The aim of this paper is to examine the relative effect of tax policy reforms on economic growth with a view to analyzing whether tax burden and tax mix have direct or indirect association with economic growth in Nigeria using annual data from 1970-2012. Error Correction Mechanism (ECM) and cointegration technique of analysis are utilized to analyze the data and draw policy inferences. The empirical results show that both tax burden (t = 17.78, p < 0.05) and tax mix (t = 7.48, p < 0.05) are found to be statistically significant but negatively associated with economic growth in Nigeria. The study found that higher taxes are strongly correlated with reduced economic growth and that the policy reforms that reduced tax burden and tax mix by shifting from direct tax to indirect and equally improving on tax administration and tax collections would enhance economic growth in Nigeria.

Tax policy remains a major fiscal policy instrument of the government for generating income and revenue to meet the recurrent expenditures and creating capital formation towards the growth and development of the economy (Adeoye, 2004). Literatures from developed countries suggest that by reducing marginal tax rates, or by replacing the federal income tax with a consumption tax, the work effort, saving, and investment can be improved resulting in faster economic growth. Taxation can also influence what choices are made and, ultimately, the rate of growth, through its effect on the return to investment or the expected profitability of Research and Development (R&D) (Kerr and Monsingh, 2001).

Applied Finance Journal, Tax Policy Reforms, Economic Growth in Nigeria.