Tax Structure and Inclusive Growth in Nigeria: The Mediating Role of Income Inequality

Oladimeji Abeeb Olaniyi

University of Ilesa, Ilesa, Nigeria

Abstract

Despite decades of economic growth, income disparities and widespread poverty persist in Nigeria, raising concerns about the inclusiveness of the country's development trajectory. Nigeria’s tax system remains heavily reliant on indirect taxes, which disproportionately affect the poor, while direct taxes critical for redistributive equity are underutilized. This study investigates how tax structure influences inclusive growth, with a specific focus on the mediating role of income inequality in Nigeria. Utilizing annual time series data from 1993 to 2023, the study adopts the Barro-Sala-i-Martin (1992) augmented endogenous growth model and employs the Autoregressive Distributed Lag (ARDL) estimation technique. The model accounts for both short-run dynamics and long-run equilibrium relationships, and is validated through robust diagnostic tests including the Breusch-Pagan-Godfrey test for heteroskedasticity, the Ramsey RESET test, Breusch-Godfrey LM test for serial correlation, and the Jarque-Bera normality test. The results reveal that tax structure positively and significantly influences inclusive growth in the short run, but has a negative and statistically insignificant impact in the long run. Income inequality has a short-term positive impact but a significant negative effect in the long run, suggesting that its persistence undermines sustainable development. Labour force participation and capital formation exhibit time-dependent effects, with long-run benefits for inclusive growth. Inflation was found to be insignificant in both periods. These findings highlight the need for fiscal reforms that prioritize efficient tax utilization, progressive redistribution, and inclusive public investments. Strengthening Nigeria’s fiscal policy framework and enhancing equity in tax collection and spending could facilitate a broad-based, sustainable development.

Keywords

tax structure; inclusive growth; income inequality; ARDL; Nigeria.

JEL classification

References

1. Obadiaru, E., Brian-Kufre, O., Ayeni, A.W. (2024). The impact of tax revenue on economic growth in Nigeria. International Journal of Multidisciplinary Research and Growth Evaluation, Vol. 5, Issue 1, 566–571. dx.doi.org/10.54660/.IJMRGE.2024.5.1.566-571

          2. Olaniyi, O., Ayoola, T., Wright, O., Aregbesola, O., Kolawole, P. (2023). Tax administration and personal income tax compliance in Nigeria: A PLS-SEM approach. International Journal of Applied Economics, Finance and Accounting, Vol. 17, No. 1, 117–126. dx.doi.org/10.33094/ijaefa.v17i1.1088

          3. Akinadewo, I.S., Kayode, P.O., Dagunduro, M.E., Akinadewo, J.O. (2023). Empirical examination of the relationship between contemporary tax administration systems and revenue generation capacity in selected states of Nigeria. International Journal of Developing and Emerging Economies, Vol. 11, No. 2, 77–92. doi.org/10.37745/ijdee.13/vol11n27791

          4. Anyaduba, J., Otulugbu, P. (2019). Taxation and income inequality in Nigeria. Accounting and Finance Research, Vol 8, No. 3, 118–135. doi.org/10.5430/afr.v8n3p118

          5. Basha, M.H. (2022). Evaluating the impact of direct taxes on economic growth: Empirical evidence from Jordan. Asian Economic and Financial Review, Vol. 12, No. 8, 627–635. doi.org/10.55493/5002.v12i8.4573

          6. Dali, S. (2017). Nigeria: The Restrained Ambitions of Africa‘s Largest Economy. Working Paper 9690176b-64fb-4216-b45d-4. Agence française de développement. Available at: ideas.repec.org/p/avg/wpaper/en750.html

          7. Oloni, E., Asaleye, A., Abiodun, F., Adeyemi, O. (2017). Inclusive growth, agriculture and employment in Nigeria. Journal of Environmental Management & Tourism, Vol. 8, No. 1, 183–194. doi.org/10.14505//jemt.v8.1(17).18

          8. Meagher, K. (2018). Taxing times: Taxation, divided societies and the informal economy in Northern Nigeria. The Journal of Development Studies, Vol. 54, Issue 1, 1–17. dx.doi.org/10.1080/00220388.2016.1262026

          9. Oyinlola, M., Adedeji, A. (2022). Tax structure, human capital and inclusive growth: A sub-Saharan Africa perspective. Journal of Public Affairs, Vol. 22, Issue 4, e2670. doi.org/10.1002/pa.2670

          10. Ibekwe, A.I., Ibekwe, A.O. (2022). Effect of income inequality on the economic growth in Nigeria. Journal of Emerging Trends in Management Sciences and Entrepreneurship, Vol. 4, No. 2, 97–110. Available at: www.jetmase.com/index.php/jetmase/article/view/62

          11. Yeboah, S.D., Gatsi, J.G., Appiah, M.O., Fumey, M.P. (2024). Examining the drivers of inclusive growth: A study of economic performance, environmental sustainability, and life expectancy in BRICS economies. Research in Globalization, Vol. 9, 100267. doi.org/10.1016/j.resglo.2024.100267

          12. Olayinka K.B. (2016). Government spending and inclusive-growth relationship in Nigeria: An empirical investigation. Zagreb International Review of Economics & Business, Vol. 19, Issue 2, 33–56. doi.org/10.1515/zireb-2016-0007

          13. Toriola, A.K., Aberu, F., Amusa, S.O., Adeniwura, O.O., Mustapha, B.H. (2022). Fiscal Stability and Inclusive Growth in Nigeria. Indonesian Journal of Contemporary Education, Vol. 4, No. 2, 43–52. doi.org/10.33122/ijoce.v4i2.36

         14. Onwe, J.C., Ojiide, M.G., Subhan, M., Forgenie, D. (2024). Food security in Nigeria amidst globalization, economic expansion, and population growth: A wavelet coherence and QARDL analysis. Journal of Agriculture and Food Research, Vol. 18, 101413. doi.org/10.1016/j.jafr.2024.101413

          15. Ogbu, O. (2012). Toward inclusive growth in Nigeria. The Brookings Institution. Global Economy and Development Policy Paper, Vol. 3, 1–7. Available at: www.brookings.edu/wp-content/uploads/2016/06/06_growth_nigeria.pdf

         16. Afolabi, J.O., Ogunjimi, J. (2020). Industralization: A Roadmap to Inclusive Growth in Nigeria. NESG Economic and Policy Review (EPR), 9 p. Available at: ssrn.com/abstract=3961400

         17. Brys, B., Perret, S., Thomas, A., O’Reilly P. (2016), Tax Design for Inclusive Economic Growth. OECD Taxation Working Papers, No. 26. Paris, OECD Publishing. doi.org/10.1787/5jlv74ggk0g7-en

          18. Khan, A., Khan, G., Safdar, S., Munir, S., Andleeb, Z. (2016). Measurement and determinants of inclusive growth: A case study of Pakistan (1990-2012). The Pakistan Development Review, Vol. 55, No. 4, 455–466. dx.doi.org/10.30541/v55i4I-IIpp.455-466

          19. Balasoiu, N., Chifu, I., Oancea, M. (2023). Impact of direct taxation on economic growth: Empirical evidence based on panel data regression analysis at the level of EU countries. Sustainability, Vol, 15, Issue 9, 7146. doi.org/10.3390/su15097146

          20. Adeosun, O.E., Olomola, P.A., Adedokun, A., Tabash, M.I. (2024). Examining the relationship between inclusive growth and tax revenue mobilization: additional evidence from sub-Saharan African countries. African Journal of Economic and Management Studies, Vol. 16, Issue 2, 219–236. doi.org/10.1108/AJEMS-11-2023-0435

          21. Ekong, C., Orebiyi, P. Iriabije, A. (2024). Fiscal policy and inclusive growth in Nigeria. World Journal of Advanced Research and Reviews, Vol. 22, Issue 3, 1715–1732. doi.org/10.30574/wjarr.2024.22.3.1849

          22. Pere-Ere, G., Ohiorenaun, J., Ikharo-Kadiri, H. Okungbowa, F. (2024). Direct taxes and inclusive growth in Nigeria. International Journal of Research Publication and Reviews, Vol. 5, No. 8, 2760–2771. Available at: ijrpr.com/uploads/V5ISSUE8/IJRPR32415.pdf

          23. Atif, S.M., Mohazzam, S. (2012). Inclusive Growth Strategies for Pakistan – Myth or Reality for Policymakers! 23 p. dx.doi.org/10.2139/ssrn.2101991

          24. Arowoshegbe, A.O., Uniamikogbo, E., Aigienohuwa, O.O. (2017). Tax revenue and economic growth of Nigeria. Scholars Journal of Economics, Business and Management, Vol. 4, Issue 10, 696–702. dx.doi.org/10.21276/sjebm.2017.4.10.4

          25. Uhuaba, O., Siyanbola, T. (2020). Tax structure and Economic Development: An infrastructural viewpoint. Indian-Pacific Journal of Accounting and Finance, Vol. 4, No. 2, 14–23. doi.org/10.52962/ipjaf.2020.4.2.101

          26. Adefolake, A.O., Omodero, C.O. (2022). Tax revenue and economic growth in Nigeria. Cogent Business & Management, Vol. 9, Issue 1, 2115282. doi.org/10.1080/23311975.2022.2115282

          27. Mdingi, K., Ho, S. (2021). Literature review on income inequality and economic growth. MethodsX, Vol. 8, 101402. doi.org/10.1016/j.mex.2021.101402

          28. Alves, J., Afonso, A. (2019). Tax structure for consumption and income inequality: an empirical assessment. SERIEs, Vol. 10, 337–364. doi.org/10.1007/s13209-019-00202-3

          29. Kakwani, N., Pernia, E.M. (2000). What is pro-poor growth? Asian Development Review, Vol. 18, No. 1, 1–16. doi.org/10.1142/S0116110500000014

          30. Anand, R., Mishra, M., Peiris, M. (2013). Inclusive Growth: Measurement and Determinants. IMF Working Papers, Vol. 2013, Issue 135. International Monetary Fund, 27 p. doi.org/10.5089/9781484323212.001

          31. Barro, R.J., Sala-i Martin, X. (1992). Convergence. Journal of Political Economy, Vol. 100, No. 2, 223–251. doi.org/10.1086/261816

          32. Omodero C., Igodo W. (2024). The Level of Development of Basic Infrastructure as a Factor in Stimulating Tax Revenue Growth in Nigeria. Journal of Tax Reform, Vol. 10, No. 2, 292–311. doi.org/10.15826/jtr.2024.10.2.170

          33. Okuneye, B., Olaniyi, O., Adekanmbi, A. (2023). Unemployment, Health Outcome and Inclusive Growth in Nigeria: ARDL Bound Test Approach. Acta Universitatis Danubius. Œconomica, Vol. 19, No. 4, 23–34. Available at: dj.univ-danubius.ro/index.php/AUDOE/article/view/2359

          34. Abd Hakim, T. (2020). Direct versus indirect taxes: Impact on economic growth and total tax revenue. International Journal of Financial Research, Vol. 11, No. 2, 146–153. doi.org/10.5430/ijfr.v11n2p146

          35. Neog, Y., Gaur, A. (2020). Tax structure and economic growth in India: insights from ARDL model. Indian Growth and Development Review, Vol. 13, Issue 3, 589–605. doi.org/10.1108/IGDR-05-2019-0048

          36. Okere, P.A., Uzowuru, L.N., Mbaeri, C.C. (2022). Fiscal Policy and Human Development in Nigeria (1986-2017). International Journal of Research and Innovation in Social Science, Vol. 6, Issue 5, 545–553. Available at: rsisinternational.org/journals/ijriss/Digital-Library/volume-6-issue-5/545-553.pdf

          37. George-Anokwuru, C. (2023), Indirect Tax and Inclusive Growth in Nigeria. European Journal of Economic and Financial Research, Vol. 7, No. 2, 33–49. doi.org/10.46827/ejefr.v7i2.1460

          38. Olaniyi, O., Adekanmbi, A., Opadeji, S., Shallie, A. (2024). Assessing the Impact of Infrastructure on Tax Structure and Improving Economic Performance: The Case of Nigeria. Journal of Applied Economic Research, Vol. 23, No. 3, 623–641. doi.org/10.15826/vestnik.2024.23.3.025

          39. Okoh, I.F., Edo, O.C., Akhigbodemhe, E.J., Edeoghon, I.O. (2021). Direct taxes and income redistribution in Nigeria. Global Journal of Business and Social Sciences Review, Vol. 9, Issue 2, 182–196. doi.org/10.35609/gjbssr.2021.9.2(8)

          40. Tanchev, S. (2021). Long-run equilibrium between personal income tax and economic growth in Bulgaria. Journal of Tax Reform, Vol. 7, No. 1, 55–67. dx.doi.org/10.15826/jtr.2021.7.1.090

          41. Avcı, B.S., Tonus, Ö. (2022). The impact of fiscal policies on inclusive growth in Turkey. Journal of Economy Culture and Society, Vol. 66, 293–306. dx.doi.org/10.26650/JECS2021-1018055

          42. Tendengu, S., Forget, M., Asrat T. (2022). Fiscal Policy and Economic Growth in South Africa. Economies, Vol. 10, Issue 9, 204. doi.org/10.3390/economies10090204

          43. Topuz, S., (2022). The relationship between income inequality and economic growth: Are transmission channels effective? Social Indicators Research, Vol. 162, 1177–1231. doi.org/10.1007/s11205-022-02882-0

          44. Chemwok, C., Siele, R., Saina, E. (2023). Income inequality and economic growth in Kenya. Journal of Business Management and Economic Research, Vol. 7, Issue 3, 80–92. doi.org/10.29226/tr1001.2023.334

          45. Danso, E., Boateng, E. (2020) Impact of Income Inequality on Economic Growth Evidence from the Ten (10) Biggest Economies in Africa. Journal of Economics and Sustainable Development, Vol. 10, No. 14, 57–69. doi.org/10.7176/JESD/10-14-07

          46. Romer, P.M. (1986). Increasing Returns and Long-Run Growth. Journal of Political Economy, Vol. 9, No. 5, 1002–1037. doi.org/10.1086/261420

          47. Ali, I., Son, H. (2007). Defining and measuring inclusive growth: Application to the Philippines. ADB Economics Working Paper Series, No. 98. Asian Development Bank, 45 p. dx.doi.org/10.2139/ssrn.4921572

          48. Raheem, I., Isah, K., Adedeji, A. (2018). Inclusive growth, human capital development and natural resource rent in SSA. Economic Change and Restructuring, Vol. 51, 29–48. doi.org/10.1007/s10644-016-9193-y

          49. Mansour, M. (2014). A tax revenue dataset for sub-Saharan Africa: 1980–2010. FERDI Document de travail, No. I19, Fondation pour les études et recherches sur le développement international (FERDI), 25 p. Available at: hdl.handle.net/10419/269280

          50. Solow, R.M. (1956). A contribution to the theory of economic growth. Quarterly Journal of Economics, Vol. 70, Issue 1, 65–94. doi.org/10.2307/1884513

          51. Pesaran, M., Shin, Y., Smith. R. (2004). Bounds testing approaches to the analysis of long-run relationship. Cambridge Working Papers in Economics (CWPE). Cambridge, University of Cambridge. doi.org/10.17863/CAM.5093

          52. Mbara, G. (2024). Income Inequality and Growth: Calibration and Simulation for the Kenyan Economy. Journal of African Economies, Vol. 33, Issue 1, 114–135. doi.org/10.1093/jae/ejae017

About Authors

Oladimeji Abeeb Olaniyi

PhD, FMNES, Lecturer of Department of Economics, Faculty of Social and Management Sciences, University of Ilesa, Ilesa, Nigeria (JP32+WRV, Isua, Nigeria); ORCID orcid.org/0000-0002-3487-0755 e-mail: oladimeji_olaniyi@unilesa.edu.ng

For citation

Olaniyi, O.A. (2025). Tax Structure and Inclusive Growth in Nigeria: The Mediating Role of Income Inequality. Journal of Applied Economic Research, Vol. 24, No. 4, 1165-1187. doi.org/10.15826/vestnik.2025.24.4.038

Article info

Received May 25, 2025; Revised July 22, 2025; Accepted August 12, 2025.

DOI: https://doi.org/10.15826/vestnik.2025.24.4.038

Download full text article: