Welfare Implication of Tax Rates Increase in a Recessionary Economy

Umar Bambale Ibrahim and Isah Funtua Abubakar

MPRA Paper from University Library of Munich, Germany

Abstract: In this work, we compare the welfare cost of the two tax policy options in Nigeria, by applying a small-open economy within the New-Keynesian Dynamic Stochastic General Equilibrium Model (NKDSGE) of Nigeria augmented by a robust fiscal sector with several tax rules. Increase in tax rates has different welfare implications in a recessive economy. Increase in Consumption tax VAT rate is welfare superior compared to increase in CIT rate, which harms private agents’ incentive to invest in either new or existing venture. Hence, data does not support tax reform in the form of increase in Company Income Tax rate. Our finding implies that the current Nigerian tax reform in the form of an increase in VAT rate while allowing other tax rates unchanged is the right policy direction.

Keywords: DSGE Models; Fiscal Policy; Welfare (search for similar items in EconPapers)
JEL-codes: H24 (search for similar items in EconPapers)
Date: 2020-09-30, Revised 2021-12-13
New Economics Papers: this item is included in nep-dge, nep-opm and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:111132

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