Macroeconomic effects of progressive tax reform in Nigeria using synthetic control counterfactual and simulation analysis

Abstract

Abstract This study examines the relationship between taxation structure and macroeconomic performance within a comparative panel of Nigeria, South Africa, the United Kingdom, and Canada over the period 2000–2024, while providing a forward-looking evaluation of Nigeria’s 2026 progressive tax reform using counterfactual simulation techniques. The analysis integrates two-way fixed effects and threshold regression models to capture linear and non-linear fiscal effects, alongside a synthetic control framework to estimate the short-run impact of the reform relative to a counterfactual trajectory constructed from comparator economies. The results indicate that higher tax-to-GDP ratios and greater reliance on direct taxation are positively associated with real GDP per capita growth, with stronger effects observed in economies operating above critical fiscal thresholds. Institutional quality and investment also emerge as significant complementary drivers of growth. However, counterfactual estimates suggest that Nigeria’s 2026 progressive tax reform may generate modest short-run adjustment costs, reflecting transitional constraints linked to institutional capacity and tax administration efficiency. These findings highlight the importance of distinguishing between long-run structural benefits and short-run policy dynamics in fiscal reform analysis. The study contributes to the literature by integrating structural econometric modelling with counterfactual evaluation in a small cross-country panel and provides policy-relevant insights for designing effective and sustainable tax reforms in developing economies.