Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited

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  • Fiscal Policy

Nigerian taxation is anti-poor and a futile development strategy 05 Apr 2018

According to the October 2017 data of the IMF, Nigeria has GDP per capita of $2,380. This represents 21 percent of the world's average of $11,310 or 4.7 percent of the G7 economies' average of $50,180.
This generally establishes Nigerians as some of the poorest people on the planet. Yet, high level of inequality in the country understates the severity of privation of the overwhelming majority of the Nigerian people. For instance, 80 percent of the population lives on less than $2 a day, according to African Development Bank's 2018 Nigeria Economic Outlook.

With the socio-economic and financial disempowerment of the poor, they are hardly able to improve their labour productivity. As a result, economic growth in countries like Nigeria are suboptimal and constrained, therefore, reinforcing the cycle of poverty and low productivity.

The question that then arises is: How do we break this vicious circle? Nigerian authorities maintain it is by having everyone, including the poor, pay their fair share of taxes. The Federal Government and the Lagos State Government in particular have been aggressively pushing this counter-intuitive answer.

As the argument generally goes, by maximizing tax revenue, government would be able to provide infrastructures and social services that would help raise productivity, increase prosperity and reduce poverty. But a closer attention to the logic reveals that the poor have to first become poorer before their situation would improve. Therefore, the best-case scenario from this logic is that the lot of the Nigerian poor would improve over the long-term. In the short- to medium-term, however, government would make them poorer by taxing them.

But then, this is not a logic that should be coming newly into application. For over a century, the Nigerian authorities have been collecting taxes. However, more government revenue has only led to wider gaps in the supply of infrastructures and social amenities – relative to demand; and more belt-tightening for more Nigerians. Recent revenue highs have, paradoxically, left the refineries, roads, rails and power infrastructures that were built decades earlier in states of disrepair, while declines in healthcare, education and water supply are accelerating.

The evidence today is that grossly inadequate economic and social infrastructures are only a justification for collection of taxes; they offer no assurance for revamping Nigerian public amenities. Against this ugly trend, government officials have continued to promote the positive prospects of taxation on development and poverty reduction. But they must be confronted with the real evidence.

Many businesses are being taxed to death. A few years back, a close friend – savvy professional – had to close down her SME business, precisely because of impossible tax burdens of the Lagos State Government. For the multiple taxes and the obnoxious antics of Lagos tax officials, she had to lay off her staff and look for a job herself. This negative effect of taxation on businesses and jobs in the country's commercial hub is not an isolated case.  

In his speech to the alumni association of the Lagos Business School last November, renowned Nigerian entrepreneur, Tony Elumelu, echoed studies that say 95 percent of SMEs die within 12 months in Nigeria. He said that, in a survey of entrepreneurs by the Tony Elumelu Foundation, respondents cited tax as the topmost constraint to doing business in Nigeria, and 79 percent of SMEs reported that the most important incentive needed from the government was tax relief/reduction.

Whereas tax revenue has been touted as a veritable source of funding broad development, in reality, this is not an eternal truth. Faced with the long-term stagnation in U.S. wages, the administration of President Donald Trump has enacted a tax cut worth $1.5 trillion. The tax cut came ahead of the unveiling of the infrastructure investment plan of Mr. Trump, with both being integral parts of his agenda to improve the welfare of Americans and make the economy stronger. The immediate effects of the tax cut have been a rise in income for many Americans and a new boost for economic growth. On the spur of the tax cut, U.S. companies have been investing more locally and repatriating profits that have been stashed outside the country for years. While finalising this article, news broke that China was at the verge of enacting a $38 billion cut in Value Added Tax for this year to provide relief in its key industries and boost consumer spending.     

Some U.S. economists are quibbling over the tax-cut facet of Trumponomics. But their argument is that the tax cut is coming at a time when it is least needed, given that the economy is already growing at a robust rate and it is at full employment. Juxtaposed with Nigeria, the authorities have been increasing tax rates and widening the tax net at a time the economy is barely recovering from recession. Instead of increasing household and corporate disposable income, the government wants more money in the hands of government.

But the taxation-for-development dictum has been discredited in Nigeria. Not least by vested interests, which have turned taxation into a means of redistributing wealth from businesses and Nigerian workers to corrupt government officials and intemperate political godfathers. In the example of the new Land Use Charge in Lagos, the tax law not only increased the estate tax by up to 400 percent, it assigned collection to the agency owned by the generalissimo of Lagos politics.

It is a fair argument that, given the weak connection between much-increased tax revenue in Lagos – not forgetting its high public debt – and available social amenities in the state, a moratorium should be placed on tax collection until such a time when correlation would be stronger. Were it a country, Lagos State would be the fourth-largest economy in Africa. But Lagos ranks 9th on “The Ten Least Liveable Cities” sub-index of the Global Liveability Report 2017, behind Douala, Harare, Algiers and Tripoli.

Without necessarily arguing against payment of taxes, it should be stated that there are other sources of funding development. One source is returns on public investment. The UAE earns over $50 billion in annualised returns on the investment of its $828 billion sovereign wealth fund. Another, but closely related source, is proceeds from sales of public assets. Saudi Arabia's national oil company, Aramco, is about to generate $100 billion from its IPO that would offer 5 percent of its shares to investors. Yet, other sources of funding development include borrowing and development aid.

But due to corruption, which over time erodes competence in public sector governance, Nigeria is doing very badly with managing its public investments and the privatization programmes. Although development aid is held to be ineffective, its performance is further jeopardised in Nigeria by insecurity and corruption. For public sector malfeasance and ineffective utilisation, Nigerians are reticent about government borrowing.

The current drive for increased tax revenue is dogmatic, anti-poor and would transfer more money to where it would be put into the least productive uses. For a better citizen-government partnership on taxation, the citizens must insist on honesty, competence and accountability in the administration of Nigerian public finance, while government responds accordingly.

Jide Akintunde is Managing Editor, Financial Nigeria magazine; he is also Director, Nigeria Development and Finance Forum. Twitter handle: @JSAkintunde