Raising Revenue without Stifling the Masses   

Mudiaga Aluya

Nigeria faces a myriad of economic challenges. Among the most pressing is the issue of government revenue. With an economy heavily reliant on oil exports, fluctuations in global oil prices significantly impact its fiscal stability.

This necessitated a revenue drive that led to the removal of oil subsidy amidst other policies and its attendant untold economic hardship on the citizenry. Then emerges the debate about how best to enhance domestic revenue mobilisation through taxation; raising critical questions. Can the government have enough? Won’t more tax burden exacerbate obvious economic hardship?  Will collecting more from citizens boost economic growth? How best to manage the drive for more revenue?

According to the Nigeria Bureau of Statistics, Nigeria’s GDP growth rate was approximately 2.74 per cent in 2023, insufficient to keep up with its rapidly growing population. Consequently, per capita income remains low, and many Nigerians live below the poverty line.

Nigeria’s tax-to-GDP ratio is one of the lowest in the world, standing at around 10 per cent, according to Minister of Finance, Mr. Wale Edun. This is considerably below the African average of around 15 per cent and the global average of above 30 per cent. Such low tax revenues limit the government’s ability to invest in critical infrastructure, education, healthcare, and other public services necessary for sustainable economic growth.

Proponents of increasing taxation argue that enhancing domestic revenue is essential for economic development. Stating that it will improve fiscal stability and reduce dependence on oil diversifying revenue sources through increased taxation can reduce vulnerability to oil price shocks. A more stable and predictable revenue stream can enable better fiscal planning and investment in long-term development projects.

They also argue that higher tax revenues can enable the government to invest more in public services such as education, healthcare, and infrastructure. Improved public services can enhance human capital, increase productivity, and attract foreign investment, all of which are crucial for economic growth.

Redistribution of wealth is another benefit of increased revenue as opined by the proponents. Progressive taxation can help address income inequality by redistributing wealth from the rich to the poor. This can boost domestic consumption, as lower-income households tend to spend a higher proportion of their income.

More so, it can enhance governance and accountability. A broader tax base can lead to greater government accountability. When citizens contribute more in taxes, they are likely to demand better governance and efficient use of public resources, potentially reducing corruption and mismanagement.

Despite these potential benefits, increasing taxation in Nigeria is fraught with challenges and risks. Inefficiencies, corruption, and a lack of capacity plague the tax administration system. Enhancing tax collection without first addressing these systemic issues could lead to increased evasion and unfair practices.

A significant portion of the economy operates informally, outside the reach of formal taxation. This makes it difficult to broaden the tax base without implementing reforms to formalize these economic activities.

With widespread distrust in the government and perceptions of corruption, many citizens may resist higher taxes like Kenyans did. Without significant improvement in public services, increasing taxes could lead to mistrust, more hardship, social unrest, and further evasion.

The impact on small businesses and the poor could be devastating. Increased taxation, if not well-designed, could disproportionately affect small businesses and low-income households. This could stifle entrepreneurship, reduce disposable incomes, and ultimately slow economic growth.

To leverage taxation for economic growth, the government needs a balanced approach that addresses these challenges while capitalizing on the potential benefits.

Improving the efficiency and capacity of the tax administration system is crucial. This includes investing in technology, training tax officials, and implementing measures to reduce corruption. Transparent and efficient tax collection can enhance public trust and compliance.

Broadening the tax base is another viable approach. Efforts should focus on formalizing the informal sector and bringing more economic activities into the tax net. Simplifying tax compliance for small businesses and providing incentives for formalisation can help achieve this goal.

Promoting and implementing reflective progressive taxation is important. Implementing a progressive tax system where higher-income individuals and profitable corporations pay a larger share can ensure that the tax burden does not disproportionately fall on the poor. This can also help address income inequality.

More important, is public awareness and engagement for the buy-in of the citizenry. Educating citizens about the importance of taxation for national development and demonstrating tangible benefits from tax revenues can increase voluntary compliance. Engaging with community, civic, and religious representatives and involving them in budgeting can enhance trust and accountability.

Above all, policy coordination and reform are crucial. Policy coordination should be part of a broader strategy that includes economic diversification, improved public financial management, and anti-corruption measures. Coordinated efforts across various sectors can create a more conducive environment for growth.

In terms of reform, efforts should be made to reduce double-digit taxation to single-digit. Though work is currently going on it. We await the outcome of the Presidential Committee on Fiscal Policy & Tax Reforms led by Mr. Taiwo Oyedele in this regard.

Increasing taxation holds significant potential to boost economic growth, provided it is done thoughtfully and systematically. Addressing administrative inefficiencies, broadening the tax base, and ensuring a fair tax system are critical steps.

Equally important is building public trust through transparent governance and demonstrating the direct benefits of tax revenues in improving public services and infrastructure.

The success of this strategy hinges on the government’s ability to implement comprehensive reforms and foster a culture of accountability and trust. If these conditions are met, increasing taxation could indeed become a powerful tool for driving sustainable economic growth and development in Nigeria.

Aluya is a public policy analyst and the Research and Advocacy Officer at the Chartered Institute of Directors.