The budget and national planning minister, Udo Udoma, and the executive chairman of the Federal Inland Revenue Service (FIRS), Babatunde Fowler, recently hinted that the federal government would raise the value-added-tax (VAT) rate by 50%, that is, from the current 5% to 7.5% or even 10%. They said the proposed increase was necessary to fund the new minimum wage of N30,000 per month. Understandably, the proposal has provoked mixed reactions, but the preponderance of public opinion is against any tax increase.
In a significant intervention, the national leader of the ruling All Progressives Congress, Bola Tinubu, warned against raising the VAT. “Let me appeal to Vice President Yemi Osinbajo and his team to put a huge question mark on anything that concerns VAT”, he said, adding that any increase would reduce the people’s purchasing power and slow down the economy.
Unsurprisingly, those who say that Nigeria is in a dire fiscal state favour a hike in tax rates, including a significant rise in the rate of VAT. The IMF, which has always called for the reform of Nigeria’s tax regime, supports the government’s plans to reform and raise the VAT. In a statement after its recent Article IV Consultation on Nigeria, the IMF stressed “the importance of strengthening domestic revenue mobilization, including through additional excises, a comprehensive VAT reform, and elimination of tax incentives.”
Well, here’s my take. There are two basic issues that undermine the tax-hike proposal, and a philosophical one: the connection with the Magna Carta. I start with the two basic points, namely: one, the premise of the proposed VAT increase is flawed; two, the idea itself is counter-intuitive.
Why is the premise flawed? Well, because it links the proposed hike in VAT to the funding of the new minimum wage. That’s thoroughly misguided, because it stigmatizes the minimum wage, making it look like a necessary evil. To say that a federal government that had a budget of N7.3trillion in 2017 and N9.1trillion in 2018 cannot fund a rise in the minimum wage without penalizing Nigerians with tax rises is to attach a nuisance value to the minimum wage. But the minimum wage is not a dirty concept; rather, it’s a policy tool that civilised nations use to reduce in-work poverty and income inequality.
Even the Nigerian Constitution recognises that imperative. Indeed, significantly, the Constitution uses the words“minimum living wage”, not “minimum wage”. Section 16(2)(d) says that “the State shall direct its policy towards ensuring reasonable national minimum living wage are provided for all citizens”. A “living” wage is defined as “a wage that is high enough to maintain a normal standard of living”.Truth be told, N30,000 per month is not a reasonably high enough living wage to maintain a decent standard of living in Nigeria!
The UK introduced the minimum wage 20 years ago, in 1999, at £3.60 an hour, and set up the independent Low Pay Commission to advise on the pace at which it should rise. Since 1999, the UK minimum wage, now called the “national living wage”, has risen faster than average earnings and is now at £8.21 per hour. What’s more, in 2015, the government set a target to reach 60% of median income by 2020, with the aim of ending low pay, meaning a living wage as high as two-thirds of median earnings!
Yet, no tax has been raised as a result; no controversy attends the regular increase in the living wage; and no false claims about its potential damage to jobs and the economy. The economist Alan Krueger, who died recently, discredited the basis of such claims with his seminal research on the impact of minimum wages on jobs. Despite its rising national living wage, the UK has the lowest unemployment rate among OECD countries, because an open, competitive and innovative economy can tolerate a reasonably high minimum wage. So, the idea that the VAT, or indeed any tax, must be raised to fund a minimum-wage increase is a misguided attack on the concept of a minimum wage and an abject failure of public policy.
Bu the second preliminary point is that the idea itself is counter-intuitive. One of the key barriers to industrialisation or the growth of the manufacturing sector in Nigeria is low consumer purchasing power. Industrialisation is not possible without a robust consumer base, and you can’t have a strong consumer base in a low-wage society or in a society where consumption taxes are a disincentive to consumption. Surely, any VAT increase in Nigeria, a country where the people have low purchasing power and are even reluctant to buy “Made-in-Nigeria” goods, would further reduce consumption, harm industries, cause job losses and increase poverty! Given those scenarios, how barmy can the VAT-hike idea be?
Sadly, Nigeria has one of the most uncompetitive corporate tax regimes in the world. According to the World Bank, there are 59 tax payments in Nigeria, compared with an average of 37 in sub-Saharan Africa. Multiple taxes are widespread across the three tiers of government. With a corporate tax rate of 30% (19% in the UK) and petroleum profit tax ranging from 50% to 85% (from 19% to 30% in the UK), not to mention heavy “sin taxes” on alcoholic beverages, as well as other special taxes and mandatory contributions, Nigeria has a very uncompetitive tax regime that is not appealing to foreign investors or supporting business growth. Rather, the government sees businesses as milk cows, a source of easily gained income, even though it provides no supportive environment for them to thrive! I mean, Nigeria imposes a tertiary education tax on businesses, yet the quality of tertiary education is so poor that industry can’t find the skills to increase their productivity!
Which, finally, brings me to the philosophical point, the connection with the Magna Carta. It is often said that only death and taxes are certain in life. So, taxes are inevitable. But the Magna Carta established centuries ago, in 1215, the fundamental principle of “no taxation without representation”. Ah, you may say, but Nigerians have been electing their leaders and, in fact, just elected new leaders in this year’s elections. Well, that’s true, but the principle goes beyond mere elections; it’s also about proper representation and linked inextricably to the social contract basis for the legitimacy of the state.
But the social contract doesn’t exist in Nigeria. Successive Nigerian governments have woefully failed the people. Nigerians lack basic things taken for granted in even poorer nations. Nigeria, as we know, is the poverty capital of the world, with over 90m of the people living in extreme poverty. According to a recent UN report, two-thirds of the world’s hungriest people live in Nigeria and seven other countries, and Nigeria is home to the 6th most miserable people in the world. Nigeria languishes at the bottom of all the World Governance Indicators, particularly government effectiveness. It’s no wonder that there is deep distrust between government and citizens in Nigeria. According to Heritage Foundation, Nigeria has the second lowest government integrity in the world.
To be sure, there is a chicken or egg conundrum about taxes. Citizens who pay taxes hold their government to account, while governments that fail and lack legitimacy in the eyes of the people will struggle to raise taxes. Both situations exist in Nigeria. Most Nigerians don’t pay taxes and so don’t hold government accountable. The government, on the other hand,lacks legitimacy and can’t secure voluntary tax compliance.
Taxes may be as certain as death, but without proper representation, without a meaningful social contract, they won’t be a certainty in Nigeria! That’s the Magna Carta test.