The problem with public finance in developing countries like Nigeria has been that the amount of revenue generated from tax and non-tax sources in recent years have not been sufficient to meet increasing expenditure of States and local Governments. The study therefore examines the effect of Value Added Tax (VAT) on the income profiles of State Govenment in South-Western Nigeria.The choice of South West Nigeria was based on its being a non-oil producing state except Ondo state. Secondarydata from the approved budgets of five out of the six states that made up South Western Nigeria were used for the study. Osun state was excluded because it shares the same characteristics with Ekiti State .Panel regression method was employed since the sample contains data across States and for the periods 2002 to 2011. Fixed effect (FE) , Random effect (RE) and Hausman-test based on the difference in fixed and random effect estimators were conducted. The study concluded that the panel estimates indicate that Random effect is best fit . From the random effect estimates, VAT is positive and significantly (β=0.7318<.05 ) related to revenue profile of States.It is recommended that Governments, policy makers should concentrate efforts at ensuring that more VAT is generated by developing strategies of poverty alleviation as VAT is a consumption tax which is a function of real income in the hands of the people.Increased consumption will increase the revenue input from the state into VAT component of the federation account .
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