COLUMNS - 20 OCT 2017

Taxes: the Price of Good Governance

Taxes: the Price of Good Governance
It is possible that more taxation will bring accountability to a Nigerian Government desperately in need of it.

From multiple reports about the trillions that the Federal Inland Revenue Service (FIRS) has generated in tax revenues, to the Economic and Financial Crimes Commission (EFCC) promise to crack down on tax evasion, the Nigerian government appears to finally be taking tax collection seriously.

While public officials may view this as progress,  it is not clear why Nigerians should consider this a happy development. As we provide our own electricity, water and security, it is only reasonable to ask what our taxes will pay for. Why should a government with a poor record of managing oil revenues be allowed to dip its hands into our pockets? 

Interestingly, the answer may be accountability. What if more taxes could create a better government? 

 

Linking Taxes and Accountability

The link between taxes and governance comes from understanding what brings about accountability. On the supply side, the government must be willing to be transparent if it must be accountable. This is an area that has already been given a lot of attention.

At the same time, Nigerians also have to demand accountability from the government. Right now, few can confidently argue our leaders are accountable, but the public also isn't demanding enough. Therefore, the quantity of accountability is low.

Taxation can increase accountability on both ends. If government officials depend on tax revenues, then they may be more transparent in order to encourage people to pay their taxes. For example, Ogun state's internal revenue service website features pictures of completed public projects  with the caption "Tax Payers Money in Action" to show state residents that if they pay taxes, their money will be used properly. Nonetheless, this channel does always work operate very well in Nigeria because when crude oil prices are buoyant, the government does not really rely on Nigerians' taxes.

On the flip side, people may be more likely to ask public servants to do better when their taxes directly fund the government. But what is so special about taxes? After all, we should care just as much about how our leaders currently spend oil revenues. 

One reason could be a behavioural bias called the endowment effect: people value things more just because they own them. While we are sometimes apathetic to politicians sharing 'the oil national cake', we may be less forgiving if that "cake" is paid for directly from our pockets. Wouldn't you think differently about civil servants if money was directly taken from your salary to pay their salaries?

A prominent example of the endowment effect is in the Niger Delta, because its indigenes know that the country's resources come from their land and they bear the environmental costs. However, since residents of the Niger Delta form a minority relative to the rest of the country, their demand for government accountability has not had widespread effects. Instead, the Nigerian government has been able to ignore, suppress or placate them.

 

Paying Taxes is Not Enough

The Niger Delta highlights an important reason why taxation alone is not sufficient to increase government responsiveness. For the endowment effect to work, two things have to be true: firstly, people need to be (painfully) aware of their tax burden and secondly, the number of people who are taxed needs to be high enough to stimulate change.

In this regard, not all taxes are created equal. For example, Value Added Tax (VAT) satisfies the second condition but not the first, because businesses often factor in the VAT payment into the price of their products, so people are not even aware that they are paying taxes at all.

Personal income tax would ideally satisfy both conditions, but at the moment, a weak tax collection structure hampers this. According to the finance minister, only about 40 million out of an estimated 69.9 million eligible Nigerians actively pay their taxes. However, most of these taxpayers have their taxes deducted by their employers before they get paid, so it is unclear how many workers are aware of these tax payments.

One solution would be to emulate a system like the United States' in which most citizens are required to file a tax return even when though the money is already deducted from their paychecks. In the process of filling out tax forms every year, US citizens are aware of just how much they pay to the government.

Certainly, this may be difficult to implement in Nigeria, not least of all because of literacy requirements - filing tax returns is difficult even for the relatively more educated US. Importing the same system could turn into a bureaucratic nightmare for everyone involved. A better alternative may be to adopt a return-free system as in many European countries, in which the government sends taxpayers a pre-filled document stating how much money has been deducted from their incomes, and asks taxpayers to confirm the amount. This could achieve the same goal without the burden of filing in returns.

Another argument in favour of making income tax payments more evident is that it may also strengthen our fiscal federalism. Unlike company taxes, personal income tax is collected by state governments rather than the federal inland revenue service (FIRS). Therefore, taxation may lead Nigerians to demand more from their state governments and reduce the current unhealthy focus on the FG.

 

All that Glitters is not Gold

Nonetheless, it would be naïve to ignore the possibility that in the long run, tax collection may backfire. When taxation becomes politicized, politicians will garner favour during elections by promising to reduce taxes. If citizens only vote for the politicians who promise the lowest tax rates, then we may end up either voting in good leaders who are unable to achieve much because they lack funds or bad leaders who do not care that government revenue is low because they had no intention of using the money for public projects anyway. In either case, the Nigerian public is worse off.

Therefore, a healthy democracy will depend not just a tax system that raises the level of government accountability, but also a populace that views taxes as essential to a functioning society. For Nigeria, this may seem like a tall order at the moment, but perhaps the current push for tax collection may actually bring that much hoped change.

 

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Ebehi Iyoha

Ebehi Iyoha

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