Africa
The Realities Of The New Tax Reform Law -By Gozie Irogboli
The reality is that Nigeria is an underdeveloped economy with rich under-utilized natural resources, poor and undeveloped economic structures and weak institutions, high level of absolute poverty and high dependency ratio in the absence of social security system. So, the focus of the nation’s economic managers should be on how to effectively utilize the nation’s abundant natural resources, develop structures and frameworks that will aid economic activities rather than laying unnecessary tax burden on the impoverished citizens.
I have monitored with interest the intensive campaign mounted by the agents of the government and their media reps about the government new tax reform law. While there is nothing wrong in enlightenment campaign to sensitize the public about the programs and policies of the government, there is need for a balanced perspective on the issues especially when such government policies are cooked without adequate stakeholders’ consultations. The emphasis of the agents of the government seems to be on the consequences of non-compliance with the new tax law that will take effects from January 2026, as if there lies the panacea for the nation’s economic woes. Nobody among the experts seems to be interested in highlighting the pitfalls inherent in the so-called tax reform law or asking the fundamental questions about its suitability or otherwise. For instance, why the fixation on expanding the tax net instead of the social safety net? Is expanding the tax net an achievement? How will the new tax regime affect the tax-payers? What will be the effect of the new tax law on the economy? How will it rejig the economy that is already deep in the doldrums? Through which platforms will the taxes be collected and what proportion of the tax proceeds goes to the collecting agents..?
A cursory look at the content of the tax reform documents seems to point out that the main motive of the government is to expand the tax net instead of economic revival. It seems that in formulating the tax reform document, the benefit and the ability-to-pay principles were not taken into consideration. In fact, the feeling among Nigerians is that they do not get any benefit from the government and therefore are not obligated or empowered enough to pay taxes. Over 60% of Nigerians live below the poverty line. The next 20% are struggling to survive. So, the taxable population comprising the top the business men, propertied class, politicians, top government functionaries, top civil servants and privileged corporate personalities should not be more than 20% of the population. Why would a man whose annual income is eight hundred thousand Naira (N800,000.00), which is less than $500, pay 15% of that to the government in the name of tax?
Fundamentally, public finance is not just about raising taxes to finance government spending, but about using public spending and taxes to positively direct the economy. And that is why the government can where and when necessary grant tax holidays and other concessions for the purpose of improving the economy. Clearly, there is no better time than now when the Nigerian economy is in a comatose state to grant such concessions. A good government tax policy should incorporate the purpose of fiscal sustainability, economic stabilization, income redistribution, among other purposes. And fiscal sustainability may not just be about generating enough tax revenue to fund government budget but about doing that without backlash. Thus, over taxing the people for this purpose is also against the sustainability purpose and therefore counterproductive. There is the stabilization motive which is about the government using the tax tools to reduce unemployment, control inflation, and stimulate investment and influence development and welfare of the people. And there is the income redistribution purpose which is aimed at reducing income inequality among the people and also fiscal disparity within the regions. Collecting revenue from VAT and giving the largest chunk to Lagos State that has advantage over every other state on account of government presence, in the name of revenue generation, is against the principle of equity and fiscal disparity. The government should give consideration to economically disadvantaged states.
I must state that taxing the people living in poverty in the name of expanding the tax net is not only extortion but an exercise in futility. It amounts to a fallacy of false analogy for anyone to compare the tax-to-GDP ratio of an underdeveloped country like Nigeria to that of developed economies and use that as the basis to support the supposed tax reform of Tinubu’s regime. The tax-to-GDP ratio is statistically insignificant to a developing economy like Nigeria’s. The main proponents of tax-to-GDP balderdash are the international lending agencies whose main motive is to put more money in the hands of the governments of the debtor nations to service their debts, borrow more in order to continue to refinance the international capitalist system.
The reality is that Nigeria is an underdeveloped economy with rich under-utilized natural resources, poor and undeveloped economic structures and weak institutions, high level of absolute poverty and high dependency ratio in the absence of social security system. So, the focus of the nation’s economic managers should be on how to effectively utilize the nation’s abundant natural resources, develop structures and frameworks that will aid economic activities rather than laying unnecessary tax burden on the impoverished citizens. The government should find a more creative way of utilizing the nation’s abundant natural resources and expand the productive base of the economy and then the tax base and tax yield will increase naturally.
Indeed, the new tax law will not serve any purpose other than adding to the impoverishment of the people, putting more money into the hands of the government officials to embezzle and service debt. This shows that the government is insensitive to the needs of the people and has no desire to revive the economy and improve the welfare of the citizenry. The conditional or unconditional transfer of N50, 000. 00 to unidentified selected families in the name of cushioning the effects of subsidy removal is an insult on Nigerians. It connotes corruption, mental laziness on the part of the policy-makers and poor conception of the needs of the people. Again, it shows that the policy-makers in this dispensation do not understand the structure and problems of the economy that they are supposed to manage.
Obviously, the purpose of the new tax law is basically selfish and political, not economic and therefore injurious. Tinubu’s government is dangerously profligate. In just two years of being in the saddle, it has borrowed more than any government in the history of Nigeria and it is still borrowing. And to continue to service the accumulated debts and borrow more, in the face of declining inflow from foreign earnings, the government is taxing the people. Buhari’s government borrowed N24trillion in eight years while still paying petroleum subsidy while Tinubu has borrowed N57trillion in 2 years even without the payment of subsidies.
Secondly, those at the helm of affairs in the country now have very poor conception of leadership and governance, judging from what is happening in the political scene. To them, leadership is about dominance and subjugation and not about goal congruence. It seems the government is using poverty as an instrument of control. Taxation to them will bring impoverishment and pauperization that will make it possible for them to have absolute control. Tinubu gave a hint on this during the campaign preparatory to the 2023 presidential election when he declared that: he will expand the tax net, reduce the purchasing power of the people and further slowdown the economy. But many mistook that to be the words of a dotard suffering from senile dementia but the reality is staring Nigerian in the face now.
However, the government may have the power to tax, embargo and sanction tax defaulters but it may not have the power to control the effects. First, the new tax regime might stifle investments and further contract the economy. And this will bring more suffering on the people. Some people may resort to holding cash instead of using the bank to evade tax. This will affect the banks and weaken the effectiveness of government monetary policy. It may also lead to dollarization as some might want to hold their money in foreign currency instead of keeping it in the bank. Again, foreign remittances may be affected negatively. The Nigerians in diaspora who remit money to Nigeria might be forced to reduce that for fear of double taxation. The new tax regime may usher in a regime of corruption by tax officials, the establishment of the Office of the Tax Ombudsman (OTO) notwithstanding. Like many other public offices in Nigeria, the OTO may not function effective since it does not have adjudicating powers and cannot interfere in the use of tax proceeds.
On the whole, the new tax law may generate tension in the economy that may reverberate in the socio-political sphere and the government may not be able to contain it unless it reverts to the status quo.
Gozie Irogboli
An economist, banker, a novelist and public policy analyst
