Moderating Effect of Government Recurrent Expenditure on the Relationship between Direct Taxation and Income Inequality in Nigeria

Abstract

This study examined the moderating effect of government recurrent expenditure on the relationship between disaggregated direct taxes (Company Income Tax, Petroleum Profit Tax and Capital Gain Tax) on income inequality in Nigeria. Specifically, it investigated how government recurrent expenditure influenced the impact of each tax type on income inequality. The study adopted an ex-post facto research design, utilizing historical annual macroeconomic time-series data from 2000 to 2024. The population comprised all available yearly observations on taxation, government recurrent expenditure, and income inequality, while a purposive census-based sample of 35 observations was used to ensure data completeness and consistency. Secondary data were collected from the Central Bank of Nigeria, National Bureau of Statistics, Federal Inland Revenue Service, and the World Bank, and hypotheses were tested using a robust least square econometric model incorporating interaction terms to capture moderation effects. The findings revealed that: government recurrent expenditure significantly moderated the effect of company income tax on income inequality, producing a positive effect (β = 0.003373, p = 0.0000); government recurrent expenditure significantly moderated the effect of petroleum profit tax on income inequality, producing a negative effect (β = -0.005835, p = 0.0000); government recurrent expenditure significantly moderated the effect of capital gain tax on income inequality, producing a positive effect (β = 0.006306, p = 0.0000). Collectively, these outcomes suggest that the broader fiscal architecture in Nigeria functions as an interconnected system where taxation and expenditure cannot be analyzed in isolation. It was recommended that Nigeria Revenue Service should review the structure of company income tax in conjunction with government recurrent expenditure to ensure that increased corporate tax revenues do not unintentionally exacerbate income inequality, integrating targeted measures that promote equitable wealth distribution across sectors.