By Kriz David
The current crisis of the tax system in Nigeria is mainly driven by an inappropriate mix and design of tax policy. The Nigerian tax system is contrary to national prosperity, and this is the reason for extreme poverty in Nigeria.
Not only is the economy burdened with systemic corruption, but Nigeria’s tax system has also failed to spur economic development and inclusive prosperity due to low tax revenues.
The tax is a derivative of the economic activity carried out in a nation. A nation’s gross domestic product (GDP) includes personal consumption, business investment, government spending, and exports less imports.
The highest annual amount of value added tax (VAT) generated in Nigeria since 1994 is 1.53 trillion naira, which was in 2020. Does the amount of VAT generated annually really reflect taxable consumption in Nigeria?
And does the total tax revenue of 7 trillion naira in 2020 really reflect the economic activities carried out in Nigeria? These are the relevant questions which require sincere answers. This should be the immediate concern of state governors.
The low tax-to-GDP ratio of 6% theoretically suggests that Nigerians are not paying enough taxes. In reality, Nigerians are overburdened with taxes. Paying taxes shouldn’t be a burden.
Paying taxes becomes a burden when the combination of tax policies and the design of a nation are inappropriate. Taxation is a strategic fiscal tool for economic development and prosperity; it is not just a fundraising tool.
The two most expensive “products” in Nigeria today are education and health care. These are valuable goods that should not be bought and sold by individuals, but should be provided by the government from tax revenues.
Nigerians pay for their children’s education from preschool to college, as well as for health care. In addition, Nigerians pay for public goods such as safety and the construction of public roads in their place of residence.
Meanwhile, governments in developed countries are offering free education and health care to citizens for paying their taxes. Nigeria has failed embarrassingly in this regard because its tax policy and design are misguided.
The problem is not that Nigerians do not pay enough taxes; the real problem is that the wrong mix and design of tax policies cannot capture the right people in the tax net and pay the right tax.
While the rich get richer by not paying their fair share of taxes, the middle class has struggled and got poorer by paying for education, health care, safety and road construction or repair, after paying their fair share of taxes.
With the right mix and design of fiscal policies, citizens will pay the right taxes without being unduly burdened, and the government will have enough revenue to provide valuable goods and other social services.
One of the inappropriate tax policies and designs in Nigeria today is personal income tax. Globally, personal income tax offers the highest tax return among all types of taxes, but this is not the case in Nigeria, as the consolidated relief, the tax bracket income and tax rates are poorly designed.
For example, the highest personal income tax rate in Nigeria is 24% for the income bracket over N 3,200,000. This means that people earning N 3,500,000, N 35,000,000, N 350,000 N,000,000 and NN 3,500,000,000 per year are all taxed at the same tax rate.
Graduated tax rates are unfair and inequitable. This is the reason for the low tax yield of personal income tax and the great inequality of income in Nigeria.
A comparison between Nigeria (Africa’s largest economy) and South Africa (the second largest economy) amplifies the loophole in Nigeria’s income tax law. In 2018, South Africa, with 21 million registered taxpayers, generates more than N10.9 trillion in personal income tax for 6.4 million people, with the highest tax rate of 45%.
The richest 1% pay more taxes than the poorest 90% in South Africa. This is possible because the tax breaks, income bracket, and tax rates are fair and equitable. In 2018, the total tax revenue generated by state governments in Nigeria is less than N1 trillion. With a well-designed personal income tax law, state governments are expected to generate more than N15 trillion from 10 million people in Nigeria.
The line on who should collect value added tax is only a fragment of the problem. Instead of the legal struggle between South and North over VAT, the Nigerian Governors Forum should seek fiscal sustainability by rethinking the mix and design of Nigeria’s fiscal policy to achieve lasting prosperity for Nigerians.
Dr. Kriz David PhD, FCA, FCTI, is a futurist and tax expert. He is the author of “Tax Strategy” and “The Tax Manual”. He can be contacted at [email protected] or 08034033979.