Tax Allowance, Private Sector Investment and Economic Growth in Nigeria

Abstract

This study investigates the impact of tax allowance on private sector and Nigerian economy from 1985 to 2023, focusing on the relationships between Real Gross domestic product (RGDP), Investment Allowance (IVA), Private Sector Investment (PSV) and Capital Allowance (CPA). Utilizing data sourced from reputable economic databases, the research employs the Autoregressive Distributed Lag (ARDL) approach to analyze both short-run dynamics among the variables. Stationarity tests reveal that RGDP, PSV and CPA are non stationary at levels, while IVA is stationary at first difference, indicating a mixed order of integration. The ARDL Bounds co-integration test confirms a long-run relationship among the variables, justifying the application of ARDL analyses. The findings indicate that RGDP has a significant positive effect on IVA in both the short and long run, suggesting that economic growth enhances tax allowance confidence. Conversely, PSV exhibits a negative impact on IVA, highlighting the detrimental effects of rising economic dynamics. Additionally, CPA positively influences IVA in the long run, although its short-run impact is less pronounced. The study concludes that economic growth enhances tax allowance confidence in Nigeria. Tax allowances in Nigeria have played a significant role in stimulating private sector investment by reducing the tax burden on companies, particularly in key sectors such as manufacturing, solid minerals mining, and agriculture. Incentives like tax holidays, investment allowances, and capital allowances encourage businesses to invest in plant, machinery, and expansion activities by improving cash flow and profitability during critical growth phases. This has led to increased gross fixed capital formation, which is a key driver of economic growth in Nigeria.