On luxury taxes

Minister of Finance Mrs. Zainab Ahmed announced last week that owners of yachts and private jets will begin to pay luxury taxes as from this year. She said in Abuja Monday last week that excise duty will be introduced in some areas while taxes will be reduced for small and medium enterprises. She said, “We are exploring ways to increase taxes as well as reduce taxes in some sectors. For small and medium enterprises, what will happen is to reduce taxes. But there are some special taxes such as luxury taxes that may be imposed.” Although they haven’t got all the approvals, she said one of the major areas that may be affected might be carbonated drinks produced in the country.

A luxury tax is levied on goods or services considered to be luxury, rather than necessity. Examples include taxes paid on jewellery and precious stones. A luxury tax may be modelled after Value-Added Tax (VAT); charged in percentage on all items of particular classes. It mainly affects the wealthy because they are the ones that deal in such goods.

Luxury taxes are based on the concept of positional goods, which are scarce goods whose value arises as status symbols, largely from their ranking against other positional goods. This creates a zero-sum game in which the absolute amount of goods purchased is less relevant than the absolute amount of money spent on them and their relative positions. Agents competing in such a game for pure positional goods do not lose utility if some of this money is taken as tax, because their utility comes as status from the amount of money (displayed to be) spent rather than the use-value of the goods themselves. For a pure positional good, a luxury tax is the perfect form of taxation because it raises revenue without any adverse utility effects.

However, re-introduction of excise duty will amount to double taxation for consumers of the affected goods. Excise duty was a tax payable to Nigeria Customs Service on consumable goods at production points. The introduction of VAT on consumable goods and services [over two and a half decades ago] necessitated the removal of excise duty from most consumable goods produced in the country. Since then, consumers of goods and services pay VAT at the point of purchase. Producers of goods and services build VAT into the cost price of their goods.

Re-introduction of excise duty on the same goods and services upon which consumers pay VAT will be a duplicated tariff. VAT has been working relatively well in Nigeria. Consumers also find payment of VAT to be more convenient than other forms of tax.  Consumers cannot evade payment of VAT, even though remitting VAT to the authorities is full of loopholes, especially by small and medium sized goods and service providers. If there are challenges in VAT administration, the solution lies neither in bringing back excise duty nor in removing some items from VAT back into the old excise duty regime. It rests in blocking leakages.

Besides helping to control consumption and improve upon the healthcare of citizens, luxury taxes are also used to discourage the importation of items which utility does not go beyond fashion. Similarly, luxury taxes are used to increase revenues generated by government. Since Nigeria exited from recession, macro-economic indices show that the country’s economy has been growing slowly. With huge deficits, the performance of the country’s annual budgets in the past few years have also not been encouraging. The introduction of luxury taxes will therefore help government to make up for the persistent deficits in the country’s annual budget.

In order to actualize the purpose which luxury taxes are meant to serve, we encourage government to consider extending the introduction of luxury goods taxes beyond yachts and private jets. It should include exotic vehicles, ivory items, fine art works, tapestries, jewelry, imported furniture, imported carpets, cigarettes, exotic wines and the like.