Ebonyi State

Abstract
The study aims to determine the effect of tax evasion and avoidance on the economic growth of
the Nigeria economy. The study adopted the ex-post facto research design and data were
obtained from Central Bank of Nigeria Statistical Bulletin for the period 1999 - 2012. The
Ordinal Least Square Regression (OLS) model was used to test the hypothesis. The finding
suggests that tax evasion and avoidance had negative significant impact on growth of the
Nigerian economy. The study thus recommends amongst others that government policies and
measures as it pertain fiscal policies in Nigeria should be streamlined to stimulate economic
growth and development by ensuring that they are tailored towards growth of the economy.

Keywords: tax evasion, tax avoidance, economic growth, Nigeria, tax system

Introduction
Taxes and tax system are fundamental components of any attempt to build a nation. Brautigam
(2008) noted that taxes underwrite the capacity of states to achieve their goals; they form one of
the central arenas for the conduct of state-society relations, and they shape the balance between
accumulation and redistribution that gives states their social character. Thus, taxes build capacity
to provide security, meet basic needs or foster economic development and they build legitimacy
and consent helping to create consensual, accountable and representative government. A key
component of any tax system is the manner in which it is administered (Naiyeju, 2010). Bahi and
Bird (2008) state that no tax is better than its administration, so tax administration matters a lot,
and an essential objective of tax administration is to ensure the maximum possible compliance
by taxpayers of all types with their taxation obligations. Unfortunately, in many countries, tax
administration is usually weak and characterized by extensive evasion, corruption and coercion.
In many cases overall tax levels are low, and large sectors of the informal economy escape the
tax net entirely (Brautigam, Fjeldstad and Moore, 2008).
A nation's tax system is often a reflection of its communal values and the values of those in
power (Ross, 2007). Thus, to create a system of taxation, a nation must make choices regarding
the distribution of the tax burden and how the taxes collected will be spent. In democratic nations
where the public elects those in charge of establishing the tax system like Nigeria, these choices
reflect the type of community that the public or government wish to create. Parkin (2006) states

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that in countries where the public does not have a significant amount of influence over the
system of taxation, that system may be more of a reflection on the values of those in power as
governments use different kinds of taxes and vary the tax rates. This is done to distribute the tax
burden among individuals or classes of the population involved in taxable activities, such as
businesses, or to redistribute resources between individuals or classes in the population. In
addition, taxes are applied to fund foreign aid and military ventures, to influence the
macroeconomic performance of the economy, or to modify patterns of consumption or
employment within an economy, by making some classes of transaction more or less attractive
(Parkin, 2006).
In a report of the Federal Inland Revenue Services (FIRS) and presented to the federal executive
council on National Tax Policy for 2009, it says that sustainable development is development
that meets the needs of the present without compromising the ability of future generations to
meet their own needs thus, in this context sustainable development refers to the pattern of
revenue generation, which is able to meet the needs of the present generation of Nigerians,
without negatively impacting the ability of future generations to meet their own needs. Generally,
taxation is regarded as a sustainable source of government revenue due to the stability and
certainty of the tax system (Aguolu, 1999). Unlike other sources of revenue, taxes are constantly
available in so far as economic activity is carried on in the society (Cobham, 2005). However,
recent developments in the global and local economy which have significantly impacted
government revenue have directed focus on taxation as a sustainable source of income (FIRS,
2009). It is in line with this that the National Tax Policy intends to create awareness on the
importance of the role, which taxation can play in securing a stable flow of revenue for the
government. Nigeria is currently viewed as a mono-product economy with significant reliance on
oil revenue due to historical developments in the Nigerian economy (FGN, 2009). However,
taxation has been identified as an alternative to oil revenue and a more reliable source of revenue
(McKerchar, 2003). It is expected that there would be increased collaboration as a result of the
need to grow tax revenues by each level of Government and that improved collaboration would
enhance tax yield between and among Federal, State and Local
The overriding objective of the Nigerian tax system should be to achieve economic growth and
development. As such, the system should allow for stimulation of the economy and not stifle
growth, as it is only through sustained economic growth that the potential ability to offer
improvements in the well-being of Nigerians will arise. The tax system should therefore not
discourage investment and the propensity to save. Taxes should not be a burden, but should be
applied proactively with other policy measures to stimulate economic growth and development.
Statement of the Problem
Kiabel and Nwokah (2009) say although tax evasion are problems that face every tax system, the
Nigerian situation seems unique when viewed against the scale of corrupt practices prevalent in
Nigeria. Under direct personal taxation as practiced in Nigeria, the major problem lies in the
collection of the taxes especially from the self-employed such as the businessmen, contractors,
professional practitioners like lawyers, doctors, accountants, architects and traders in shops
among others. As observed by Ayua (1999) self employed persons blatantly refuse to pay tax by
reporting losses every year and many of them live a lifestyle inconsistent with reported income,
which is usually unrealistically low for the nature of their businesses. Civil servants and other
salaried workers are the only class of people that actually pay tax in Nigeria. However, even
among the salaried workers, he observed, many have turned the statutory personal allowances
and relief into a fertile ground for tax evasion. Almost all Nigerian taxpayer is married with four

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children. Similarly, despite the tax provision meant to plug loopholes through which taxable
persons can minimize tax liability the self-employed persons employ all kinds of avoidance
schemes to minimise or escape tax liability and makes you wonder whether there are still any tax
officials working in that capacity. Such scenarios, no doubt, say a lot about tax administration
system in Nigeria both in its design and in the disposition of some taxpayers towards taxation.
While it immediately presupposes that there are legal framework put in place to punish tax
evaders it perhaps raises a poser on the efficiency and effectiveness of tax laws and tax
administration in Nigeria (Uche and Ugwoke, 2003). Some state governments in an effort
towards solving this problem had even gone to the extent of engaging the services of tax
consultants. This government effort, notwithstanding, the problem of tax evasion and avoidance
still persists (Alabi, 2001). There is no doubt that revenue due to any government will be reduced
by the unpatriotic act of tax evaders which can be attributed to corruption.
Tax evasion and avoidance have adverse effect on government revenue. Tax avoidance generates
investment distortion in the form of the purchase of assets exempted from tax or under-valued
for tax purposes (Kiabel and Nwokah, 2009). Avoidance takes the form of investment in arts
collection, emigration of persons and capital. And as observed by Toby (1983) the taxpayer
indulges in evasion by resorting to various practices. These practices erode moral values and build
up inflationary pressures. This point can be buttressed with the fact that because of the evasion of
tax, individuals and companies have a lot of money at their disposal and companies declare higher
dividends and individuals have a high take home profit. This increases the quantity of money in
circulation but without a corresponding increase in the goods and services, this then build up
what is known as inflationary trends where large money chases few goods (Toby, 1983).
The importance of taxation in governance albeit good governance cannot be overemphasized, the
realization of this has a long history in Classical Economics. Beginning from Adams Smith,
through other classical economists like David Richardo and John Stuart Mill, the place of
taxation in the running of successful government, has been recognized. Sowell (1974) quoted
David Richardo as having argued that an economic principle could only be considered useful if it
directs government to the right measures of taxation. He equally said that, it is in order to
emphasize the prominence of taxation, that both Richardo and Mill, put revenue first, in the
division of public finance into three, viz "revenue, expenditure and public debt" Therefore it
could be seen that, government through effective taxation carry out developmental and growth
policies that impact positively on the life of its citizens. Revenue generation is viewed as the
primary and most important role of taxation. Taxation is however not only a means of revenue
generation for government, it can also be used to stimulate other sources of government revenue
and develop other areas of the economy from which government can realize revenue. However,
it seems that when there are leakages in tax collection through evasion and avoidance, the
economic growth of such a country might be affected. Therefore, this paper seeks to determine
the effect of tax evasion and avoidance on growth of the Nigerian economy.
Review of Related Literature
Tax avoidance arises in a situation where the taxpayer arranges his financial affairs in a way that
would make him pay the least possible amount of tax without infringing the legal rules. In short
it is a term used to denote those various devices which have been adopted with the aim of saving
tax and thus sheltering the taxpayer's income from greater liability which would have been
otherwise incurred (Kiabel, 2001). Ani (1983) had described tax avoidance as follows: the
taxpayers knowing what the law is, decide not to be caught by it arranges his business in such a
manner as to escape tax liability partially or entirely. It is a lawful trick or manipulation to evade

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the payment of tax. The meaning of tax avoidance is vividly captured in the case involving
Ayrshire Pullman Motor Services and David M. Ritchin vs. Commissioner of Inland Revenue
when the Lord President, Lord Clyde held that:
No man in this country is under the smallest obligation moral or otherwise
so to arrange his legal relations to his business or to his property as to
enable the Inland Revenue to put the largest possible shovel into his stores. The
Inland Revenue is not slow and quite rightly to take every advantage, which
is open to it under the taxing statutes for the purpose of depleting the
taxpayer's pocket. And the taxpayer is in like manner entitled to be astute
to prevent so far as he honestly can the depletion of his means by the
revenue (Kiabel and Nwokah, 2009: 2).
Thus, it is clear that tax avoidance is legal or at least not illegal since one is mostly probably using
the lax laws to limit his tax liability under the same laws. Examples of tax avoidance include:
seeking professional advice; reducing one's income by submitting claims for expenses in earning
the income: increasing the number of one's children (in Nigeria the maximum allowable is four)
and taking additional life assurance policies.
Tax avoidance is thus considered to be a matter of being sensible. While the law regards tax
avoidance as a legitimate game tax evasion is seen as immoral and illegal. Tax evasion is an
outright, dishonest action whereby the taxpayer endeavours to reduce his tax liability through the
use of illegal means. According to Farayola (1987), tax evasion is the fraudulent, dishonest,
intentional distortion or concealment of facts and figures with the intention of avoiding the
payment of or reducing the amount of tax otherwise payable. Tax evasion is accomplished by
deliberate act of omission or commission which in them constitutes criminal acts under the tax
laws. These acts of omission or commission might include: failure to pay tax e.g. withholding
tax; failure to submit returns; omission or misstatement of items from returns; claiming relief
(in Personal Income Tax), for example, of children that do not exist; understating income;
documenting fictitious transactions; overstating expenses; failure to answer queries (Aguolu,
1999).
The most common form of tax evasion in Nigeria is through failure to render tax returns to the
Relevant Tax Authority. A tax evader may he charged to court for criminal offences with the
consequent fines, penalties and at times imprisonment being levied on him for evading tax
(Faseun, 2001). And as observed by Sosanya (1981): Tax evading has become the favourite
crime of the Nigerian, so popular that it makes armed robbery seem like minority interest. It has
become so widespread that there now exist a cash economy of vast proportions over which the
taxman has no control and which is growing at several times the rate of the national economy.
No doubt, tax evasion and avoidance had robbed the Nigerian government of substantial tax
revenue. According to the Nigerian Stock Exchange, 85 percent of corporate tax revenue in the
country accrues from the 257 companies listed on the exchange compared to the 30,000
companies registered with the Corporate Affairs Commission. This is a serious indictment of
the administrative machinery and capacity of the tax authorities in Nigeria.
Mookherjee (1997) considers bonus systems in the context of corrupt tax collectors and argues
for the need “to go beyond the question of what levels of corruption arise and examine induced
effects on tax compliance and audit incentives”. Hence, when evaluating bonus systems,
Mookherjee solely considers the possible gain in tax revenues following from the fact that the
position of corrupt tax officers is strengthened, this way of justifying bonus systems should be
rejected because it does not capture the long-term effects of an increase in corruption on tax

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revenues and government legitimacy. It highly implausible that sustained development can
grow from an institutional framework that fosters corruption and extra-legal tax enforcement.
Mookherjee is of course aware of the vices of corruption, but suggests simply that "if incentive
reform causes various undesired side effects, the range of policy instruments must be expanded
to moderate their effects". However, this is a problematic position within the present mode of
reasoning. If one considers an increase in corruption an undesirable side effect to be moderated,
then an incentive reform cannot be justified by showing that it increases tax revenues by
(possibly) inducing more corruption, such a justification would be undermined by the policies
aiming at reducing corruption.
The richer countries of the world have grown their overall tax revenues since the 1970s. The EU
countries are characterized by total central government revenues of around one-third of GDP.
The direct tax take increased from the 1970s to 1980s, but overall growth was primarily due to
increases in the revenue from sales taxes, in contrast, the US exhibit lowers overall revenues and
shows continuing growth in direct taxation only. According to Cobham (2005) Latin America
and the Caribbean saw fairly stable direct tax revenues, falling trade tax with trade liberalisation
taking hold and increasing reliance on sales tax. East Asia, at roughly similar levels of per capita
income, exhibited a similar pattern, albeit with lower trade tax and hence overall revenues
(around 2% and 14% of GDP respectively in East Asia, compared to around 4% and 17% in the
former).
The Middle East and North Africa is a general exception, showing a significant and sustained
reduction in each tax component, most notably in direct tax. This is driven by those countries
whose vast resource wealth eases revenue mobilisation. South Asia exhibits by far the lowest
contribution from direct taxation of any region, and by far the lowest total tax revenue. Despite
managing notable increases in sales taxes during the period, the overall growth has been
constrained by a fall in the originally dominant share of trade tax. Sub-Saharan Africa also
increased sales tax revenues, but a fall in already low direct tax revenue from the 1980s to 1990s
has restricted the overall growth here. In both these poorest regions of the world, trade taxes are
responsible for more than a third of total tax revenue. The difference in the ability of rich
countries to obtain direct tax revenues (around 12- 18% of GDP) and that of poor countries
(typically 2-6%) is stark. A possible implication is that much more economic activity in the latter
takes place out with the scope of direct tax structures - in the informal economy.
There are important differences between the different regions of poorer countries, which drive
important differences in ultimate policy recommendations. Cobham (2005) deals with these in
more detail, but two main points can be noted: Low-income countries primarily in Sub-Saharan
Africa and South Asia face a critical constraint to their development in the form of low overall
revenues; no successful development path can be envisaged which does not eventually lead to
sufficient domestic revenue mobilisation to ensure fiscal independence; Middle-income countries
are less revenue-constrained but face other problems - in the Middle East of weak political
representation linked at least in part to 'resource curse' effects of oil wealth (Ross, 2004) and in
Latin America of poverty resulting so much from low absolute incomes as from high inequality
in the distribution of income. In both cases, increasing direct tax revenues is likely to be
important.
Almost every region increased the contribution of direct taxes during the 1980s, but then saw this
reversed during the 1990s. This was the period, as Emran and Stiglitz (2002) detail, during which
the orthodoxy of switching to VAT-type taxation emerged. This orthodox view states that since
these taxes impose a lower administrative burden on governments than systems of direct

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taxation, and since models show they can be relatively undistortionary, they represent the easiest
option for developing countries to increase their tax revenues not least when they are already
losing trade tax revenues through liberalisation. More recently, empirical analysis by IMF
researchers has shown that most low-income countries were completely unable to achieve even
such a welfare-reducing compensation for lost trade tax revenue. Baunsgaard and Keen (2005)
show that on average, low-income countries replaced less than 30% of the lost revenues, In
other words, trade liberalisation systematically undermined the attempts of low- income
country governments to mobilise domestic revenues it increased, in fact, their dependence on
relatively volatile external aid finance.
The relationship between economic development and growth in government expenditures has a
long history, beginning from Wagner (1890). This seminal work gave rise to the popular Wagner
Law, which states that there is a long run tendency for state activities to grow relative to the
growth of national income. Since Wagner's epochal work, several studies have been
undertaken on his conclusions. Most of these studies, according to Essien (1997) dwell on:
a. Appropriate measure of public sector growth.
b. Correct interpretation of the Law
c. Finding an index of government size to facilitate companion between countries and
d. Testing the lawby adopting a case-effect relation to estimate the income elasticity of
government expenditure.
Essien (1997) is in itself a study on the "test of Wagner's Law on the Nigeria economy i.e. the
extent to which the size of government would grow, relative to increase in National output".
Hinrichs (1966) examined for industrial countries, the thesis of a rising government share of
expenditure during development.
It should be recognized that Wagner (1890) did not offer clearly reasons for "the growing share
of state activity" Bahl and Kinn (1998). However, subsequent studies attempted a filling of this
gap. For instance, Peacock-Wiscman displacement thesis concluded that government
expenditures undergo a shift in response to major crisis of distribution. An explanation of the
upward shift in government's share has been tested statistically with some success for a number
of industrial countries arc seen in Gupta (1967). For a small sample of developing countries the
same result was found Goffrnan and Mahar (1971) but Bahi, Kinn and Park (1986) estimated a
downward displacement for growing government expenditures between 1961 and 1964 in
Korean.
From Adebayo (2000) the following government activities, which have pronounced
implications for poverty reduction and development, may be linked to increase in government
expenditures. First is "Expenditure on Poverty Reducing Activities". Specifically the activities
are those in the Education, Health and Social services sectors. The rule of the thumb is;the higher
the expenditure on these activities, the lower the incidence of absolute poverty. The second is
the meeting of the basic needs of the poorest 40% - 50% of the population. This is often
referred to as The Basic Needs Approach to development. Indicators of the basic needs are
usually (1). Food, calorie - supply per head or calories supply as a percentage of requirements
of proteins, (2) Literacy rates, primary school enrolment (as a percentage of the population aged 5-
14), (3) Health: Life expectancy at birth infant mortality (per thousand at birth), (4) Water Supply:
Percentage of the population with access to potable water and (5) Housing.
The concept of Targeting as an interventionist policy in welfare enhancement and particularly in
poverty reduction, has received considerable attention overtime. Good examples in this regard
include Ravallion (1991), Kanbur et al (1994), Van de Walle (1998), and Coady et al (2004).

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Targeting can assume different dimensions and may be of several types. Van de Walle (1998)
specified two categories of Targeting. These are broad and narrow.
In Broad Targeting, no attempt is made to reach the poor as individuals rather; efforts are made
of targeting types of spending that are relatively more important to the poor. Examples of Broad
Targeting expenditure include basic social services, primary education, rural development, health
care delivery, safe water provision and basic physical infrastructure.
According to Van de Walle (1998), spending on basic social services is found to benefit the poor.
Money spent on primary education for example, is likely to reach more poor children than
money spent on secondary or tertiary education. Better health and basic education, access to safe
water and basic physical infrastructure rise poor people's well being and may also raise their
productivity and income".
Van de Walle (1998) defined Narrow Targeting as a deliberate attempt to concentrate benefits on
poor people - whatever the type of spending. Narrow Targeting is said to have become popular in
recent times, because it enhances the chance of reducing budget deficits and public spending,
while still protecting the poor. Narrow Targeting can be of two types; Indicator Targeting also
called Categorical Targeting. Basley and Kanbur (1993) explained Categorical Targeting as one
that identifies a characteristic of the poor (an indicator) that is highly correlated with low income
but can be observed more easily and more cheaply than can income. Examples of such indicators
include region of residence (geographical targeting, land holding class, gender, nutritional
sisters, disability, household and size. A second variant of narrow targeting is called Self
Targeting. Van de Walle (1998) said that in Self Targeting "Instead of relying on an
administrator to choose participants, these schemes aim to have beneficiaries select themselves,
through creating incentives that will induce the poor and only the poor to participate”.
Government spending can also be channeled into employment generation, in order to reduce
poverty level. There is a growing interest in studying the linkage between poverty reduction and
employment characteristics, Rahman and Islam (2003) is a good example.
Theoretical Framework
A country's tax system is a major determinant of other macroeconomic indexes. Specifically, for
both developed and developing economies, there exists a relationship between tax structure and
the level of economic growth and development. Indeed, it has been argued that the level of
economic development has a very strong impact on a country's tax base (Musgrave, 1969), and
tax policy objectives vary with the stages of development. Similarly, the (economic) criteria by
which a tax structure is to be judged and the relative importance of each tax source vary over
time (Musgrave, 1969)
For example, during the colonial era and immediately after the Nigerian (political) independence
in 1960, the sole objective of taxation was to raise revenue. Later on, emphasis shifted to the
infant industries protection and income redistribution objectives. In his discussion of the
relationship between tax structure and economic development, Musgrave (1969) divided the
period of economic development into two, the early period when an economy is relatively
underdeveloped and the later period when the economy is developed. During the early period,
there is limited scope for the use of direct taxes because the majorities of the populace reside in
the rural areas and are engaged in subsistence agriculture. Because their incomes are difficult to
estimate, Lax assessment at this stage is based on presumptions prone to wide margins of error.
The early period of economic development is, therefore, characterized by the dominance of
agricultural taxation, which serves as a proxy for personal income taxation, and in Nigeria the
various marketing boards served as effective mechanisms for administering agricultural taxation.

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Agricultural taxation substituted for personal income tax given the difficulty in reaching
individual farmers and the inability to measure their tax liability accurately.
Further, the large percentage of self-employment to total employment makes effective personal
income tax unworkable (Musgrave, 1969). This problem thereby necessitates the use of the
ability-to-pay principle, effectively limiting personal income taxation to the wage income of
civil servants and employees of large firms both of which account for an insignificant
proportion of the total working population. During the early period of economic development,
direct taxes in form of company income taxes cannot be important because there are few home-
based industries. The same principle applies to Excise Tax (an indirect tax) on locally
manufactured goods. Both will increase in relative importance as economic development
progresses, however, due to growth or non-static nature of the bases of these taxes. Several retail
outlets also make a sales tax system difficult to implement, and a multiple-stage sales tax system
even more so (Musgrave, 1969). Further, the rudimentary nature of the economy precludes retail
form of taxes.
At this stage also, taxes are difficult to collect because of the lack of skills and facilities for tax
administration. Given this, a complicated tax structure is not feasible and the amount of revenue
from personal income tax will depend on taxpayers’ compliance and the efficiency of the tax
collector. An important source of government revenue during the early stage of economic
development is the foreign trade sector because exports and imports are readily identifiable and
they pass through few ports. However, revenue from export and custom duties is not stable
because of periodic fluctuations in the prices of primary products. This tends to complicate plan
implementation in many developing countries (Massel et al., 1972).
Economic development brings with it an increase in the share of direct taxes in total revenue.
This is consistent with the experience of developed economies in which direct trades yield more
revenue than indirect taxes. For example, personal income tax becomes important as the share of
employment in the industrial sector increases. Also, as the dominance of the agricultural sector
decreases, sales tax may be broadened because a great deal of output and income will go through
the formal market as the economy becomes more monetized. Musgrave (1969) noted that at this
stage, taxes may be imposed on firms or individuals, on expenditures or receipts, and on factor
inputs or products, among others. He further argued that there would be a tendency to shift from
indirect to direct taxes. His theory relates to a normal development process, however. It does not
consider a situation where the sudden emergence of an oilboom provides an unanticipated source
of huge revenue. Hence, this stereotype may not be applicable to an oil-based economy like
Nigeria. Nevertheless, the theory stifle represents a benchmark against which country specific
empirical evidence may be compared.
Methodology
The research design adopted for this research is the ex-post facto research design. The adoption
of this research design hinges on the study historical data to investigate the on the impact of tax
evasion and avoidance on Nigeria's economic development. The issue of data is at the very centre
of research and also the nature of data for any study depends entirely on the objectives of the
research and the type of research undertaken (Onwumere, 2005). For this research secondary data
sources from the Central Bank of Nigeria Statistical Bulletin was used to test the hypothesis using
the Ordinary Least Square Regression (OLS) model. The justification for adopting this analytical
technique is based on the following premise; the ordinary least square is assumed to be the best
linear unbiased estimator (Gujarati, 1995); it has minimum variance (Onwumere, 2005), and
similar works in other jurisdiction adopted this technique in their study.

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Description of Explanatory Variable

(a) Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is the total value of goods and services produced in a country
over a specified period. It equals the total income of everyone in the economy, and the total
expenditure on the economy's output of goods and services. GDP is a gauge of economic of
economic performance because it measures something people care about their incomes. Similarly,
an economy with a large output of goods and services can better satisfy the demands of
households, firms and the government. In line with the work of Rahman and Islam (2003) this
seminal paper will adopt the natural log gross domestic product as proxy for the productivity of
the Nigerian economy.
(b) Tax Evaded and Avoided
Tax evasion and avoidance arises in a situation where the taxpayer arranges his financial affairs
in a way that would make him pay the least possible amount of tax without infringing the legal
rules or completely refuses to pay tax. For this seminal paper, the natural log between the
difference of total budgeted tax revenue and actual tax revenue was used as a measure of tax
evaded and avoided in Nigeria for the period 1999 to 2012.
Model Specification
This simple regression equation is stated thus:
Y = B1 + B2X2 + u ……………………………………………………………… (1)
Where, Y = dependent variable; X = explanatory variable; B1 = intercept of Y; B2 = slope
coefficients; U = stochastic variables (Gujarati, 1995). Therefore, in writing the model equation,
the following proxies and symbols wereused in this research.
GDP = Gross Domestic Product
TEA = Tax Evaded and Avoided
a = Regression equation intercept
b = Regression equation coefficient
µ = error term
Equation (1) will be re-written to suit the study along the four hypotheses.
Thus, Tax Evasion and Avoidance do not have positive significant impact on Gross Domestic
Product of Nigeria, it is represented as:
GDP = a + bTEA + µ ……………………………………….. (2)

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ANALYSIS OF RESULT
Table 1 below presents the quantum values of the model proxies.
Table 1: Quantum Values of Model Proxies
Year Budgeted tax Actual Tax Tax Evaded GDP (N)m
Revenue Revenue and Avoided
(N)m (N)m (A) (N)m
1999 1,877,283 707,400 469,883 310,890.10
2000 1,299,268 839,794 459,474 312,183.50
2001 1,319,907 995,731 324,176 329,178.70
2002 1,369,334 701,307 668,027 356,99.30
2003 1,426,553 764,895 661,658 433,203.50
2004 2,845,143 802,910 2,042,233 477,533.00
2005 2,847,671 989,950 1,857,721 527,576.00
2006 2,892,370 994,117 1,898,253 561,931.40
2007 2,925,837 1,117,728 1,808,109 595,821.60
2008 3,107,595 1,174,488 1,933,107 634,251.10
2009 3,737,949 1,228,017 2,509,932 674,889.00
2010 3,894,540 1,309,943 2,584,597 718,977.33
2011 4,233,325 1,531,776 2,701,549 775,525.70
2012 4,811,063 2,199,687 2,611,376 834,161.83
Source: CBN Statistical Bulletin (Various Years)

As revealed from the table above, the growth rate of Nigeria's GDP has been increasing over
the years. From 1999 to 2012, GDP growth rate had remained over the 5% growth rate mark
yearly. In 2001, GDP increased to by 5.44% to 329,178.70million and further grew by 8.45%
in 2002 to 356,994.30million. In 2003, GDP growth rate grew by 21.35% (433,203.50million)
which was the highest growth rate over the period of this study. In 2005, the growth rate was
10.23% (527,576.00million). From 2005 to 2012, the growth rate again, was consistent and
remained in the region of 6% to 7%. In 2006, the growth rate was 6.51% (561,931.40million),
in 2007, it grew by 6.03% (595.821.60million), in 2008, grew by 6.45% (634,251.10million), in
2009, it again grew by 6.41% (674,889.00million), in 2010, grew by 6.53% (0718,977.33) and
climbed to the 7% mark in 201 i and 2012. Specifically, in 2011, it grew by 7.87% to
775,525.70million and in 2012, grew by 7.56% to 834,161.83million.
Table 2: Regression Result
Dependent Variable: GDP
Variable Coefficient Std. Error t-Statistic Prob.
TEA -4.390065 2.061081 2.129982 0.0452
C 0.216555 2.399287 0.090258 0.9289
0.090258
R-squared Adjusted 0.839874 Mean dependent var 5.858400
R-squared S.E. of 0.731285 S.D. dependent var 4.862100
regression Sum 4.531715 Akaike info criterion 6.005725
squared resid Log 431.2653 - Schwarz criterion F- 6,200745
likelihood Durbin- 71.07156 statistic Prob(F- 2.209000
Watson stat 1.571733 statistic) 0.117033
Source: E-View Results

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As revealed from Table 2, Tax Evasion and Avoidance has negative and significant impact on
Nigeria's gross domestic product (coefficient of TEA = -4.39, t-value - 2.130). This indicates that
a one percent decrease in economic growth in Nigeria is due to 4.39 percent decrease in tax
evasion and avoidance. The probability value of 0.0452 < 0.05 confirms the significance of the
result. The coefficient of determination which measures the goodness fit of the model as revealed
by R-square (R2) indicates that 84% of the variations observed in the dependent variable were
explained by variations in the dependent variable. The test of goodness of fit as indicated by R
was properly adjusted by the Adjusted R-Square to 73.1%.

Conclusion
Tax evasion and avoidance have adverse effect on government revenue. Tax avoidance generates
investment distortion in the form of the purchase of assets exempted from tax or under-valued
for tax purposes. This increases the quantity of money in circulation but without a corresponding
increase in the goods and services, this then build up what is known as inflationary trends where
large money chases few goods. Therefore, taxation thus is not only a means of revenue
generation for Government, it can also be used to stimulate other sources of Government revenue
and develop other areas of the economy from which Government can realize revenue. However,
when there are leakages in tax collection through evasion, no development can take place, thus in
most countries where, there is high rate tax evasion and avoidance, it is usually associated with
high unemployment. This was buttressed from the findings of this study that tax evasion and
avoidance have negative and significant impact on growth of the Nigerian economy, lowers
government revenue and leads to low employment rate in Nigeria.

Recommendations
This study thus recommends as follows:
1. The enforcement of laws on tax evasion and avoidance should be intensified to ensure
that defaulters are brought to book irrespective of whose ox is gored.
2. Government policies and measures as it pertain fiscal policies in Nigeria should be
streamlined to stimulate economic growth and development by ensuring that there
tailored towards growth of the economy.
3. In order to ensure growth of the Nigerian economy, fund generated from tax revenue
should be strictly utilized for the benefit of the masses and not to the pocket of the
privileged few.

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