Strengthening the Social Contract
Governance and Tax Compliance in Nigeria
Abstract
The study examines the impact of governance on tax compliance in Nigeria, framed through the lens of the social contract theory, which posits that effective governance fosters public trust and voluntary adherence to tax obligations. Nigeria, despite being Africa's largest economy, has one of the world's lowest tax-to-GDP ratios, largely attributable to weak governance, pervasive corruption, inadequate rule of law, and perceived inequities in resource distribution. The study uses an ex-post facto research design and analyses secondary time-series data from 2011 to 2023. Governance is measured via custom indices: public sector corruption, rule of law, access to justice, equal distribution of resources, and regime corruption (sourced from World Bank-related reports), with population as a control variable. Tax compliance is proxied using tax revenue as a percentage of GDP. Multiple regression analysis, adjusted for multicollinearity by excluding highly correlated variables (rule of law and access to justice), reveals that individual governance proxies (public sector corruption, equal distribution of resources, and regime corruption) do not have a significant effect on tax compliance. However, the aggregate model is statistically significant (p = 0.007), explaining approximately 63% of the variation in tax compliance (adjusted R² = 62.70%). These findings show that governance influences tax compliance holistically rather than through isolated dimensions, likely due to interrelations among governance indicators and the challenges posed by Nigeria's large informal economy. Also, the findings align with social contract theory, underscoring the need for comprehensive governance reforms to rebuild trust and enhance voluntary compliance. The study concludes that a multidimensional approach to improving governance is essential for boosting tax revenue performance in Nigeria. Policy recommendations include pursuing holistic governance reforms across executive, judicial, and legislative arms; intensifying taxpayer sensitisation programs; and regularly updating tax laws to eliminate loopholes.
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