Abstract

The aim of collecting taxes is to finance government expenditure in providing public goods to aid the welfare of the citizens. This paper sought to determine the welfare effect of taxation on Nigerian economy using consumption theory function. Total consumption expenditure (TCE) was used to measure the welfare effect of taxation while private investment level (PIL) and total federally collected revenue (TFCR) were used to capture the economy. Jarque – Bera normality tests showed that TCE data had a normal distribution (P = 0.00000), PIL data had normal distribution (p = 0.00000) and TFCR data were normally distributed (p = 0.000006). Augmented Dickey Fuller (ADF) showed that TCE data were stationary at first difference (P = 0.000*) with lag 6, PIL data was stationary at level (P = 0.000*) with 0 and TFCR data was stationary at first difference (P = 0.0023) with lag 9. Ordinary least square method of regression analysis was used to measure the possible effect, PIL had a direct/positive relationship with TCE as expected but no significant effect (p = 0.7922) while TFCR had negative and significant effect (p = 0.0000*) on TCE. About 65% of the variations in TCE are explained by variations in PIL and TFCR. The overall significance of the model was tested using F-test and we found out that taxation has a significant (p = 0.00000) welfare effect on Nigerian economy. We conclude that the negative and significant effect of total federally collected revenue on total consumption expenditure can be as a result of mismanagement of funds, lack of implementation of policy and corruption which is very rampant in Nigeria and we recommend that the revenue should be spent such that income will be evenly and fairly distributed also, private investment should be encouraged as it impacts consumption positively.