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Much ado about tax to GDP ratio

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Come August, it will be 3 years since oil prices started to drop from $100/barrel where they had been for four years.


Now that the price of crude oil has stubbornly refused to go back where Nigeria wants it, the realisation is slowly dawning that maybe things will be like this for a while. Come August, it will be 3 years since oil prices started to drop from $100/barrel where they had been for four years. Given that government spending has not been cut from the time when oil prices were high, there is no way that those expenditures can be funded by oil prices below $50/barrel.

In the short term, the government has tried to ‘solve’ this problem by borrowing heavily and monetising its expenditure (aka printing money). But nobody, not even the government itself, thinks this is sustainable. So, it is left with only one other option – raising extra revenues by finding ways to collect more taxes. To make the case for collecting more taxes, the government highlights the fact that Nigeria’s tax to GDP ratio is very low. This is true – Nigeria’s 6% ratio is one of the lowest in the world.

In 2016, according to the Nigerian Bureau of Statistics (NBS), Nigeria’s GDP in nominal terms was N101 trillion. In other words, all of the economic activity that took place in the country in 2016 amounted to that. Not all of it can be taxed or is even taxable so a tax to GDP ratio is a sort of indicator of how effective the state is. At 6%, this means that the Nigerian government managed to collect just over N6 trillion in various taxes. You can say 6% is a small ratio but you can also say N6 trillion is a lot of money. Either way, the GDP is never just sitting there waiting to be collected by the government. Raising that percentage is determined by history, culture, trust and even technology. There is a level of tax that can be collected by force. Beyond that level however, there has to be a willingness for people to pay voluntarily. That’s the only way you can get to the 30% range Nigeria’s finance minister often talks about as the OECD (Organisation for Economic Co-operation and Development) average.

To be clear, just increasing the ratio by 1% will translate into an extra N1 trillion for the government to spend but this is not the ambition it has set for itself. Ghana’s ratio is around 16% so we can safely say this is the minimum the government will like to achieve. What are the obstacles that might stop a country getting to this ratio?

The most obvious one is that it needs a ‘why.’ Why should any citizen give the government any extra money? This is a universal question. The Chinese government might say it needs the money to build more roads, railways and bridges. And when you look around China, you cannot fail to see that the government is indeed building roads, railways and bridges which make it easier to collect more taxes as a percentage of GDP in the future. Another government of a country, like Singapore, might say it needs the money to maintain a certain level of national defence as a way of guarding against that external aggression.

In most advanced countries that collect in the 30% of GDP range, the ‘why’ is often that taxation helps the government to redistribute income. As I live in the UK, I’m a bit familiar with how this works here. The latest figures from the UK’s Office of National Statistics (ONS) showed that the top 20% of UK households have £84,700 in average annual income before taxes. By the time taxation is applied, this falls to £63,300. Conversely, the bottom 20% of households have £7,200 in average annual income but after benefits, this rises to £17,200. Every rich and developed country will have figures like this – using the tax system to shift some income from the rich to the poor. The difference will be in the degree of redistribution. Where this works properly, over time, the level of poverty should be reducing in that society. There’s no need to check Nigeria’s redistribution figures as we know that poverty has been increasing in the country over the last decade and more.

Given Nigeria’s long history of corruption and government letting down the citizens (often not gently), simply repeating percentages and deploying FIRS officials to harass citizens won’t raise that ratio in any meaningful way. The question of ‘why’ must be answered and it starts by government spelling out the case to Nigerians

Party Politics 101
In any democracy, citizens have hopes and dreams. However, the mechanism for turning those hopes and dreams into steady electricity, running water, infrastructure and security among other things is the political system. It is in the political system that citizens deposit those dreams and hope they turn into tangible economic development. One can then say that a country’s progress cannot rise above its political system. You ought to look at your politics and be honest enough with yourself in saying ‘this is as good as it gets.’ It follows then that if you want things to be better, you have to pay attention to your country’s politics and the intricacies of how it works.

On July 8th, in partnership with EiE Nigeria and the support of The Guardian, this writer will be moderating an event at the MUSON Centre in Lagos titled Party Politics 101. On the panel with me will be 3 people – Ayisha Osori, Bobo Omotayo, Akinyinka Akinnola – who have engaged with Nigeria’s political system and lived to tell the story. What exactly is wrong with Nigeria’s politics and how can we fix it? The event is free but you need to register for a ticket here: http://eie.ng/ If you can’t make it in person, there will be a livestream on Facebook. Whichever way, let us try to better understand how this vehicle that ought to be the repository of all our hopes and dreams really works. I hope to see you there.


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