Welfare implication of alternative tax rates adjustment policy in Nigeria : a DSGE analysis

This study sets out to determine the desirable policy adjustment in the tax rate for Nigeria that ensures the least welfare cost. A calibrated small open-economy New Keynesian Dynamic Stochastic General Equilibrium (NKDSGE) model of the Nigerian economy is applied to achieve this objective. Within this framework, we examined the impact of an increase in value-added tax (VAT) rate from 7.5 to 15 percent on key macroeconomic variables relative to the impact of an increase in company income tax (CIT) rate from 30 to 35 percent on macroeconomic variables. Further- more, we examined the welfare costs of the increases in the rates by ranking their welfare costs. The results indicate that increases in VAT and CIT rates decrease output, consumption and investment in the short run. Furthermore, findings revealed that households are willing to give up around 23 percent of their non-stochastic steady-state consumption to ensure that an increase in VAT rate policy is implemented. This is so because the increase in the VAT rate policy resulted in an 11.33 percent welfare cost relative to an increase in the CIT rate policy, which resulted in a 23.18 percent welfare cost. Therefore, the Nigerian government should not consider the increase in CIT rate policy as a desirable policy option.