Nigeria’s fiscal suicide: Taxing the poor into poverty

“This policy not only reduces their already limited purchasing power but also stifles domestic consumption—the very engine of economic growth.”

Nigeria stands at a critical fiscal crossroads. Despite repeated calls for economic reform, the government continues to rely on misguided policies that tax the poorest citizens rather than foster an environment conducive to growth. This approach is not only economically unsustainable, but it also perpetuates inequality and hinders long-term development. As one of Africa’s largest economies, Nigeria’s revenue collection remains shockingly low, especially when compared to regional peers like South Africa and Kenya. The nation’s tax laws, which disproportionately affect those with lower incomes, make the issues they are intended to address worse.

A recent study by BusinessDay highlights this troubling discrepancy. Among eight African nations, Nigeria has the lowest personal income tax (PIT) exemption threshold, yet it collects the least revenue. In 2023, Nigeria generated just N1.53 trillion in PIT revenue, while Kenya brought in N5.8 trillion and South Africa a staggering N50.5 trillion. This contrast underscores the inefficiency of Nigeria’s tax system and its failure to capture sufficient revenue for meaningful public investment.

Taxing the poor is not a path to prosperity. The world’s leading economists, including John Maynard Keynes, have long argued that progressive taxation, where the wealthiest pay more, is essential to both economic growth and social stability. Keynesian economics suggests that taxing those with higher incomes—who are more likely to save rather than spend their disposable income—does less harm to the economy than taxing those who live paycheck to paycheck. Nigeria, however, has failed to adopt such a system.

With a PIT exemption threshold of just N70,000, low-income earners are subjected to taxation, despite their precarious financial positions. This policy not only reduces their already limited purchasing power but also stifles domestic consumption—the very engine of economic growth. According to Numbeo’s 2024 data, Nigeria’s purchasing power index is one of the lowest globally, at just 9.4, compared to South Africa’s 84.7. This stark disparity reflects the severe economic constraints facing ordinary Nigerians.

The lessons of economic history are clear. No nation has successfully taxed its way to prosperity without fostering an environment that encourages wealth creation. Even Great Britain, one of the world’s earliest industrial powers, faced a similar dilemma under Queen Elizabeth I. In the late 16th century, heavy taxation and monopolies led to public dissatisfaction and economic stagnation. It was only after Parliament limited the Crown’s ability to levy taxes without reform that Britain laid the groundwork for the Industrial Revolution.

Economists Daron Acemoglu and James Robinson, in their seminal work Why Nations Fail, argue that inclusive economic institutions—those that protect property rights, enforce contracts, and promote innovation—are crucial for sustained growth. Nigeria’s current fiscal policies, which tax the poor while offering little in return, fail to create the conditions necessary for such institutional development. Without structural reform, Nigeria’s economy will remain stuck in a cycle of low growth and high inequality.

To address these deep-rooted issues, Nigeria must rethink its fiscal approach. Raising the PIT exemption threshold, as proposed in the Economic Stabilisation Bill (ESB), is a welcome first step. By increasing the threshold to N1.5 million, the government can relieve the tax burden on low-income earners and improve their purchasing power. This, in turn, would stimulate domestic consumption and contribute to economic recovery.

However, raising the exemption threshold alone will not be enough. Nigeria’s tax system needs broader reform to widen the tax base and ensure that the wealthiest individuals and corporations contribute their fair share. This would help to diversify government revenue sources and reduce over-reliance on oil, which remains a volatile and unsustainable pillar of the economy.

Additionally, improving tax administration and enforcement is crucial. Corruption and inefficiency within the Nigerian tax system have long undermined the government’s ability to collect revenue. Addressing these systemic issues, alongside increasing transparency and accountability, will be key to ensuring that tax reforms lead to real economic progress.

Nigeria’s future prosperity depends not on squeezing more revenue from its poorest citizens but on creating the conditions for sustained economic growth. As Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, recently noted, “The best way to generate revenue on a sustainable basis is to grow your economy. When businesses grow and individuals prosper, you take a share of their prosperity by way of taxes.”

The government must prioritise reforms that empower citizens, expand the tax base, and encourage investment. This involves creating a conducive business environment, protecting property rights, and investing in infrastructure. By fostering a thriving economy, Nigeria can generate more revenue through a wider tax base, reducing the burden on the poorest citizens.

Additionally, the government should implement targeted social programs to address the needs of the most vulnerable, such as providing quality education, healthcare, and social safety nets. These investments in human capital will not only alleviate poverty but also create a more skilled and productive workforce, driving economic growth.

The road ahead requires bold action and a long-term vision. By prioritising economic growth, wealth creation, and social justice, Nigeria can break free from the cycle of poverty and inequality and build a prosperous and equitable society for all its citizens.