“Governments need money. Modern governments need lots of money” – Sven Steinmo, author of The Evolution of Modern States.
In as much as taxes are first and foremost a source of revenue to the government, there are other facets of this complex tool that must not be overlooked. One such facet is tax as an instrument for stabilising the economy; another is tax as a vehicle for wealth creation and redistribution, whether by encouraging entrepreneurship or creating social safety nets.
With only 7% of the population registered as tax payers, it is safe to say the government has failed at mobilising the tax base. The low rate of compliance in Nigeria can be linked to the reality that historically, tax revenues have not been spent on endeavours that better the lives of the polity.
Spending For The Populace
Paying taxes is not an act of charity, neither is it merely a “civic duty”. Taxes are part of a social contract, accompanied by the expectation that government spending would benefit us, the taxpayers. And irrespective of time, place, or politics, there are two basic needs taxpayers expect the government to fulfil: education and health.
The importance of tactical spending on education cannot be overstated. Education boosts human capital, spurring economic growth and development in the process. Without high-quality education to develop human capital, a large population quickly becomes a liability to the nation.
A quick delve into the 2017 Budget reveals that the Federal Government (FG) has earmarked ₦450 billion for education, 6% of total budgeted expenditure. Numbers alone don't tell much so we can ask two questions for more perspective: How will the allocation be spent? How are we doing in comparison to our peers?
Well, of the total education budget, ₦50 billion will go to capital expenditure, with ₦400 billion going to recurrent expenditure. Yet using UNESCO's Global Education 2030 Framework as a yardstick, the most urgent needs of the sector are educating the educators and building effective learning environments – by investing in libraries, laboratories, and computers. All of these qualify as capital expenditure. In our reality, however, the bulk of the budget will go towards salaries and overheads, leaving urgent needs unmet.
As for the peer comparison, the World Bank estimated the ratio of government spending on education to total expenditure in Ghana, Kenya, and South Africa at 21%, 17% and 19% respectively in 2014. The last time any of these countries were below 10%? Ghana in 1980. The only excuse for spending 6% should be because we’re confident that our educational system is way ahead of Kenya’s, or South Africa’s, but it is evidently not. One only has to take a look at ratings of top universities in Africa for a dose of reality.
Government spending on health is no better, shown once again by a peer comparison. World Bank data for 2014 shows Nigeria, South Africa, and Kenya spending 8%, 14% and 12% of their respective annual budgets on health.
As if all that were not enough to make people feel that the government does not deserve tax money, we are further inundated with tales of misappropriated funds. True or not, stories like that of former Minister Diezani Maduekwe encourage Nigerians to think of taxation as "legalised robbery".
Focusing on Compliance
We have all come across reports of the FIRS shutting down companies for tax noncompliance. Since 2014, when oil prices took a deep dive, the government has doubled down its focus on tax. From sending FIRS after noncompliant companies, to increasing VAT on luxury items, all taxation avenues are being explored. This sudden crackdown shows that the government had previously banked on voluntary compliance with little interest in enforcement.
Unsurprisingly, the real crux of the issue of non-compliance has been ignored, and that is an absence of a database management system that collects relevant information on tax payers and tracks compliance, making it easier to enforce tax laws.
A proper database management system captures all employed workers, including those in the informal sector. In a round-about way, the government has tried to overcome the lack of centralised information. Through taxes such as merriment and road closure levies, market taxes, and motor park levies, the FG seeks to capture those not employed in formal institutions that would permit easier collection of income tax. But without a database management system, there is no way to prove or disprove that such taxes sourced from the informal economy were collected, making them highly susceptible to graft.
Taxation As A Policy Tool
Economists intended taxation as a tool for the government to affect economic outcomes and redistribute wealth, not solely a source for sustaining its existence. It seems the Nigerian government views taxation as the latter.
A good example of the government's haphazard use of this fiscal policy tool is the decision to double down on tax enforcement during a recession. Such actions send the message that the government is exploiting the people it serves. This is at odds with the conventional use of fiscal policy during a recession when taxes are cut to boost people's disposable incomes and support aggregate demand.
Social welfare programs such as employment insurance, also constitute worthy uses of tax as a policy tool. For example, Canadians pay their taxes knowing that if they were ever to lose their job, they are sure to receive Employment Insurance while they search for a new job. Since taxes also pay for universal health care which covers all essential basic care in Canada, people are more inclined to pay their share, even if grudgingly. Can you imagine a similar system in Nigeria, a country where hospitals can refuse life-saving treatment when patients don't have hundreds of thousands handy?
Yes, governments need taxes, lots of taxes. But governments must also see taxation as a tool to affect economic prosperity in the lives of the larger population.