Tax Smoothing (TS) is the adjustment of tax rates to minimize welfare losses or excess burden from taxation by spreading the burden of increasing distortionary taxes over time, given a particular path of government expenditure. TS is often occasioned by unsustainable Fiscal Policy (FP), which invariably leads to debt accumulation and imposes a burden on future generations if not well managed and productively utilized.

Previous studies on FP in Nigeria largely focused on the direct effect of its sustainability or vulnerability on economic growth, with little attention paid to TS. This study, therefore, was designed to test the validity of the TS hypothesis in Nigeria from 1971 to 2023. Barro’s Tax Smoothing Theory provided the theoretical framework, while secondary data on Government Revenue (GR), Government Expenditure (GE), and Gross Domestic Product (GDP) were sourced from the Central Bank of Nigeria’s Statistical Bulletin and the World Bank Development Indicators. All estimates were validated at α = 0.05.

The findings confirmed the TS hypothesis, as GR was predicted by GE (X² = 6.11) and GDP growth rate (X² = 4.09). This implies that government sets the budget surplus equal to expected GE and GDP over time; when expenditure was expected to increase, the government ran a budget surplus, but when expenditure was expected to decline, the government ran a budget deficit. The results established that the Tax Smoothing hypothesis was valid for Nigeria between 1971 and 2023.

The study concludes that government revenues largely drove government expenditures in Nigeria. Therefore, there is a need for government to improve revenue generation, block leakages, embrace fiscal discipline, and prioritize public expenditure.