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Explainer: America, Canada show how fiscal federalism works

Taxes for Traders – How to Stay Legal

The United States of America and Canada, where taxes are decentralised, are two countries that offer glowing examples of true fiscal federalism.

Each level of government in both countries adequately finances its operations, a hallmark of the fiscal federalism that Nigeria is striving to achieve.

Lessons from both countries come at a time where some Nigerian states, specifically Lagos and Rivers, have expressed their readiness to collect their own Value Added Tax (VAT), aside from PAYE, due to the gross injustice done in the revenue sharing, issues of infraction of the Constitution, and issues of illegality.

In Canada, both the federal and provincial governments have broad taxing powers.

Read Also: Rivers sets Nigeria on course to true federalism with new laws

Its constitution gives the federal government an exclusive power to raise revenue; however, the constitution also gives the provinces the power to apply direct taxation in their jurisdictions. As a result, the federal and provincial governments share several of the most significant taxation powers.

They all levy taxes on resources, revenues or profits generated within their jurisdictions, and property taxes are used to finance much of local government expenditures.

The type of taxes levied by Canadian provinces are personal and corporate income taxes, payroll taxes and specific excise taxes on items like alcohol, tobacco and petroleum products. The federal government levies many of the same taxes, with the major exceptions of resource and property taxes.

In America, most states impose and collect their own corporate and personal income taxes as well as retail sales taxes. Their municipalities (a political subdivision of a state) use property taxes extensively as well as taxes on natural resources.

The federal government shares many of the same tax bases, with the notable exception of the sales tax. It also uses the payroll tax for financing a specific programme, the Social Security System.