A Theoretical Framework for Optimal Tax Mix Design in Resource-Dependent Developing Economies: Evidence from Nigeria

This study develops an original theoretical framework for optimal tax mix design in resource-dependent developing economies, using Nigeria as its primary empirical case. The optimal tax literature, rooted in Ramsey and Mirrlees traditions, has predominantly been calibrated to advanced economy conditions where non-resource tax bases are diversified, administrative capacity is high, and informal sectors are minimal. The applicability of these frameworks to resource-dependent economies with structural informality requires fundamental reconsideration. This research constructs a dynamic general equilibrium model incorporating an oil revenue block, a formal non-oil sector, a large informal sector, and an endogenous tax administration capacity constraint, calibrated to Nigerian macroeconomic data from 1995 to 2024. The model is used to derive tax mix recommendations balancing revenue adequacy, efficiency, equity, and administrative feasibility across different oil price scenarios. Simulations test the welfare and revenue implications of shifting the tax mix from direct petroleum dependence toward expanded personal income tax, consumption taxes, and property taxes. The study expects to derive a novel resource-dependent economy optimal tax mix theorem, demonstrating conditions under which VAT broadening dominates income tax reform as the preferred diversification strategy. Empirical validation employs vector autoregression and structural identification using oil price as an exogenous instrument. Original contributions include the resource-dependency-adjusted optimal tax model and the first simulation-based tax mix analysis for Nigeria covering the post-PIA fiscal era. Keywords: optimal tax mix, resource dependence, general equilibrium model, Nigeria, tax diversification.