Issue of Income Inequality in Nigeria: the role of Indirect Taxes

Abstract

The main objective of this study is to conceptually examine the effect of indirect taxes on income inequality in Nigeria. To achieve this, prior literature on the concept of indirect taxes and income inequality were carefully reviewed. The methodology employed in this study is purely exploratory. From the review of prior studies, it was observed that there is no consensus as to the effect of indirect taxes on income inequality. Some studies revealed that indirect taxes are negatively related to income inequality because it helps increase government revenue which is used to alleviate poverty and enhance redistribution of income. Other studies found that indirect taxes contribute significantly to income inequality. From the review, the study revealed that indirect taxes are basically imposed on consumption and are regressive which implies that an increase in its rate will further widen the income gap to varying degrees. As indirect taxes increase the price of goods and services also increase which then makes it difficult for income inequality to be reduced because all taxpayers pay the same tax rate irrespective of their income level. Going by the outcome of the reviews, the paper takes a position that, the indirect tax does not reduce income inequality. This paper recommends that government should reconsider the recent increase in VAT, as this increase in VAT rate would further increase the price of commodities and services in the nation which therefore implies that the low-income earners will have less of their income to spend on more commodities. Also, the Federal Government should remove the recent amendment to CETA, to allow the average low-income earners to be able to afford the listed imported goods in the fifth schedule of CETA.

Keywords: Taxes. Taxation, indirect taxes, Value added tax, Custom and excise duties, income Inequality