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

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.