Institutional Quality and Tax Revenue Mobilization in Nigeria (1996 - 2021)

1. INTRODUCTION

Taxation as a means of revenue generation, income redistribution, and curbing of social evils through reprising of goods, such as alcohol and tobacco, all began in the 20th century (Pamba, 2023). According to Russell (2010), taxation plays a crucial role in the economy of middle and low-income countries as it expands respective countries’ tax base, administratively and economically.

However, research on the determinants of tax revenues has yielded inconsistent results due to variations in countries and sample periods. Early studies by Lotz and Mors (1967), Bahl (1971), and Heller (1975) identified development level, monetization, trade openness, and sectoral composition as causes which influence the determinants of revenue (Johnson & Omodero 2021). Other authors have expanded on these factors, considering social determinants, such as education, informal economy, tax compliance, urbanization, inflation, and official development assistance (Abu et al., 2021; Johnson & Omodero, 2021; Rotimi et al., 2021). Institutional factors, such as corruption, government accountability, political as well as economic regulation have also been included (Augustine, 2020; Bangaké et al., 2022; Nguyen & Luong, 2021; Ofori et al., 2021; Pamba, 2023; Rotimi et al., 2021; Salman et al., 2022).

Nigeria has been categorized as a mono-economy country due to its heavy reliance on revenue from the oil sector. For instance, in the first quarter of 2022, 90% export income and 85% of government revenue accrued from oil and gas. However, the decrease in the revenue from the oil sector forced the government to seek other means of funding for its capital projects, leading to a greater reliance on debt. Taxation has emerged as a significant tool to generate revenue in order to support capital projects. Despite efforts to increase revenue through taxation, Nigeria lags behind other developing countries in revenue collection due to low taxpayer compliance and inadequate government services in proportion to the taxes paid (Johnson & Omodero, 2021).

The tax payment data mentioned in earlier studies indicate a low tax morale and noncompliance. This may be attributed to institutional factors, such as weak governance, corruption, and poor tax administration and management. These factors hinder the allocation of revenue towards long-term projects in the country.

Numerous studies have explored the connection between institutional quality and tax mobilization. For instance, Rodríguez-Pose and Muštra (2022) examined the relationship between economic returns, political and fiscal decentralization in the European Union (EU) for the period of 2000-2015 by employing panel data fixed effects analyses. Their findings suggested that regions with better government quality benefit more from regional autonomy, while those with poorer government quality experience slower growth. Nguyen and Luong (2021) studied the effect of institutional quality on public debt in 27 transition countries. The study highlighted the role of institutional quality, particularly in controlling corruption, in managing public debt. Similarly, Zalle (2022) explored the intricate interactions between natural resource dependence, corruption, and tax revenue mobilization worldwide. The study revealed that decreasing corruption tends to boost non-resource tax revenue, however, tax revenue mobilization may sometimes lead towards corruption and evasion of natural resource rents. Pamba (2023) conducted an empirical analysis of the effect of institutional quality on tax revenue in South Africa using a time series dataset spanning over the years (1996-2020). The study revealed that all governance quality variables except for corruption had an adverse impact on tax income in South Africa. Amedanou (2021) examined the impact of political regimes and institutions on revenue collection across the eight WAEMU member states for the time period (1990-2017). The evidence supported that addressing tax collection issues necessitates reforms in these institutions and a democratization of states' political regimes. Salman et al. (2022) examined the influence of management on the performance of tax revenue in West African countries. The study concluded that governance affects tax revenue in West Africa, emphasizing the need for policies that ensure quality institutional framework. Rotimi et al. (2021) focused on the effect of revenue generation on economic growth in Nigeria (1981-2018). The study discovered that non-oil revenue affects economic growth positively.

While previous studies, such as Salman et al. (2022) have assessed the effect of institutional management on tax revenue performance (TRP) in West Africa, there remains a lack of focused, country-specific investigation that critically explores the dynamics between institutional quality and tax mobilization within the Nigerian context. Most of the existing literature either generalizes findings at the regional level or does not fully incorporate long-run data to observe institutional evolution over time. Consequently, there is an insufficient understanding of how Nigeria’s unique institutional characteristics—such as governance structures, corruption levels, rule of law, and political stability—impact its tax revenue mobilization efforts. Therefore, this study sought to bridge this gap by examining the relative impact of institutional factors (which include corruption control, effectiveness of government, regulatory quality, political firmness or stability, rule of law, and voice and accountability) on tax revenue mobilization in Nigeria (1996-2021). The inclusion of all six indicators of institutional quality—voice and accountability (VOC), political stability and absence of violence, government effectiveness (GOE), regulatory quality, rule of law, and control of corruption (COC)—is justified to provide a comprehensive and multidimensional assessment of the institutional environment. This is because each indicator captures distinct but interrelated aspects of governance that collectively influence the effectiveness, equity, and sustainability of tax mobilization efforts in Nigeria. The findings of this study would assist the Nigerian government to identify additional institutional factors affecting tax revenue mobilization and provide policy recommendations in order to enhance revenue collection.

Methodology

The research design employed in this study was ex-post facto. The nature of the research demanded the use of quantitative analysis of data in validating the hypotheses of the study. This research was anchored on the benefit received from taxation theory, which aligns with the six governance indicators introduced by Kaufmann et al. (2002), which were also applied in this investigation. This theory underscores that when there exists effective governance, characterized by the provision of public goods and services, there is a higher propensity of taxpayers willing to fulfill their tax obligation.

In an attempt to examine the effect of institutional quality on tax revenue mobilization in Nigeria, the study adapted the model from the study conducted by Salman et al. (2022) on the influence of management and TRP in West Africa. The data series covered the time period between 1996 and 2021. The data was collected from the publication of the Government Revenue Database (UNU-WIDER), World Governance Indicators (WGI) of World Bank, and World Development Indicators (WDI).

The functional model is:

Where TRP is tax revenue performance, GOE is governance indicator

The model can be restated in an econometric model as thus:

where TRP is tax revenue performance; GOE is government effectiveness; RUL is rule of law; RTQ is regulatory quality; COC is control of corruption; VOC is voice and accountability; PAV is political stability and absence of violence; AGRIC is share of agriculture; EDE is economic development; TRD is the degree of trade openness; ε is the unobserved determinant of tax performance.

In the ARDL model form:

AGRIC is included as a control variable because AGRIC in Gross Domestic Product (GDP)may significantly affect tax mobilization capacity, particularly in developing economies, such as Nigeria, where a large portion of agricultural activity remains informal and untaxed. EDE, representing economic development, is controlled for since the level of economic advancement influences both institutional capacity and the efficiency of tax systems, thereby shaping revenue outcomes. TRD, the degree of trade openness, is also accounted for as increased integration into global markets may impact tax bases and administrative efficiency through both customs revenue and institutional reforms prompted by external trade relations. For the estimation techniques, the initial step involves employing descriptive statistics to provide a concise overview of the statistical properties pertaining to the dataset utilized in this investigation. The descriptive attributes encompass metrics, such as the average, middle value, most frequent value, smallest and largest values, as well as measures of dispersion including standard deviation, skewness, kurtosis, and others. Following this, the investigation applied the unit root test to ascertain the integration of variables. Ultimately, the ARDL methodology, which estimates for both the short- and long-run was employed.

Results and Discussion

The mean values offer a central tendency of each variable, with the minimum and maximum values suggesting whether these averages are low or high. For instance, the mean value of 0.188946 for TRP lies between -0.160000 (minimum) and 0.867000 (maximum), indicating moderate performance in revenue collection relative to its potential. Comparatively, AGRIC has a high mean value of 24.64356, which reflects the sector's significant contribution to the Nigerian economy. Conversely, COC has a negative mean (-1.173591), suggesting poor governance in this area. These observations reveal key economic implications, such as the dominance of agriculture and challenges in institutional quality.

The standard deviations, representing the variability of these variables, highlight the dispersion from the mean. TRP showed a standard deviation of 0.259252, indicating moderate variability, while EDE showed high variability with a standard deviation of 3.434665, suggesting that development levels fluctuate significantly over time. This variance in EDE could imply unstable growth, possibly linked to the volatility in technological advancement and productivity. Political stability and absence of violence (PAV) also exhibit considerable variability (0.422602), reflecting political instability’s significant economic implications for industrialization.

Skewness values indicate the asymmetry of the data distribution, with positive skewness in TRP (0.871932) and AGRIC (1.453828) implying that the distributions are right-tailed, showing more observations below the mean. In contrast, variables, such as VOC with a skewness of -1.301418, suggest a left-skewed distribution, indicating most values lie above the mean. A positively skewed variable, such as agriculture, suggests that while the sector is dominant, extreme high values are rare, possibly reflecting challenges in agricultural technology or productivity growth.

Kurtosis values describe the "tailedness" of the distributions. A kurtosis of 5.245334 for AGRIC and 5.079152 for VOC indicates leptokurtic distributions, where extreme values occur more frequently. This suggests instability or shocks in these areas, such as sharp changes in agriculture’s share or in political accountability. Conversely, TRP with a kurtosis near 3 (3.299092) implies a distribution close to normal, reflecting a relatively stable revenue system with fewer outliers.

The Jarque-Bera statistics test for normality in distribution. For variables, such as AGRIC, the null hypothesis of normal distribution at the 5% significance level was rejected. This non-normality could imply that agricultural performance is subject to irregular shocks or policy changes, which is critical in understanding labor productivity and industrialization. Similarly, VOC, with a Jarque-Bera value of 12.02243 (p-value 0.002451), suggests non-normality, reflecting volatile political environments that may impact long-term economic stability. On the other hand, variables, such as COC (Jarque-Bera 1.554670, p-value 0.459629) do not show significant deviation from normality, indicating more stable, though still poor, governance outcomes.

Table 1

Descriptive Statistics

Note. TRP is tax revenue performance; GOE is government effectiveness; RUL is rule of law; RTQ is regulatory quality; COC is control of corruption; VOC is voice and accountability; PAV is political stability and absence of violence; AGRIC is share of agriculture; EDE is economic development; TRD is the degree of trade openness

Table 2

Stationarity Tests

Note. *** represent significance level at 1%

The results of the ADF unit root test presented in the table above reveals that at 5% level of significance apart from EDE and VOC that were stationary at level that is I(O), TRP, COC, GOE, POV, REQ, RUL, TRD, and AGRIC were stationary at first difference, that is I(1).

Empirical Results

Table 3

ARDL Results

Note. The values reported in parentheses ( ) are t-statistics and [ ] is the probability value

Table above shows that COC has a negative but insignificant effect on tax revenue performance both in the long and short-run. The results suggest that in Nigeria, COC is not contributing to tax revenue performance. It was revealed that the EDE has an insignificant positive influence on TRP in the short-run but positively significant influence in the long-run. Specifically, when EDE appreciates by 1%, tax revenue performance increases TRP by 6% in the long-run, while EDE fails to stimulate TRP in the short run.

Likewise, GOE has an insignificant positive effect on TRP in both the short-run and long-run. This suggests that in Nigeria, GOE is not contributing to TRP.Also, the results determine that the political stability and absence of violence affect TRP negatively in the short-run, but there is an insignificant positive effect in the long-run. The regulatory quality was shown to exert an insignificant negative effect on TRP in the short-run and a significant negative effect in long-run. Thus, a 1% increase in regulatory quality would lead towards a decline of 125% in long-run. It was also found that the rule of law has an insignificant positive effect on TRP in the short run but a positive effect in the long-run. Specifically, when the rule of law appreciates by 1%, tax revenue performance increases by 0.8% in the long-run. Additionally, it shows that voice and accountability have an insignificant negative effect on TRP both in the short and long-run. The results suggest that in Nigeria, voice and accountability have a negative but not significant effect on TRP.

Agriculture was also shown to exert negatively significant effect on TRP in both the short run and long-run. Thus, a 1% increase in agriculture leads towards a decline of 3.6% in the short-run and a decrease of 0.9% in the long-run.

Diagnostic Test

The bound t-test which is in line with Pesaran et al. (2001) was conducted on the model to detect the presence or otherwise of a cointegration between the variables.

Table 4

Bound Test

Table above shows that the F-statistics of the model (11.87464) is greater than the corresponding upper bound critical value (3.3). Therefore, the null hypothesis is rejected and the alternative hypothesis of co-integrating relationship between the variables in the model is accepted.

Table 5

Heteroskedasticity Test

H0: the residuals have no ARCH effect

H1: the residuals have ARCH effect

The null hypothesis is accepted from the result presented in the above table.

Table 6

Breusch-Godfrey Serial Correlation LM Test

H0: The residuals are independent

H1: The residuals are not independent

The LM test presented in Table 8, with the p-value (0.1849) > 0.05, shows that the null hypothesis is accepted and the residuals are independent.

Discussion

Corruption exhibits a negative effect, though it lacks statistical significance in the short-run and long-run analyses. Given that its t-value surpasses the unity threshold, one can infer a negative association between corruption and tax revenue performance in Nigeria; however, this effect appears weak. This outcome aligns with the conclusions drawn by Ozekhome (2022). Undoubtedly, corruption diverts and distorts public resources intended for economic growth and development, consequently undermining tax compliance among taxpayers and impacting TRP in Nigeria.

In both short-run and long-run assessments, the coefficient for regulatory quality demonstrates a negative sign, suggesting a feeble regulatory environment in Nigeria. These points towards potential deficiencies in policy formulation and implementation, which may influence tax revenue performance. This finding corroborates the research by Eregha (2013).

GOE exhibits a positive relationship with TRP, although it fails to attain significance level of 5%. Nevertheless, the government must maintain consistent, high-quality public services, such as the civil service, and ensure the independence and efficiency of strategy design and execution, as well as uphold its reliability and commitment to policies. Thus, enhancing GOE and capacity is imperative to bolster tax revenue performance in Nigeria, consistent with the findings of Olarinde and Jonathan (2021). A 10% decline in GOE leads towards a 0.05% reduction in TRP in Nigeria and vice versa.

The rule of law, which encompasses supremacy of the law, equality before the law, civil liberties, and human rights displays a positive coefficient in both short-term and long-term contexts. Nevertheless, it only achieves significant impact in the long-run. Evidently, political stability has a detrimental impact on short-term tax revenue performance but an insignificant positive effect in the long-term. This suggests a lack of political stability and the presence of violence in Nigeria, hampering the tax revenue performance, as confirmed by Ozekhome (2022). A 10% enhancement in political stability results in a 0.6% increase in tax revenue performance.

EDE has a positive relationship with tax revenue performance in Nigeria, though it only attains significance in the long-term. This implies that a 10% increase in per capita income stimulates a 0.06% rise in tax revenue performance in Nigeria.

Conclusion

The study concluded based on the results that COC and regulatory quality shows a negative sign in both the short and long-run. GOE exhibits a positive relationship with tax revenue performance, though it does not attain statistical significance at the 5% level. The rule of law shows a positive sign in both the short and long-run.

The policy suggestions emanating from the above findings are as follows:

• Strengthen anti-corruption efforts through transparency, digital tax systems, and institutional oversight to improve tax compliance.
• Reform and enforce clear, fair, and predictable regulations to address weaknesses in regulatory quality.
• Improve GOE by investing in public service quality, civil service professionalism, and policy implementation capacity.
• Promote the rule of law by ensuring equal application of tax laws, protecting rights, and upholding judicial independence.
• Enhance political stability by addressing insecurity and governance issues to create a conducive environment for tax collection.

Support long-term economic growth through human capital development, infrastructure, and diversification to expand the tax base.

Conflict of Interest

The author of the manuscript has no financial or non-financial conflict of interest in the subject matter or materials discussed in this manuscript.

Data Availability Statement

The data associated with this study will be provided by the corresponding author upon request.

Funding Details

No funding has been received for this research