The International Monetary Fund (IMF) is a good institution. It is also a bad one. Today I choose to dwell on the bad especially as it has to do with recommendations to foist more tax on Nigerians. I hope too that government has the good sense not to kowtow to the uninformed suggestion; but chose to be creative around job creation, providing a conducive business environment and mainstreaming the informal sector as ways of expanding the tax base.
At the just concluded Spring Meeting, after haranguing Nigeria on its ballooning debt servicing cost, the Bretton woods institution proceeded to urge the country to improve revenue. This is a good thing. After all, at the end of the day, it is the amount of revenue generated that would determine how far a country can go in providing infrastructure and improved welfare for the people. And to be sure, the prescription was on the backdrop that debt service to revenue ratio is as high as 45 percent; a situation that Kemi Adeosun, the Finance minister, acknowledged in the fall of 2017. She was quoted as saying that “we believe that 45 per cent is too high, and we expect this to continue to improve in 2017/18 as our revenue initiatives deliver on target”.
But where I freak out is when the prescription for ameliorating the situation, includes that the government should tax us more. “We expect revenue from taxes to step in and bridge the gap,” an IMF official was quoted as telling Nigeria’s delegation to the meeting. He recommended the use of property tax to expand the tax base, remove tax exemptions, and implement public finance management reforms.
He added: “There has been less emphasis on tax collection, so using this avenue to enhance tax collection is important”. It is true that Nigeria has one of the lowest tax collection rates in the world. The tax to GDP ratio in Nigeria is 6.1 percent compared to South Africa with 26.5% in 2014/15; and Kenya is 15.9 percent.
It is not bad to impose tax since it is a potent fiscal tool but my worry is that government may listen wholesale to this institution that caused havoc in Latin America with their one size fits all prescriptions nay, mandate, that brought many of them to their knees. Popular in the recipe of the IMF, at that time, was the structural adjustment programme (SAP). The results of SAP, as we also found out in Nigeria in the 1980s, were high “social costs in terms of rising unemployment and underemployment, falling real wages and incomes, and increased poverty”.
In retrospect, the IMF and the World Bank had a blanket advice to every country in ‘crises’ despite having an assemblage of the ‘best’ brains in economics and public policy. In fact they were the perfect example of the Mark Twain Quote, “To a man with a hammer, everything looks like a nail”. Although the IMF had admitted its error and undertook wide reaching reforms, this Nigeria prescription comes across as one coming from someone who has little understanding of the people’s problems.
For instance, by recommending property taxes, does the IMF have any idea the kind of angst Lagos state attracted when it legislated an increase in the land use charge? Well, property tax is not bad in itself but too much of it would come across as being insensitive to the plight of the people who have to be a government unto themselves by providing their own electricity, water and pretty much any other amenities. Shouldn’t there be some kind of rebate for doing for themselves what government ought to do for them?
It goes against logic and economics to impose more tax on a population writhing from the lacerating effects of a recent recession. The pains are there and are as open as fresh wounds. To tax more would be to make the cut deeper. The economy is one beset by high inflation, 13.34 percent in March. This already has a nibbling effect on disposable income; more tax will only turn nibbling to big bites.
Economics has it that the consumption multiplier is more potent than the tax multiplier. This brings us to what government should focus on rather than heaping more tax on the people: Job creation, better business environment and mainstreaming the informal sector. These three in concert can raise an army of taxpaying population to stave government’s revenues fears.
On Job creation, when a sizeable number of the population is gainfully employed, they are able to pay taxes to government. What this means is that it is better to have many people paying reasonable amount in tax than to have a few paying through their noses.
A smart way to also improve the tax base would be to ensure a conducive business environment so that businesses can thrive. When businesses survive and make decent profits, they will naturally pay corporate taxes that will help deepen the tax base. Once again, a demonstration that it is not how much but how many (are paying tax) that get the economy up to speed with the low tax to GDP ratio and ultimately, debt service to GDP ratio. Such a benign approach also has the benefit of curbing or minimising tax avoidance or minimising it.
In not mainstreaming the informal sector said to constitute 64 percent of the GDP, government is losing on a huge opportunity for tax revenue. This is higher than the 41 percent for developing economies. “The sector is made up primarily of self employed persons, small and microenterprises and other forms of economic activities”. By their very nature and the fact that they are not captured in government data, they represent a major leakage in government revenue. This is yet another example of how government can spread the tax net rather than imposing more taxes or increasing the tax payable.
Government has been smart in looking at tax avoidance by tracing avoidance to tax havens among other creative measures but until it can multiply, in geometric term, the number of the employed, improve the macroeconomic environment to encourage more businesses to set up and to thrive; and extending a helping hand to the informal sector, tax revenues will continue to be challenged and by extension, the debt service ratio. A perpetuation of the status quo may set the economy on a suicidal course of debt overhang and dependency.
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