Taxation, governance, democracy and development
There is something that young people like myself when we wonder at the usefulness of conventional wisdom – the question is rendered in broken English, but the prevailing sentiment is stubbornly universal.
It asks for the utility and usefulness of the convention in question. In the case of tax, they would ask: ‘Who tax don epp’?
There is a reason the conveners of this meeting wove the subjects of taxation, governance, democracy and development are very tightly together. Modern governments need money, lots of money, in order to run nation states. Where and how they get this money has a profound effect on the political economy of a society.
The imperatives can be broken into three simple questions:
1. How do governments get money to run their operations, and to achieve their goals? (Taxation)
2. How do citizens take ownership of and in that process? (Governance through democracy)
3. How does that create a loop of accountability that leads to the bottom-line? (Development)
For much of its life, Nigeria has been run on oil money. Our oil addiction took off fully in the 1970s, and we have not looked back. Like a junkie who sells all the family jewels to sustain its habit, Nigeria gradually abandoned the things that made it great. And we might want to gloss over it because we are to be polite here, but you know it as much as I do: many of the people who have spoken over the past few hours supervised our common wealth, and they did so with irresponsibility as their governing principle.
Even through price collapses of the 80s and the low prices for nearly all of the 1990s, we were not shaken out of our addiction. Now, over 18 months into the most recent bust, the long and short of the times we live in now is this: Low oil prices mean our government is looking for money. Everywhere. From everybody. At once.
They are running after those who stole our commonwealth, plugging leakages, and they are also talking about raising Value Added Tax, stamp duty and expanding the tax base.
Our petro economy meant that Nigeria had, pre-2000, never really bothered with taxes as a nation. It has always been much easier to simply drill a hole in the ground, sell oil, and have finance commissioners from the 36 states gather in Abuja once a month to share the proceeds. The resulting intellectual laziness spread from the federal government down to the states, and gave us a bloated government that remains with us to this day, one so bloated, it sucks the life out of everything else around it.
It is from this near lifeless mass that the government wants to extract taxes.
Oil prices are down and people are fasting for it to go up, government is now deciding to go borrow from the World Bank and the African Development Bank to finance its fantasy (deficit) budget, and the black market already devalued the naira while the CBN struggles with reality and schizophrenia.
So, the government has turned to a very lazy option in the absence of income, realism or continued growth: it wants to tax the life out of people like me, who slowly and steadily – without access to funding, government intervention or even serious minded engagement – began to build businesses when everyone else was busy drinking oil.
In essence, to solve a problem it caused, the Nigerian government resorts to type: punishing those who were trying an alternative solution.
Thinking through tax
When it comes to paying taxes, Nigeria ranks 181st out of 189 countries.
There are, amongst other things, three major hangers for this reality:
1. Let’s Nigeria’s position on the World Bank’s Doing Business Index. We currently rank 169th out of 189 countries, and in the ‘Starting a business’ measure of that Index, Nigeria ranks 175th out of 189 countries. If you have ever tried to register a company with the Corporate Affairs Commission (CAC), you are likely to agree with that ranking.
How many have been put off from registering their businesses as a result? How can you tax companies you do not know exist? I a, aware of associates who have simply decided to run their businesses from their homes, rather than wear themselves out with that mating ritual. The result is a potentially huge loss of value. What’s worse is that nothing has come out of repeated statements from government officials to reform the CAC. Something so basic.
2. The sheer number of these taxes is a disincentive to any business that decides to be fully tax compliant. As a business owner, I am liable pay a dozen different taxes and contributions – VAT, PAYE, Company Income Tax, Tertiary Education Tax, Business Premises Levy, Development Levy, National Social Insurance Trust Fund, Industrial Training Fund, National Housing Fund, Pensions and the Lagos State Signage Act. The ridiculousness of these competing demands without commensurate value makes those who choose to pay them feel like fools.
3. The arbitrariness of the tax collection authorities, making silly assessments of people’s wealth based on popularity, randomly invading offices and terrorizing citizens, acting with righteous anger to offend the sensibilities of decent people who want to make a living and pay their fair share. That’s asides the complexity of the payment process and lack of accountability on these multiple taxes.
You cannot tax poverty
But this is the most urgent of those reasons: the unfairness of the tax architecture. The unreasonableness of taxing businesses over and beyond what is sensible simply because the government has expenses it simply not afford.
There is first an impossibility in convincing a honest businessperson about the sense in paying more than 10 different taxes in a nation where political leaders – who do not understand the value chain for creating industry – can be found miraculously with anything from 400,000 million to N4 billion in their accounts.
The rationale is simple: it appears hard working business people are suffering for being stupid enough to choose creating value over participating in the National and State Olympics for Stealing Government Money.
The second is that in a climate notorious for stifling innovation and creativity, and where the best capitalized young businesses these days are lifted by a tide of venture capital funds from other markets, any measures that are perceived as rent collection by another name will find it difficult to gain social currency.
Thirdly, save for the Lagos, Kaduna and certain other state governments, there is a clear absence of any purposive drives for wealth expansion – to help businesses grow, create more value, employ more people, increase the volume of already existing tax capacities and to inject commerce with a renewed urgency.
Indeed, within the context of the National Assembly rapaciously draining the common wealth through allowances and salaries fixed far above the recommendation of the Revenue Mobilisation and Fiscal Commission, and the federal government-scoring zero in the 100-day assessment by SBM Intelligence report on ICT, on job creation and on a long-term economic vision, it has become clear that there is a lack of concerted efforts to increase wealth, to expand income, to deepen industry.
The fact that our governments have always been able to extract oil rents is one of the reasons why they have forgotten how to be real governments. A real government ensures that it provides an atmosphere for its people to prosper, knowing that you can’t tax poverty.
There is a reason Nigeria’s tax to GDP ratio is about 6 or 7%, one of the lowest in the world. You can only tax wealth that is created, and wealth is not created by accident.
Can the government really afford the immediate consequences of its renewed tax vengeance: citizens who choose not to establish new businesses, at least those trackable via the formal sector, or who decide they will vanish from the tax bracket entirely?
Because, where revenue drives seem like gimmicks drawing from short term thought rather than long term strategy, citizens withdraw from fulfilling their social contract in this case, taxation.
No one likes a friend, however big and no matter how enthusiastically that friend was voted for, who never gives, but only collects.
Which is where long term thinking about how to expand wealth, and strengthen the citizen-government social contract becomes imperative.
Thinking through the social contract
Governance is about institutions, and the type of governance in a society is based on what types of political institutions exist and how these institutions are configured. These institutions also determine how wealth is created, how resources are allocated, and in whose hands the created wealth remains.
In ‘Why Nations Fail’, Daron Acemoglu and James Robinson examined the reasons why some countries are rich and others poor, and come to the conclusion that rich countries have inclusive political institutions, while poor ones have extractive political institutions. According to them, inclusive political institutions lead to inclusive economic institutions which support economic growth, and extractive political institutions often lead to extractive economic institutions, which restrict economic growth.
Extractive political institutions concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power. Inclusive political institutions on the other hand, distribute power broadly in society.
Nigeria’s brief period of optimism as a nation came to an end with the 1966 coup, after which power was taken from the regions and vested in the center in a unitary system of government. This created a highly extractive political system, which was manned by the military unto whom political power was concentrated, along with their civilian collaborators.
.Being a paper presented by Chude Jideonwo, Co-Founder Managing Partner, RED, at the inaugural conference of the Ibadan School of Governance and Public Policy, on Monday.
To be continued.
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1 Comments
A compelling perspective on our Taxation and channeling of that total resource from private hands that pay, to the public domain that utilizes it for Development. Whether exclusive or inclusive, there is always a wedge between the institution of
government and the people even when they are designed to be one and the alternate. Taxation you’ll agree has been the champion of this discord. Your line, ‘No one likes a friend, however big and no matter how enthusiastically that friend was voted for, who never gives, but only collects’, resonates in our taxation practices and policies. The base is there and by George has an open-ended expansion possibility horizon. The ‘extracting and utilizing’ administrators are kicking our Taxation system in the molars. How then can we chew for nourishment. Forgive me for a second for making this lopsided comparison which I must insert for its erudite story of Tax effects. The United States is the greatest Nation in our Universe. Her emergence grew from the simple phrase, ‘no taxation without representation’. Now, it isn’t that they are not taxing but are doing so with unparalleled representation. Until we start thinking in that direction, our Taxation mechanics are sure to malfunction. I hope the Administration is paying attention. Our present tax base if efficiently directed, could fund our Budget each series and even auto-adjust in creation of more. The piece is an excellent mirror in the window of our Taxation policy applications.
We will review and take appropriate action.