Nige­rian Tax­a­tion is Anti-poor and a Fu­tile Devel­op­ment Strat­egy

Financial Nigeria Magazine - - The Fixes From The Managing Editor -

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 coun­ter­in­tu­itive 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 best­case 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 pri­vati­sa­tion 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.

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