Effect of Tax Revenue on Public Debt in Nigeria

Abstract

Nigeria has experienced a continuous increase in public debt despite efforts to generate revenue through taxation. This growing debt has raised concerns about the country's fiscal sustainability, especially in light of the significant portion of the national budget allocated to servicing debt. The effectiveness of tax revenue in reducing public debt remains contentious. The study therefore investigates the effect of tax revenue on public debt in Nigeria from 2013 to 2025, focusing on some of the key tax components such as Company Income Tax (CIT), Petroleum Profit Tax (PPT), Value Added Tax (VAT), and Capital Gains Tax (CGT) with total outstanding public stock debt as a proxy for public debt. Employing a longitudinal research design and secondary data sourced from the Federal Inland Revenue Service and Debt Management Office, the study adopts a multiple regression model to assess the relationships between tax revenue and public debt. Descriptive statistics reveal significant variability in public debt and tax revenue over the study period, with CIT showing a strong positive correlation with public debt, while VAT and CGT exhibit weaker relationships. The Augmented Dickey-Fuller (ADF) test results indicate that public debt is non-stationary, while most tax variables become stationary after differencing. The regression analysis demonstrates that VAT has a significant positive impact on public debt, whereas PPT and CGT do not significantly influence debt levels. The presence of autocorrelation in the residuals, as indicated by diagnostic tests, suggests the need for further model refinement. The findings suggest that optimizing VAT and CIT collection may improve fiscal outcomes, while additional efforts are needed to enhance the impact of other tax types on reducing public debt.