Tax Incidence of Value Added Tax on Household Welfare in Nigeria: A Microsimulation Analysis

This study conducts a microsimulation analysis of the tax incidence of Nigeria's Value Added Tax system on household welfare across different income deciles. The distributional equity of VAT has long been debated in public finance economics, with critics arguing that flat-rate consumption taxes are regressive relative to income, imposing a higher proportional burden on lower-income households. In Nigeria, while certain essential goods are VAT-exempt, the practical application of exemptions in informal markets is inconsistent. Using nationally representative household consumption data from the Nigeria Living Standards Survey, the study constructs a microsimulation model that applies VAT rates and exemptions to each item in household consumption baskets, computing effective VAT burdens by income decile, geopolitical zone, and rural-urban classification. The model incorporates assumptions about informal market compliance rates and pass-through of VAT costs to consumer prices. The study expects to find that effective VAT burdens are mildly regressive across income deciles, with the poorest households spending a higher proportion of income on VAT than higher-income groups, particularly in urban areas where informal market exemptions apply less consistently. It also anticipates that VAT exemptions for key food staples provide meaningful relief to households in the South East and South West where formal retail penetration is higher. Contributions include the first geographically disaggregated VAT incidence microsimulation for Nigeria. Keywords: VAT incidence, household welfare, microsimulation, distributional equity, consumption tax.