The Impact of VAT Rate Increases on Consumer Purchasing Power in Nigeria: A Study of Lagos Households
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Background of the Study
Value Added Tax (VAT) is a consumption tax levied at every stage of production and distribution, ultimately borne by the end consumer. In Nigeria, VAT is a significant source of government revenue, contributing to the funding of infrastructure and public services. However, periodic increases in VAT rates often spark debates about their implications for consumer purchasing power and overall economic stability (Akinola & Yusuf, 2023).
In recent years, the Nigerian government increased the VAT rate from 5% to 7.5% in 2020, citing the need to boost revenue amidst declining oil earnings. While the government projects increased fiscal benefits, households in urban centers like Lagos, already grappling with inflation and stagnating wages, face a heavier financial burden (Nwosu & Ibe, 2024). Studies have shown that VAT rate hikes disproportionately affect low- and middle-income households, reducing their disposable income and altering consumption patterns.
Globally, governments implement VAT adjustments to bridge fiscal deficits, but the socioeconomic implications vary widely depending on the structure of the tax system and economic resilience of consumers. This study examines how VAT rate increases have impacted the purchasing power of Lagos households, providing insights into the broader implications of such fiscal policies.
Statement of the Problem
The increase in VAT rates in Nigeria has triggered concerns about its impact on household purchasing power, particularly in Lagos, the country's commercial nerve center. Rising consumer prices and declining real incomes have raised questions about the effectiveness of VAT as a revenue tool without exacerbating economic inequalities. Despite numerous studies on VAT and revenue generation, limited attention has been given to the specific effects of VAT hikes on household consumption in Nigeria (Okon & Adeyemi, 2023).
As Lagos households face higher living costs due to VAT-induced price increases, their ability to maintain pre-VAT consumption levels is significantly threatened. Addressing this issue requires understanding the trade-offs between fiscal sustainability and consumer welfare. This study investigates the extent to which VAT rate increases have affected household purchasing power in Lagos.
Objectives of the Study
- To evaluate the effect of VAT rate increases on the purchasing power of Lagos households.
- To analyze changes in consumption patterns following VAT hikes.
- To recommend policies to mitigate the adverse effects of VAT increases on consumer welfare.
Research Questions
- How have VAT rate increases affected the purchasing power of Lagos households?
- What changes in consumption patterns have occurred following the VAT rate hikes?
- What measures can be adopted to reduce the impact of VAT increases on consumer welfare?
Research Hypotheses
- H₀: VAT rate increases have no significant effect on the purchasing power of Lagos households.
- H₀: VAT rate hikes have not led to significant changes in consumption patterns among Lagos households.
- H₀: Mitigative policies do not significantly reduce the adverse effects of VAT increases on consumer welfare.
Scope and Limitations of the Study
The study focuses on the impact of VAT rate increases on households in Lagos between 2023 and 2025. It excludes other economic variables such as inflation and wage growth. Limitations include potential biases in self-reported data on household consumption.
Definitions of Terms
- Value Added Tax (VAT): A tax on the value added to goods and services at each production stage, ultimately paid by the end consumer.
- Purchasing Power: The financial ability of consumers to buy goods and services.
- Lagos Households: Families residing in Lagos, Nigeria’s most populous city and economic hub.
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