EuroEconomica, Vol 34, No 1 (2015)

Optimal tax rate and economic growth. Evidence from Nigeria and South Africa

Olufemi Muibi Saibu


The recent economic crisis had made developingcountries to look inward for financial resources to finance development. Thereadily alternative is the tax revenues however, the possible adverse directand indirect effects of tax on productivity and work efforts as well as onaggregate consumption had make some African countries (especially Nigeria andSouth Africa) reluctant in implementing far reaching tax policy reform. Thispaper examines optimal tax burden and real output growth Nigeria and SouthAfrica, two of the top four economies in Africa. The paper empiricallydetermined what should be the optimal tax rate for Nigeria and South Africa-thetwo leading economies in Africa. The paper found that nonlinearity hypothesis inthe effects of tax in the case of South Africa is rejected while a significantnonlinear relationship is found in the case of Nigeria. The results suggest  that the  growth-maximizing  tax rate  is  about  15%  of  percapita GDP for South Africa and 30% for Nigeria.  At that  tax  rate, the  economic  growth rate  would  be around  6% and 8% instead  of the  actual  mean growth rate of 2.84% and 4.51% for SouthAfrica and Nigeria respectively.  Thepaper concluded the current tax burden in the two countries may be sub-optimaland may hurt long term sustainable growth process in the two countries


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