Navigating the politics of tax and economy gaps, by Adefolarin A. Olamilekan
One global concern for political economists and economists of either the classical, Keynesian or neo-Keynesians schools of thought is that they never shy away from the questions bordering on tax, particularly, the central question on taxation and economic growth or the argument of Marxian economists that tax revenues should be evident in economic development and not in growth measures alone.
However, governments across the world, always nurse the hope of incurring higher revenue and do not stop them from targeting and raising around 10 or 40% of GDP in taxes.
The developed nations have mastered this practice so well that the positive result from tax collections is evidently seen in how their governments plough it back to essentially finance investments in human capital, infrastructure and the provision of services to their citizens.
Sadly, the same can’t be said of the majority of nations regarded as developing or emerging economies because of the politics of tax and poverty of understanding how its usage can help reduce the economic gaps.
Instructively, the very principles behind tax or the collection of taxes and fees are not just about distributing resources or control of luxury goods but a key to development priority.
Although there is an argument that made tax a paramount element for businesses to enjoy a set of right price incentives for sustainable private-sector investment, in the short, medium or long term, this may depend on the context of stakeholders and tax regulators’ interest if it is a cooperative environment with less fight over tax evasions and avoidance.
Arguably, taxes have a key role to play in making economic growth sustainable and equitable, especially in the context of rescuing a nation from a financial crisis. But we cannot rule out the magnitude poor nations are struggling with, in the key facts about taxes.
As mentioned earlier, but with emphasis now, collections of taxes and fees is a fundamental way for countries to generate public revenues which makes it possible to finance investments in human capital, infrastructure, and the provision of services for citizens and businesses.
The foregoing above gives us the opportunity to interrogate the recent decision Nigeria took on its tax administration, which in the past days has drawn local and global attention. And many experts have continued to express divergent opinions that demonstrate a trend understanding of the economic and political forces that shape the way tax as a fiscal policy is politicized to create economic gaps in the country.
The Nigerian media aptly captured the news of President Tinubu signing four Executive Orders suspending the implementation of some key tax laws, in a detailed released statement by the Special Adviser to the President on Special Duties, Communications and Strategy, Dele Alake.
The Executive Order signed by the President include; the suspension of the 5% Excise Tax on telecommunication services as well as the Excise Duties escalation on locally manufactured products. Similarly is the suspension of the Import Tax Adjustment levy on certain vehicles. Another is the new Executive Orders, deferring the commencement date of the changes contained in the Finance Act from May 23, 2023, to September 1, 2023. In addition to that is the suspension of the newly introduced 10% Green Tax through Excise Tax on single-use plastics, such as plastic containers and bottles.
The presidency justified the reasons behind the orders as carefully thought out to ameliorate the negative impacts of the tax adjustments on businesses and chokehold on households across affected sectors. By this, the presidency has acknowledged the challenges and for the Government not to exacerbate the plights of Nigerians. For instance, the Tinubu Administration said it noticed that some tax policies are being implemented “retroactively with their commencement dates, in some instances, pre-dating the official publication of the relevant legal instruments backing the policies.”
Again, it recognized the noble idea and intentions behind “upward adjustments of some of these taxes, as they were designed to raise revenue and address environmental and health issues.” At the same time, it raised issues that the tax law “generated significant challenges and elicited serious complaints amongst key stakeholders as well as in the business community.”
Pertinently, the Government discovered these gaps as hindrances to the implementation of the tax law. But it is important to stress here that many of the contents in the suspended tax laws were to reduce the nation’s over-dependence on petrol dollar rentier economy.
That it is not just sufficient enough as revenue to finance and meet the basic needs of citizens and national developments, but the world is already moving away from fossil fuels.
Although the non-oil sector is a key economic diversification route, the Government wanted to cash on through tax remittances from services, imports and exports. For us, reckoning with this level of taxation is an important tipping point to make the Nigerian state viable and put it on a path of not just growth, but economic development.
Moreover, the recent achievement of the nation’s 8% GDP to tax from 6% GDP according to FIRS was a good development. Cautiously, Tinubu’s government has set for itself 18% of GDP in tax going forward.
On the other hand, this is the reason tax and its target of increasing revenue collection generates political forces and economic gaps.
In retrospect, successive Nigerian government’s task in ensuring it administered a proper tax policy dates back to 2012 when a modest effort to entrench a robust and efficient tax system in Nigeria – the National Tax Policy (NTP) was first published in 2012.
Notably, the Buhari administration between 2016 and 2022, showed serious commitment by reviving the National Tax Policy (NTP), with a target to accommodate an operational tax system and clear implementation and monitoring strategies for stakeholders in the system.
Clearly, this was also demonstrated through legislation to resolve and support all new socio-economic efforts by taxation, with new tax laws such as the Finance Act 2023, notably for providing the 0.25% levy on commercial companies’ Profit Before Tax (PBT) to fund the National Agency for Science and Engineering Infrastructure (NASENI), enhancements of Research and Development (R&D), technology and innovation to transform the national economy. Also, as a critical departure for Nigeria to join the rest of the developed nations deploying and using knowledge, research, science and technology, along with innovation to positively turn around their nation’s economy.
Obviously, the Government toed this line, having considered NASENI’s obvious values of adding to the socio-economic transformation of the country with world-class designs and fabrication of machines, and equipment, including successful research and development and activities of various technology devices to transform the nation’s industrial sector and competitiveness.
Worthy as this could be, the tax laws to be implemented have raised dust in the variation of what to collect, when to collect and the intricate of multiple taxations.
From the facts of it, having a disjointed tax law for remittances in macroeconomic headwinds is not just a slap on our face in line with global best practice, but we have succeeded in creating a system that would suffocate businesses and taxpayers that are burdened with rising costs, negative profit margins and capacity underutilization brought about by our national economy deficits.
And, as the Government sincerely said, if it has not put a hold on it through the Executive Orders suspensions, the current administration equally presents an image of policy inconsistency and creates an atmosphere of uncertainty for businesses operating in Nigeria while recognizing, the importance of “more consultation and a holistic approach to the country’s net zero plan in a manner that does not impact the economy negatively.
According to the World Bank Group (WBG), developing countries that are mostly in need of revenues, including Fragile and Conflict-Affected States (FCS), often face the steepest challenges in collecting taxes, Nigeria is inclusive in this categorization and predicament on tax.
As we conclude, confronting us is what solution options we are left with.
Truth be told, the national financing gap to achieving development estimates is about N25 trillion annually.
Succinctly put, much of this financing gap will need to be met through effective tax remittance which requires appropriate fiscal tax policies to create the needed price incentives for businesses and taxpayers.
Another way is to avoid complicated tax systems associated with high levels of tax evasion, tax avoidance and corruption.
And, we need to adopt a modern tax system that is aimed at optimizing tax collections by reducing the burden on taxpayers and businesses.
Along these thoughts is for the Nigerian governments both at the federal and sub-national levels to ensure the tax system is fair and equitable as a means to further bring easier methods for the larger informal sectors to pay taxes and have proper incentives.
However, a bigger task before President Tinubu, National Assembly and the 36 states governors, is how they are going to balance the goals of the National Taxation Policy (NPT) by not just seeking tax-increased revenue mobilization but rather must focus on reducing collection and compliance costs, fair taxation of the poor, in relation to the rich; formal, corporate organization and informal bodies.
For us, the tax system should be devoid of politics and economic gaps as a leeway to alleviate poverty and avert economic challenges.
Adefolarin A Olamilekan