Journal of Emerging Trends in Economics and Management Sciences: Home

Article Title:
Underground Economic Activities and tax Revenue Losses: Empirical Evidence from the Nigerian Economy
by Josephine Adanma Nmesirionye and John Uzoma Ihendinihu

Abstract:
Increasing unreported economic activities are operated outside the purview of government regulations and could sum up to substantial amount a year in Nigeria. This huge loss in expected government revenue could have adverse consequences on the capacity of government to fund her programmes and projects, and in satisfying public expectations in service delivery. The purpose of this study therefore is to provide estimates of and trends in the value of unrealized tax revenue resulting from underground economic activities in Nigeria. Macro-economic (time series) data for the period 1980 -2013extracted from the Central Bank of Nigeria statistical bulletin and National Bureau of Statistics were used. The estimation procedures adopted followed Tanzi (1980) model, and the formulated hypotheses tested using correlation and simple regression techniques. The results show that Nigeria lost a total of N38,357.3 billion in tax revenue over the period with an average of aboutN1,128.2 billion per annum as a result of underground activities in the country. The resulting trend indicates a steady growth from 1980 with N8.2 billion toan all height peak of N5,048 billion in 2005, and dropping to about N2,095billion in 2013. The results also affirm that significant causal link exists between the size of underground economy and total unrealized tax revenue, with about 85.7% of the changes in annual tax revenue losses attributable to variations in size of underground economic activities. The paper, therefore, advocates the need for government to block all identified avenues of revenue losses arising from underground economic activities by pursuing people-oriented economic reforms that encourage entrepreneurs to operate within the regulated economy, while strengthening financial discipline, transparency and accountability in tax administration in the country.

Keywords: underground economy, tax evasion, unrealized tax revenue, tax base, tax gap

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