Politics

Nigerian taxation is anti-poor and a futile development strategy

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.

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