International Journal of Development and Economic Sustainability Vol.4, No.4, pp. 20-31, August 2016 ___Published by European Centre for Research Training and Development UK (www.eajournals.org) 20 2053-2199 (Print), 2053-2202(Online) TAX BUOYANCY AND ELASTICITY IN NIGERIA: THE CASE OF AGGREGATE TAX Ojonago Daniel Musa, Andenyangtso Bulus, Christopher Chukwudi Nwokolo and Denis Nfor Yuni Department of Economics, University of Nigeria, Nsukka ABSTRACT: This study was motivated by the growing demand for government funds to meet up with their expenditures as well as diversification for different streams of income. Empirical evidence has shown that the buoyancy and elasticity of tax are two clear ways of measuring how tax revenue responds to changes in income. This study adopted secondary data sets, which were sourced from CBN statistical Bulletin, National Bureau of statistics (NBS) and Federal Inland Revenue Service (FIRS) of Nigeria. A standard multiple regression estimation procedure in the form of the vector error correction model (VECM) model was adopted. The result from the study showed that tax revenue is significantly buoyant and elastic in Nigeria. In view of the result the study recommended among others that, the government introduces policies that will help her take advantage of the potentials inherent in the country and increase its tax revenue thereby having another source of financing its budget other than the current crude oil proceeds. KEYWORDS: Tax Buoyancy, Tax Elasticity, Tax Revenue, GDP, Nigeria. INTRODUCTION Background of the Study Taxation has remained the most important source of revenue to many governments of the world. Governments use tax proceeds to render their traditional functions of providing public goods, maintenance of law and order, defense against external aggression, regulation of trade and business to ensure social and economic maintenance (Azubike, 2009). The economic effects of tax include micro effects on the distribution of income and efficiency of resources use as well as macro effect on the level of capacity output, employment, prices and growth (Musgrave and Musgrave, 2004). Owing to the inherent power of government to impose taxes, the government is assured at all times of its tax revenue no matter the circumstances. With modifications as a result of different manifestoes of opposing political parties, the government’s ability to impose tax is unlimited. The collection of tax is such that the most veritable tax handles are under the control of the federal government while the lower tiers are responsible for the less strong ones. Specifically, the federal government taxes corporate bodies while state and local governments’ tax individuals. A major element contributing to this development was the prolonged military rule that had ignored constitutional provision. This military rule affected utilization of taxation in raising revenue for the public expenditure, and in the process have affected the nation’s economic growth. Besides, Wagner’s law stipulates that public expenditure is a natural consequence of economic growth (Demirbas, 1999). The magnitude of government surplus or deficit is probably the