The performance of Nigeria’s tax system is increasingly topical given the decline in government revenue due to the fall in oil price. Tax is the least costly means of funding government expenditure. In 2016, the Federal Inland Revenue Service (FIRS), Nigeria’s agency that assesses, collects and records taxes, was tasked to bring in about ₦4.9 trillion, which aggregates to 67% of the 2017 budget. In 2015, the FIRS collected ₦3.74 trillion in taxes (FIRS). To reach its target and increase the country’s 6% tax to GDP ratio, the government’s tax plan is to broaden the tax base by improving compliance, and imposing taxes on luxury commodities, cigarette, and alcohol.
On the other side of the globe, there are also growing tax debates. Since 2015, there has been a reduction in corporate tax amongst OECD countries with the average OECD corporate tax rate at 25% (OECD). The UK has its corporate tax rate at 19% (OECD) and is presently considering cutting it further. The rationale is that low corporate tax attracts foreign direct investment and this is especially significant for post-Brexit UK.
America is calling for massive income and corporate tax cuts as well. In repealing the Affordable Care Act the wealthy are saved millions in taxes. The reasoning is that tax cuts increase economic activity through consumption and investment, and the increment will eventually trickle down to the common man. However, the data do not always concur. Economic activity has slowed down in some countries that have reduced their tax rates. Canada with a low corporate tax rate of 15% (OECD) is experiencing a stall in economic activities.
Although, there are divergent opinions, high tax rates and economic growth have once co-existed. According to Bill Gates, America’s economic growth increased in the 1960s even though tax rates were high.
Nigeria may have to consider increasing its tax rates. The country’s 5% VAT tax is significantly lower than the low middle-income country average of 13% (IMF, 2011). Although its corporate income tax rate competes favourably, tax holidays and Free Trade Zones (FTZs) reduce the tax revenue that would otherwise be realised. While Ghana has 3 FTZs and South Africa has 2 Industrial Development Zones (International Trade Administration), Nigeria has 14 operational FTZs and 18 underway (Nigeria Export Processing Zones Authority). Although FTZs attract foreign direct investment (FDI), they deprive the country of tax revenue. Moreover, FDI not only depends on corporate tax rate but is also a function of the interplay of factors such as corruption, and political stability.
In addition to imposing excise duties on cigarette, and alcohol; duties on soft drinks, gambling and other commodities that are somewhat harmful to society may also be considered. The enforcement of property tax should also be considered as it has the potential to serve as an equitable and reliable means of increasing tax revenue since its tax base is relatively prosperous and immobile.
Tax laws should be clear, concise and readily available, and tax fraud should be a criminal offence as in some developed countries.