... Also of interest is the issue of how politics affects taxation and what they really mean to people. This point implicates Nigeria being a country of robust mutual suspicion especially on the political front where meanings are read to every government move and policy. The good news, is that there’s a reliable way to deal with this challenge: transparency in governance.
ADEREMI MEDUPIN
Recent Debates on Taxation in Nigeria
As if putting fire to a barrel of petrol, in October 2024, the executive arm of the Nigerian government forwarded a set of –four-in one Tax Reform Bills to the country’s legislature; the reaction was bombastic in body and oral forms. One sore point in the debate is a shootout from the country’s fiscal federalist structure , in particular, VAT attribution-that is, where should emphasis be placed when applying the concept of derivation: is it production or consumption and at what stage of the process?
An attempted response to this question came with an interesting but politically sensitive illustration with alcohol, the sale and consumption of which is frowned upon in the core northern parts of the country, incidentally where grains, the key raw material inputs into alcohol production are produced and sent to the southern parts where the final product is made through brewing and presumed largely consumed. This aspect of the debate raises a substantive subject of its own, namely: value creation versus revenue recognition. When the reform bill was taken up by the Nigerian Senate in late November 2024 , it was treated with the sensitivity considered required, hence, it was subjected to extensive and intensive, near rancorous, debate.
Along the line in the engulfing debate, a northern state Governor not known for careless utterances actually declared ominously in a BBC Hausa Service interview, that the proposed tax reform “will destroy Northern Nigeria”, insisting: “we condemn these bills. They will drag the north backward and not only the north, South East, and some states in the South West”, adding, that “If these bills sail through, we will not be able to even pay salaries”. Unfortunately, like most contributors to the debate, no empirical data is advanced in support of positions advanced. As widely publicized, the four Tax Reform Bills comprise of:
i) A Bill for an Act to Establish the Joint Revenue Board, the Tax Appeal Tribunal and the office of Tax Ombudsman-for the harmonization, coordination and settlement of disputes arising from revenue administration in Nigeria and for related matters;
ii) A Bill for an Act to repeal the Federal Inland Revenue Service and enact the Nigeria Revenue Service-charged with powers of assessment, collection of, and accounting for revenue accruable to the government of the Federation;
iii) A Bill for an Act to Provide for the assessment, collection of, and accounting for revenue accruing to the Federation, Federal, States and Local Governments; prescribe the powers and functions of tax authorities and for related matters; and
iv) A Bill for an Act to repeal certain Acts on taxation and consolidate the legal frameworks relating to taxation and enact the Nigeria Tax Act to provide for taxation of income, transactions and instruments, and for related matters.
A reading of the bills shows a multipurpose product reflecting high level thinking and evidently designed to streamline the country’s multiple tax laws and rules thereby reducing the hitherto array of layers of taxation, some of which were objectively unnecessary because trivial and in conflict with standard principles of taxation. In particular, the initiative was aimed at enhancing the efficiency of tax collection processes, making them more straightforward and accessible for all taxpayers. As my former Economics Lecturer and currently a leader at a semi-political forum, Professor Kayode Familoni commented at the said forum, the Bills conformed to the principles of simplicity, fairness and equity; these critical points were among those advanced by the Chairman of Presidential Committee on Fiscal Policy, Mr Taiwo Oyedele, who never failed to be impressively articulate during his public appearances. It is pertinent to note that until the crafting of the reform bills, the broad instrument guiding taxation in Nigeria was the National Tax Policy issued in April 2012 by the Federal Ministry of Finance. The embracing principles of the policy are spelt out in Appendix 3 on State Policy on Taxation, stating inter alia:
1. The State shall direct its taxation policy towards ensuring that the tax system promotes fiscal responsibility and accountability to Nigerians. Accordingly, the tax system shall reflect the principles of Fiscal Federalism by ensuring that: (a) each tier of government benefits in the sharing of revenue realized from its jurisdiction; and (b) that that there is an equitable sharing formula for taxes collected by the Government of the Federation.
2. The Government of the Federation shall ensure a periodic review of the tax laws and administration in Nigeria.
3. (d) It shall be the duty of Government at all levels to ensure that multiple taxation in all its forms is eliminated at all levels of Government.
Looking at the provisions and projections of the National Tax Policy as excerpted above and placing them as context for the 2024 Tax Reform Bills, we see that the reform initiative was indeed inspired and derived from that policy framework; which takes us to the rationale for taxation.
Essence of Tax
Conceptually, tax refers to a compulsory contribution to state revenue, levied by the government on workers’ income and business profits. In the text, An Introduction to Taxation-by Eamonn Butler published in July 2024 by the Institute of Economic Affairs, it is recalled that governments throughout history have turned to taxation in order to fund their provision of goods and services to the public. In this vein, in March 2001, Vito Tanzi and Howell Zee-writing on “Tax Policy for Developing Countries”, using the platform of the International Monetary Fund (IMF) -posed the question nakedly: Why do we have taxes? The simple answer, according to the hosting global neoliberal institution, is that, taxation is the only practical means of raising the revenue to finance government spending on the goods and services demanded by most of the citizens. This explanation is corroborated by an economic analyst who argues that, in a context where many governments have to cope with less revenue, increasing expenditures and resulting fiscal constraints, raising revenue remains the most important function of taxes, which serve as the primary means for financing public goods such as maintenance of law and order and public infrastructure. However, setting up an efficient and fair tax system is far from being simple, particularly for developing countries that want to become integrated in the international economy.
The ideal tax system in these countries should raise essential revenue without excessive government borrowing, and should do so without discouraging economic activity and without deviating too much from tax systems in other countries. Among the primary uses of these taxes are developing infrastructure, providing services to citizens, and developing human capital. Another goal of taxation is the redistribution of wealth. Willing governments can reduce the inequality gap by redistributing wealth from the rich to the other citizens through progressive taxation.
Adam Smith in The Wealth of Nations (1776) wrote: "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate”. Empirically, taxation is a significant source of revenue for the government which is used in running the cost of governance. Through the payment of taxes, the government can build social infrastructures that help to reduce poverty-thus implicitly touching on the core of the economics of taxation which broadly embraces theory, empirical work, and policy objectives of taxation.
Kernel of Economics of Taxation
At the core of the theory of taxation is the issue of who can pay and who can benefit from tax, usually tagged the Benefit Principle, which assumes, as Wikipedia puts it, “that tax levels are automatically determined because taxpayers pay proportionately for the government benefits they receive. In other words, the individuals who benefit the most from public services pay the most taxes”. This is erected on the foundation of the belief that “people are naturally different, their preferences differ, and consensus requires that each pay a slightly different tax for each service or good they consume”. In this theoretical framework, taxes as a necessary source of funds for the provision of essential and beneficial government services, with focus on who pays them and who is affected by them. This raises the issue of tax burden, which is in effect the change in people’s economic situations as a result of a given tax-which may not necessarily fall on the person or business that has the statutory liability for paying the tax to the government. Thus, the actual burden, or incidence, of a tax, is mainly determined by the relative elasticity of demand and supply. When demand is more inelastic than supply, consumers bear most of the tax burden, and vice versa for sellers when the supply is more inelastic than demand.
Perhaps more than any other economist, the use of taxation in giving effect to the active role of the government in the modern economy, JM Keynes is the one noted for his policy prescription that, during times of prosperity or “boom” cycles, governments should increase income tax rates in order to stabilize the tempo of economic activity. Conversely, during recessions, the ideal policy is tax reduction in order to enable consumers enjoy enhanced disposable income that will equip them to increase demand for goods and services thereby encouraging more production by private sector agents leading to increased employment and greater national output. In practical terms, the economics of taxation is the design of an efficient tax system that would be fair, equitable, and simple to understand, as suggested by Adam Smith and leading economists.
Adam Smith’s Canons of Taxation
Historically, there have been different types of taxes that are often used; these are progressive, regressive, and proportional taxes. All of them are broadly classified into direct and indirect taxes. However, it was Adam Smith (1723–90) who formulated the principles of good tax policy as fairness, certainty, convenience and efficiency – ideals that are widely accepted up till today. In his famous book, Wealth of Nations, Adam Smith presented and explained the four principles, which are also commonly referred to as the Main Canons of Taxation. They are as follows:
1) Canon of equality or equity: By equality is meant equality of sacrifice. Accordingly, Canon of equality states t that the burden of taxation must be distributed equally or equitably in relation to the ability of the tax payers. By the way, equity has two main elements, namely: horizontal equity and vertical equity. Horizontal equity suggests that taxpayers in similar circumstances should bear a similar tax burden. Vertical equity suggests that taxpayers in better circumstances should bear a larger part of the tax burden as a proportion of their income.
2) Canon of Certainty: This canon argues that the tax which an individual has to pay should be certain and not arbitrary with respects to the time of payment, the manner of payment, the quantity to be paid (tax liability) etc. In other words, the canon states that there must be certain to the taxpayer as well as to the tax-levying authority in respect to certainty of revenue the government intends to collect over the given time period. This implies that the taxpayer must know the time of payment, the manner of payment as well as the amount of tax to be paid. This implies that the taxing authority needs to clarify the reason and method of paying the tax. This canon is normally assumed to imply simplicity, which requires that tax rules should be clear and simple to understand, so that taxpayers know where they stand. A simple tax system makes it easier for individuals and businesses to understand their obligations and entitlements. As a result, businesses are more likely to make optimal decisions and respond to intended policy choices.
3) Canon of Convenience: According to this canon, taxes should be levied and collected in such a manner that it provides the greatest convenience not only to the taxpayer but also to the government. In particular, it dictates that the time and manner of payment should be convenient to the tax payer. For example, it is considered convenient to pay a tax when it is deducted at source from the salaried classes at the time of paying them. By extension, convenience also covers the ease of remitting taxes.
4) Canon of Economy or Efficiency: This canon implies that the cost of collecting a tax should be as minimum as possible. Any tax that involves high administrative cost and unusual delay in assessment and high collection of taxes should be avoided altogether.
Now, there is also the appreciation of another binding principle or canon, namely that of flexibility, which registers especial relevance in the context of technological advancements and its increasing application to commerce. The principle dictates that taxation systems should be flexible and dynamic enough to ensure they keep pace with technological and commercial developments. In other words, a tax system needs to be dynamic and flexible enough to meet the current revenue needs of governments while adapting to changing needs on an ongoing basis. Against the backdrop of the these canons, participants in any debate about the quality of tax reform need to ascertain the degree to which such a reform or reforms conform with or violate the canons.
Country Taxation Profiles
Not surprising, taxation regimes vary across jurisdictions. Interestingly, Ivory Coast currently holds the record for the highest top marginal income tax rate in the world-standing at 60%; it is pertinent to note that both Qatar and Bahrain have zero income taxes. Coming to corporate (company income) tax, the countries with the highest rates are: Comoros (50%), Puerto Rico (37.5%) and Suriname (36%). It is perhaps more realistic to use a common measuring rod for reporting on tax rate across countries-that is, tax-to-GDP ratio.
Starting with Africa, the average tax-to-GDP ratio stands at 15.6%; the three countries with the highest figures being Seychelles, Lesotho and Namibia. Ghana’s ratio in 2022 was 13.8%-below the government’s target of 18-20% by 2027. In 2021, Egypt’s ratio was 14.1%- a fall from 17.4% in 2006. For Nigeria, at the end of 2021, the ratio was 10.86%, although it was actually estimated previously to be 6%. For European countries, as of 2023, the rate stood at 40.0%, a slight fall from the 2022 figure of 40.7%; the three with the highest rates are Denmark, UK and Sweden. For China, in 2022, the rate was 20.1%.
According to the World Economic Outlook of April 2021, for India, the tax-to-GDP ratio was 19.8%; for Nepal-21.50%; for Pakistan-14.9%; and for Sri Lanka-12.74%. In 2023, the United States had a rate of 25.2%. During 2021-2022, the average tax-to-GDP ratio for Latin America and the Caribbean stood at 21.5%; this is very close to Russia’s ratio which as at June 2024, was reported to be 21.4%-decreasing from 23.2% as at March 2024. It is pertinent to enter a caveat on the largely inconsistent and therefore unreliable status of the overall data pertaining to this measure across jurisdictions-depending on the researcher’s source; what is certain, however, is the significant variation across economies.
Most Recent Developments and Some Emergent Issues
A major novelty in tax administration in recent time, is the enhanced role of technology in revenue generation generally. Specifically, technology has enabled revenue collecting authorities to automate their tax administration processes, including tax assessments, filings, and payments. In this vein, the introduction of electronic tax filing systems such as the Integrated Tax Administration System (ITAS) has made it easier for taxpayers to file their returns and pay their taxes online. This underscores the relevance of the study, “Digitalization of tax administration and corporate performance: Evidence from China”, carried out by Yuham He and Yang Yi, published in the International Review of Financial Analysis-Volume 90, November 2023. In the study, the authors made the submission that:
The digitization of tax management and collection makes enterprise transaction activities and operation status more transparent, which is a crucial initiative to lower the likelihood of tax evasion and leakage by enterprises.
Needless to add that in the area of technology application to tax administration, the economically advanced countries are far ahead of the developing economies, especially Africa. These economically developed countries “have implemented highly automated tax systems as well as cutting-edge technical tools like electronic tax declaration and payment, data collection, and management. There is an issue underpinning the general philosophy of taxation, which is the morality of how taxes are raised and what they are spent on. Here, the concern is how enabled are the citizens-individual and corporate-to make optimum tax payment. A detailed examination of this challenge is clearly beyond the scope of our theme, suffice to draw the reader’s attention to the fact that the structure of the economy in focus is of primary relevance- touching on the questions: Who owns what? Who does what? Who gets what? –in the economy.
Also of interest is the issue of how politics affects taxation and what they really mean to people. This point implicates Nigeria being a country of robust mutual suspicion especially on the political front where meanings are read to every government move and policy. The good news, is that there’s a reliable way to deal with this challenge: transparency in governance. It is important to highlight the tax behaviour of transnational corporations, especially in Africa which countries are rich in resources but fall prey to aggressive tax planning and tax evasion-facilitated by offshore companies-ably monitored and documented for display on the website of University of Portsmouth. In the specific case of Nigeria, Google reveals how “these companies operating in oil, gas, and manufacturing industries have employed many tax strategies, such as utilizing offshore intermediary firms, asserting recharges, royalties, or technical fees, and understating profits, in order to evade paying taxes” in the country. Clearly, creative ways must be found around the challenges of poor tax performance in the face of the myriad of development needs in combination with revenue shortfalls.
Way forward
As an author on introduction to taxation cited earlier averred, taxes seem likely to remain both a necessary and an inevitable way of maintaining public activities and services on the scale that they exist today. Perhaps it should be a duty of every government to explore all the options before they initiate and adopt new and possibly higher taxes. In this vein, we should not underestimate the willingness of the general public to pay voluntarily for something they believe to be important and relevant to their lives.
For developing economies, a minimum requirement for consideration on appropriate tax system are two interrelated factors namely: (i) the status of the economy in the global order-which touches on (ii) the structure of the economy in focus. There’s also the cross cutting issue of inequitable income and wealth distribution especially in market-driven economies with the outcome such that the ability to pay is objectively undermined among significant proportions of the population. Unless and until these basic factors are interrogated and factored into policy formulation, the primary lesson from the economics of taxation would have been lost. Furthermore, citizens need to be convinced that public money is being judiciously spent with minimal preference for trivialities that tend to balloon the cost of governance. When political leaders call for sacrifice against the backdrop of reckless display of wasteful spending, such calls can only fall on deaf ears or worse, instigating hate and resistance. I come in peace, please.
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