Taxation, politics and development

On October 17 the world observed the International Day for the Eradication of Poverty to remind everyone of the deep inequalities that persist in society. While the rich continue to amass wealth in a system designed to protect their fortunes, millions suffer in poverty. Economic justice is not charity, it is a right denied to most Africans.

African expert Fadhel Kaboub believes that there is a very simple straightforward explanation why African countries like Nigeria still struggle with poverty and malnutrition.  He quite correctly asserts that they were placed in a structural trap by western colonialism. Although the colonial rule has been over for several decades, serial Nigerian leaders have been unable to decolonise economic structures.

Colonial rule in Nigeria can be summarised in three basic points. Firstly, we are supposed to be the place where cheap raw materials are sourced from. Secondly, we are supposed to be the place that consumes technology and industrial output from colonial ruling developed nations. Thirdly, we are supposed to be the place where obsolete technologies and assembly line manufacturing, which are no longer required in developed nations, are outsourced to under the label of development cooperation, job creation and “technical assistance”.

Colonialism wasn’t a system for development rather it was a system of extraction and exploitation. The visible manifestation of this is external debts denominated in US Dollars whose repayment is prioritised to the extent that it hampers government from investing in basic healthcare, social services, education, manufacturing and infrastructure which are the building blocks of prosperity.

It’s not by accident that Nigeria exports cheap raw materials stuff and imports expensive finished goods leading to a permanent deficit situation, it’s by design. Even those Nigerians wishing to manufacture finished goods must first import both the machines and the intermediate components, before assembling them with low-cost labour. This means that even quadrupling exports can’t get Nigeria out of the mess.

This structural trade deficit weakens the Naira relative to the dollar, and our reliance on imports means that we import inflation! Government then borrows more dollars to continue the vicious debt cycle then becomes obsessed with prioritising those economic activities which can help pay off debts rather than those which can assist in transforming society.

Compare this to India where 250 million citizens have come out of poverty in just 10 years. This successful transformation isn’t a coincidence, it’s the result of a clear well thought out strategy meticulously executed by government. The four pillars of this growth strategy have nothing to do with taxation. They are pubic investment in physical, social and digital infrastructure; inclusive growth; modern manufacturing and innovation; and the simplification of laws for minimum government and maximum governance. Rather than follow this example Nigerian political leaders prefer to implement all sorts of tax regimes then squander the money on their personal luxurious lifestyles, white elephant projects and corruption.

Closing the gap between the rich and the poor is a moral and ethical imperative. However, implementing higher income tax rates on the rich has little effect because rich Nigerians don’t pay anything close to their real tax liability. The wealthy don’t become rich through hard work, rather they exploit workers, avoid taxes,  make their money from investments which are taxed at a much lower rate and prioritise profits over people. When wealth becomes concentrated in the hands of few people as in Nigeria, there will always be disastrous consequences for consumer demand, jobs and economic growth.

Truthfully it’s virtually impossible for nations like Nigeria to establish an efficient tax system. Most Nigerian workers are employed in small informal enterprises, and many are paid in cash “off the books. They are seldom paid a regular fixed wage, and don’t spend money in large stores that keep accurate records of sales and inventories,”. As such the base for an income tax is hard to calculate and the possibility that government will ever achieve high tax levels is virtually excluded.

Unsurprisingly, there is much furor over the proposed tax reforms by the Tinubu administration which have more to do with politics than economic realities. Despite valid opposition from many quarters a compliant Senate has passed The Joint Revenue Board of Nigeria (Establishment) Bill 2024, The Nigeria Revenue Service (Establishment) Bill 2024, The Nigeria Tax Administration Bill 2024, and the Nigeria Tax Bill 2024 for second reading.  While these bills may give government more money, none of them has the potential to save Nigeria from its precarious economic situation, caused by unfocused unprincipled governance.

While tax systems are key tools for redistributing wealth, the proposed new bills will mean than our already poverty ridden Northern States will receive less revenue from VAT than previously. Of course there are valid arguments that those states which ban the consumption of alcohol should not benefit from VAT charged on it, but they are countered by the fact that corporate headquarters based in Lagos pay VAT in Lagos but sell throughout the nation.

Politics and religion aside the proposed new VAT policy will exacerbate the bigger problem of urban migration and increase poverty in our cities. The House of Representatives must be commended for suspending indefinitely the debate on the various tax reforms bills. It is far more important for government to come up with a clear well thought out strategy for development like India, than to simply concentrate on accessing more money to be squandered or stolen.