Nigeria’s tax burden – A roadblock to shared prosperity

Nigeria stands at a pivotal moment. Facing significant economic challenges, the country’s fiscal policies seem misaligned with the goal of long-term growth. Despite persistent efforts to raise revenue through taxation, the government’s strategy remains regressive, disproportionately impacting the poorest citizens while delivering insufficient returns. BusinessDay research reveals that Nigeria has the lowest personal income tax (PIT) exemption threshold among eight selected African countries, yet its revenue collection lags far behind peers like South Africa and Kenya. This imbalance points to deeper structural issues within Nigeria’s tax regime—issues that must be addressed if the country is to build a sustainable path to prosperity.

“This imbalance points to deeper structural issues within Nigeria’s tax regime—issues that must be addressed if the country is to build a sustainable path to prosperity.”

The comparison with South Africa is particularly stark. In 2023, South Africa collected N50.5 trillion in PIT, compared to Nigeria’s N1.53 trillion. Even Kenya, with its higher exemption threshold, outperformed Nigeria by generating N5.8 trillion. These figures highlight the inefficiency of Nigeria’s tax system and raise questions about its fairness and effectiveness. At present, the burden falls most heavily on those least able to bear it, further exacerbating inequality and economic hardship.

History offers clear lessons for nations attempting to tax their way to growth. During the reign of Queen Elizabeth I, England faced similar fiscal pressures, with heavy taxation imposed on an already struggling population. The economic strain led to discontent, forcing Parliament to demand reforms that ultimately curbed the Crown’s ability to tax without checks. This shift was instrumental in laying the groundwork for England’s economic transformation during the Industrial Revolution.

Nigeria’s situation today bears echoes of this past. The government’s focus on extracting revenue from a narrow base of low-income earners, without meaningful reform or wealth creation, is unlikely to lead to economic progress. Instead, it risks deepening poverty and stifling growth. In an environment where local purchasing power is among the lowest in the world—Nigeria’s purchasing power index is just 9.4 compared to South Africa’s 84.7—taxing the poor can only further suppress consumption and economic activity.

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The government’s recent proposals, such as the Economic Stabilisation Bill (ESB), offer a step in the right direction. By raising the PIT exemption threshold to N1.5 million, the bill aims to relieve low-income earners and expand the tax base. However, for this reform to be effective, it must be part of a broader strategy to encourage economic growth, improve tax compliance, and streamline revenue collection. A tax system that encourages entrepreneurship, investment, and innovation is essential for fostering long-term prosperity.

Nigeria’s experience underlines the importance of creating an inclusive tax framework that supports growth rather than hinders it. Economists have long argued that taxing the wealthy, who have a lower marginal propensity to consume, can help stimulate economic activity by leaving more disposable income in the hands of those who are most likely to spend it. This principle is particularly relevant in Nigeria’s case, where many citizens already struggle to meet basic needs. Targeting them with further taxes will only deepen economic hardship and limit the country’s potential for growth.

Nigeria cannot tax its way to prosperity by focussing on the least affluent. Sustainable economic growth requires a tax system that encourages investment, broadens the tax base, and promotes fairness. 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.” Nigeria must take this to heart.

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The challenge ahead is clear. The government must prioritise reforms that build a more inclusive and growth-orientated tax framework, one that empowers its citizens and promotes shared prosperity. This requires a comprehensive overhaul of the existing tax system, reducing reliance on narrow revenue streams such as oil and boosting non-oil sectors to diversify the economy. Measures like simplifying tax compliance for small and medium-sized enterprises (SMEs) and strengthening enforcement to reduce tax evasion should be at the forefront of these reforms.

At the same time, addressing fiscal imbalance is crucial to avoid trapping the economy in a vicious cycle of debt and underinvestment. A progressive tax regime that ensures the wealthy contribute a fair share while alleviating the burden on the lower-income population would stimulate consumption and growth. Expanding the tax base through digitisation and financial inclusion efforts can enhance the government’s capacity to fund vital public services like education, healthcare, and infrastructure, which are key drivers of long-term prosperity.

Without these changes, Nigeria risks falling further behind its peers, trapped in a cycle of low growth, fiscal imbalance, and heightened inequality. However, with decisive action, the country can shift towards sustainable development, fostering an economy where all citizens have the opportunity to thrive. The path forward must prioritise not just fiscal stability but also inclusive growth that bridges the gap between the wealthy and the underprivileged, ensuring that Nigeria’s growth benefits the many rather than the few.