Two weeks ago, the International Monetary Fund (IMF) lamented Nigeria’s low tax revenues. Launching the IMF’s Regional Economic Outlook for Sub-Saharan Africa, the Fund’s Director for Africa, Abebe Selassie, said: “For a country like Nigeria, Africa’s most populous country, with all those development spending needs, we think it is problematic that the tax revenue to GDP is only 8–9 percent when it should be a lot higher.”
A few years ago, in its 2019 Article IV consultation with Nigeria, the IMF made the same point. It said Nigeria suffered from “low tax mobilisation,” adding, “The revenue base is simply too low to address the current challenges.” Compared with the sub-Saharan African average of 18.6 percent, Nigeria’s 8–9 percent is, indeed, minuscule and shocking. Like the IMF, successive Nigerian governments have fretted about it, but they always diagnosed the problem wrongly, dealing with the symptoms rather than the root causes.
Q: “But while tax administration is extremely weak in Nigeria, the absence of a digital payment system is not the reason most rich people don’t pay tax or pay the requisite amount of tax.”
In August 2019, President Buhari’s then-chief of staff, Abba Kyari, sent a query letter to Dr Tunde Fowler, then chairman of the Federal Inland Revenue Service, FIRS, asking him to explain why there were “significant variances between the budgeted tax collection and the actual collection for the period 2015 to 2018” and why “the actual collections for the period 2015 to 2017 were significantly worse than what was collected between 2012 and 2014.” Subsequently, in December of that year, the Buhari government refused to reappoint Fowler as head of FIRS. Fowler’s query and removal from office reflected the anxiety within the government about the perennially low tax generation amid deep fiscal challenges.
When Bola Tinubu became president last year, he made boosting Nigeria’s tax revenue a top priority and said his administration aimed to increase Nigeria’s tax-to-GDP ratio to 18 percent by 2026. In July 2023, Tinubu inaugurated the Presidential Committee on Fiscal Policy and Tax Reforms, headed by Taiwo Oyedele, a tax expert at the accounting firm PwC. The committee submitted its report in October 2023, highlighting what it described as “quick wins” through the simplification and digitization of the tax regime.
Indeed, recently, Tinubu met Bill Gates, the Microsoft founder, at the World Economic Forum (WEF) in Saudi Arabia, and they discussed how digital technology could be used to ease tax collection in Nigeria. Gates told Tinubu he would work with his administration to create a digital identity platform to ensure payment efficiency and make tax collection easier.
But while tax administration is extremely weak in Nigeria, the absence of a digital payment system is not the reason most rich people don’t pay tax or pay the requisite amount of tax. For instance, the Federal Ministry of Finance once said that just 241 people paid more than N20 million in personal income tax in a year, while the then head of the Federal Inland Revenue Service was quoted as saying that “over 6,772 billionaires don’t pay tax.”.
Surely, no one can say it’s because of the lack of a digital payment system that the billionaires were not paying tax. Certainly not. The problem, simply put, is corruption. A lot of rich people avoid and evade tax and get away with it, aided and abetted by complicit tax officials, who are in the pocket of the wealthy tax dodgers. Moreover, the government grants tax exemptions to many favoured companies and wealthy individuals, which effectively amounts to giving subsidies to the rich.
Yet, the tax-dodging billionaires are not the only problem. Are there enough people able to pay tax in Nigeria? In most countries, the middle classes, micro, small, and medium enterprises, MSMEs, the employed, and the self-employed collectively account for the largest proportion of tax payments. For instance, in the UK, the top 1 percent of taxpayers, that is, the billionaires, contribute 30 percent of income tax, while the rest, which include the middle classes and the lower classes, account for 70 percent of income tax receipts.
But the strength of the economy determines the strength of the different categories of taxpayers and, thus, the robustness of the tax intakes. That’s why tax receipts usually fall during a recession because company and individual incomes are reduced and, inevitably, their tax payments. As Martin Woolf, the chief economics commentator of the Financial Times, rightly put it, “the main source of greater prosperity and higher fiscal revenue must be faster economic growth.” Thus, the truth is that tax revenue is a function of economic activities.
Unfortunately, the Nigerian economy is not producing enough income for taxpayers. The middle classes are disappearing, and those left are mostly managing to eke out a living. According to an estimate by the International Labour Organisation (ILO), 93 percent of all employment in Nigeria is in the informal sector. And, of course, everyone knows that most of those in the informal sector don’t pay tax. First, because they earn a very low income and depend on a daily income to survive. Second, because the state cannot even track them for tax purposes.
In his book Reclaiming the Jewel of Africa, Dr Segun Aganga, a former Minister of Finance and later Minister of Industry, Trade, and Investments, said that MSMEs account for about 48 percent of Nigeria’s GDP, but added: “Most MSMEs are nano, micro, and small businesses that do not make sufficient profit to pay high tax or they are not in the tax net.” If those accounting for 48 percent of a country’s GDP can’t pay tax, where will high tax revenues come from? The National Bureau of Statistics (NBS) says that 76.7 percent of Nigeria’s working-age population is self-employed. But what kind of self-employment? Most of them are petty traders or microentrepreneurs who simply can’t make ends meet. Thus, it’s not surprising that, according to one analysis, 67 million of Nigeria’s labour force of 77 million are not registered taxpayers.
Truth be told, the “cult of the small” of unviable smallholders and microentrepreneurs, as David Pilling, FT’s Africa Editor, puts it, will simply not generate prosperity and tax revenues. It’s not rocket science: any economy where businesses and individuals are not earning enough to pay a high tax or to pay any tax at all will have a small tax base and a low tax revenue intake. Thus, to boost its tax revenue intake, Nigeria needs a robust economy, needs businesses of all sizes to flourish and create well-paying jobs, and needs to incentivize those in the informal sector to join the formal, tax-paying sector.
But there’s another problem: systemic non-compliance with tax requirements by the citizens. A Nigerian once told the Financial Times: “In Nigeria, the government pretends to tax people, and people pretend to pay.” At the best of times, taxation is politically sensitive; for most people, it’s a necessary evil. But most Nigerians simply don’t want to pay tax, even if they can. So, why is there such poor tax compliance in Nigeria? Well, the answer is simple: the Nigerian state has violated the social contract with the people and can’t induce their loyalty.
The Magna Carta established the principle of “no taxation without representation,” which means that taxation is predicated upon representation. But representation is more than elections; elected governments must meet the basic needs of the people. Sadly, the Nigerian state does not. Ordinary Nigerians lack the basics of life. The state can’t protect them or improve their living standards. That can’t engender voluntary tax compliance.
In sum, to boost tax intake, Nigeria must grow the economy and honour the social contract. Of course, Nigeria must overhaul its tax administration, including through digitalization. But, in the end, only a robust economy and loyalty-inducing governance will boost fiscal revenue.
