A couple of thoughts (sorry if it ends up being long) on the current "tax reform" and just some of the things I observed:
1). Virtually all the discussion was about VAT and redistributing revenue. No talk about its effects on savings, investment, productivity and economic growth. That says a lot about the nature of the Nigerian state and the quality of discourse.
2). To the best of my knowledge, no one made any reference to the Laffer Curve and how one cant just wish to have more revenue and it comes just like that through some wishful thinking without a fairly sophisticated understanding that this is not a wish-it-on-paper-and-it-happens issue. Even if some might not agree with the curve and its theorems, addressing it at some length shows that one has done their homework and thought through things.
3). Perhaps more disturbing to me and why even though I support the measly corporate tax reductions I ultimately don't support this bill. It aims to increase the portion of national output which the Nigerian federal government consumes with the aim being 18% of GDP.
We must keep in mind that Nigeria has been in the middle of economic stagnation for a decade. Which is another way of saying that a massive tax hike bill just took place in the middle of a decade old stagnation.
Lets even say what I just said is dismissed as the rantings of a "market fundamentalist", lets look towards Keynes. Yes, Keynes supported counter cyclical policies in these kind of circumstances, but even Keynes never supported tax increases under these circumstances. Even by Keynesian logic (which Tinubu implicitly subscribes to in his fiscal policies), more that doubling the tax net in the middle of a decade old economic stagnation is wrong policy.
Further more lets even do a worldwide comparison of the percentage of national output consumed by the central government (not sub-nationals) in a number of emerging markets:
China: 11.6%
Taiwan: ~12.5%
Singapore: ~13.7%
UAE: ~7.1%
Indonesia: ~10.2%
Malaysia: ~11.8%
As we can clearly see, they don't excessively consumer their national output. And we wonder why they are growing in leaps and bounds.
Truth be told. The whole 18% (their minimum) figure is an IMF fiction which has more to do with ensuring that international creditors are paid than anything to do with productivity, economic growth and the welfare of Nigerian people. But the Nigerian technocratic class has been gaslite into thinking that attempting to double the tax drag net in the middle of a decade old stagnation would bring growth.
4). Whether Nigerians realize it or not, in crafting such a bill they are competing with the almost 200 countries of the world for resources and business. I just did not see that awareness anywhere talking in terms of global competitiveness.
I know Feyi has argued that this till is good in high earners. I beg to differ. His logic is that its a small crop of Nigerians who earn so high. But one has to think about it in terms of such a crop increasing if the economy improves (which I am not sure with this bill).
The 25% kicks in around $30,000. Nigeria should have raised that rate to as high as $80,000 or even $100,000. Ill give another reason. Doing such can be a very good way of attracting in talent and capital into the Nigerian economy; goes back to what I say about discourse about global competitiveness totally missing from this whole debate.
One should stack the personal rates against rates in emerging markets - Nigerians love to talk big but sell themselves short. For example, I did a quick back of the envelope comparison against Singapore. Nigeria's rate for the lowest earners kick in at less than $1000 at a higher rate while Singapore has a far higher rate for its highest earners.
Nigerian policy makers thinking in terms of global competitiveness should have decided for example, that they want a far more market friendly and competitive personal tax rate than every emerging market nation, BRICS, G7, and G20. With how the Nigerian executive can arm twist the legislative to get what it wants, it could have gotten this.
5). On the corporate tax rate front, I think this is the lowest hanging fruit which Nigeria (and in fact the African continent) is not taking advantage of. I know the fashionable talking point is about "race to the bottom". But a country like Nigeria should go for an Irish style low corporate tax rate of at least 10% (maybe even 5% and 0% in some industries) and on top of that have a super deducting regime regime (say 250%) in which say the cost for setting up factories, deploying capital equipment are instantly written off immediately. I know all the fashionable international organizations would wail all day and night about Nigerians unfair tax practices and how 15% is a holy rate no one is allowed to go below - they should be ignored and politely told to get get lost.
For example, an aspect of the tax bill I actually liked but I felt could be far better was a schedule of industries which get VAT rebates etc. IMO, VAT rebate is deeply weak and mediocre. Fuse that schedule with an Irish style low tax rate and instant super deducting as I suggested and this could literally change Nigeria's economic fortunes forever. Furthermore, it probably would set off a domino on the African continent. I can see countries like say Kenya, Ghana and say Tanzania immediately moving to copy this when they see how it makes Nigerian very competitive overnight.
6). I've said something for a very long time and this bill only confirmed it. Nigeria lacks a privately funded think tanks that can for example analyze the recently passed tax bill and analyze it, score it and begin pointing out to the population where the dead bodies are in the bill.
For the most part people had to believe what the gentleman who shepherded the bill said. I'm not saying he lie or was dishonest in the goods he sold. But this is not how this game works.
7). Lastly, I don't hide my preference for a drastically smaller federal government. Tinubu claims to lean in such a direction - I've always had my misgivings about the coherence of his views in this regard - but he just signed a law which if it goes as advertised (that is, the central government consuming more of national output), such totally undercuts what he says in this regard or what he might try to do in this regard.
A.) I agree to your points 1, 2 & 6. They speak to the state of public intellectual discourse. And I am happy people like you have decided to take on this challenge to think , analyse , write and proffer solutions . May your ilks continue to grow.
B.) For your argument on the measly corporate tax reductions, I disagree . Yes , reducing the corporate taxes can make investors to come in. Yet, we need to have an understanding of where we are coming from; especially the current state of the tax revenue. Nigeria needs revenue , a hugely marked tax cut may be dangerous . Gradual reductions make sense to me, if we add other corporate tax incentives already given by the govt into the equation.
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On the whole, many thanks for these great write-ups
Thank you very much for the feedback. Its very much appreciated. I hope that with the little we do here and there by commenting and writing articles, discourse would be improved and whoever should be reading some of the things posted in a forum like this and by participants like me, they are reading all these even if silently and not engaging and using all the information however they see fit.
But I feel I need to address what you said about corporate tax rates and revenue.
Ill humbly submit that one of the most damaging legacies of Tinubu introduced into Nigeria even before he became president is the obsession with government revenue. This is straight from the Lagos playbook in which IGR is seen as some kind of achievement and the end be all. Instead of measuring economic health and vitality in terms of economic growth, numbers of businesses and factories brought it, numbers of jobs brought in etc, government revenue has substituted such to a degree that should not exist in a country that badly needs growth and numbers.
To the corporate tax rate issue.
Under point #2 above, I talked about the so-called "Laffer Curve". A general and crude idea is that beyond a certain point on a parabolic curve (as this article illustrated), attempts at tax collection begin to show diminishing returns, and government tax revenue actually begins collapsing despite higher rates. This curve implies that a revenue maximizing point exist and even a growth maximizing point exist on this parabolic curve. Being able to derive exactly where on the curve such exist for each economy is not an exact art and not something which using data and equations we can produce figures but in a qualitative manner (e.g. collapse in revenue despite higher rates or reduction in growth around a point of tax rates etc).
A secondary implication is that actually in many cases (once one does not reach exactly 0% or in that region), reducing tax rates actually increases tax revenue on NET. The reason is simple. With lower taxes, consumers, businesses etc have more funds to spend on investments and keep as savings which expands businesses from which the tax base of businesses and individual tax payers increase.
Critically, different Laffer Curves exists for whether its income taxes, consumption or sales taxes like the VAT, or even corporate taxes. But they all share similar characteristics generally described above.
The implications of the Laffer Curve described above generally describe so called pro-growth tax policies.
I used the example of Ireland and argue that Nigeria (and in fact African countries) should be looking to imitate the Irish example (with modifications). Its a policy which can be implemented relatively easily with a few tweaks here and there to the tax code but could have revolutionary effects on Nigerian African economic trajectory.
Irelands corporate tax rate today is somewhere between 12% and 14% (I cant remember the exact rate).
Ireland began moving in a low corporate tax rate direction in the late 1980's and is probably one of the most decisive policy changes that catapulted it from a rural and poor Western European backwater less 1.5 generations ago to the forefront of Western Europe and having one of its highest GDP per capita figures.
Very critically!
One would think it "lost" all the "tax revenue". Rather, despite low rates, Irelands corporate tax revenue is always reaching record highs with it simply not knowing what to do with it.
Below are Irelands corporate tax rate figures since around the year 2000. As one can see, despite the dips around the time of the financial crisis, its grown by a factor of 5X despite "low rates" and what conventional wisdom would say about "revenue loss":
Year Corporate Tax Revenue (€ billion)
2001 4.16
2002 4.80
2003 5.16
2004 5.33
2005 5.49
2006 6.68
2007 6.39
2008 5.07
2009 3.90
2010 3.92
2011 3.52
2012 4.22
2013 4.27
2014 4.61
2015 6.87
2016 7.35
2017 8.20
2018 10.4
2019 10.9
2020 11.83
2021 15.23
2022 22.65
2023 23.84
I know that there is a debate about Irelands corporate taxes only incentivizing trillions in foreign corporate profits sitting in Ireland with accusations that its a "tax shelter." While all that might be factually correct, if you carefully look at what I said in my previous post I talked about how Nigeria can have a corporate tax regime that tilts in the direction of the real economy through super depreciations.
Ill argue that yes even if corporate tax revenue would be forgone its more than worth it and a cheap price to pay for a country like Nigeria. Corporate tax rates nowadays on average (Ireland is kind of an exception to this rule) are never a big portion of government tax receipts. Forgoing that in exchange for unparallel economic growth is a criminally cheap bargain. In exchange, you get modern factories and increase your capital stock which makes your workers and economy more productive, you get very high rates of growth and increasing wages and standards of living over time, all the worlds best brands want to invest in your economy, very critically it attracts and incentivizes domestic capital which might be on the sidelines, you stop draining your best talent etc etc.
Great points. Jokingly , we may have to pardon Mr. Tinubu's 'obsession' with increased revenue, being an accountant, he believes a good top-line would reasonably produce a nice bottomline.
1. That said, having revenue is not bad. Every economic entity requires positive revenue/income to survive. For a country like Nigeria , it is crucial . Yet , I understand it is a balancing act between - incentivising and disincentivising investors. But we need revenue .
2. The present tax law has also excluded SMEs earning less than 50M naira in annual revenue. This is a big deal as SMEs are estimated to contribute around 48% of the Nigerian GDP, they account for a large percentage of businesses (96%) and employment (84%).
3. There are other potential gains from the new tax regime : A gradual reduction in corporate tax plus an expected efficiency gain in tax collection is a BIG LEAP. For a country that suffers from massive tax avoidance and even invasion , efficiency in tax collection will help fix some leaking pipes.
4. In addition, since taxation is not only about revenue generation, it is equally a useful tool in addressing inequality and (re)distribution of income.
5. Even Laffer Curve has been proved to work more in economies with more formal sectors anddd efficient tax compliance. I understand that higher Marginal Tax Rate ( MTR) could discourage capital owners from further investment , yet a gradual reduction is just fine. Especially with the small size of the top earners and the corporate payers. So a massive tax cut may be of small effect based on the large informal sector.
6. The real focus should be on efficiency in tax collection and compliance. More revenue will come in that may even reduce the constant allure of deficit monetization by the Central Bank of Nigeria. From another perspective, a growing compliance signals less default risk incidence to Nigeria lenders.
Ill be as brief as possible in addressing all your points:
1). Government taking more revenue out of an economy slows down growth. There is the concept of opportunity cost and "the unseen", revenue taken in is what funds obscene public sector pay packages and 100 car motorcades which are used to terrorized every day Nigerians or having almost 50 ministries of which at least 50% of their work is pure inefficiency. This instead could have been used by businesses to fund expansion, employ more people etc.
Nigerian need to let go off this obsession with "revenue", this thing is deeply abnormal and bizarre. You basically are making the case for politicians to steal your hard earned money.
2). I'm happy for that aspect though I feel its not internationally competitive and if this new law fails to bring in enough revenue and using inflation to fund deficits continue, inflation creep can render such useless for many businesses over the years to come.
3). I don't care for governments being more efficient at tax collection.
4). You can either select growth and economic development or you can select obsessing about inequality and redistribution. You can't have both. Such goals are incompatible and cant be reconciled.
Ever noticed how China for example, a so called communist state, put the inequality and redistribution talk on the back burner and obsessively went in on growth and wealth? I think it safe to say Chinese across all income levels are better off today. Africans should kills the talk about inequality and redistribution. Growth must be the obsession or Africans would have another century of looking like idiots.
5). Economic law is universal whether is the same whether in the time of the Roman Empire, the Industrial Revolution, or todays booming East Asia.
Its the same whether is among the Zulu people, the Han Chinese or the Amerindian tribes of central America. Its also the same whether its with the lest developed nations or among the most developed nations.
This point merits addressing. One of the key subtle messages of the economic field towards Africans is that "you Africans are a totally different case, what works elsewhere and in many cases people use in an almost copy and paste fashion can never work with you." Many Africans have subconsciously bought into this deeply dangerous and psyche damaging assumption. Which might account for the painfully poor state of economic discourse in nations like Nigeria.
About the Laffer Curve which is the main in the context of this issue. Very interestingly a few years back there was a episode from Kenya (the country which the Tinubu governments sees as some kind of example for tax to GDP ratio BTW) which basically verified what anyone with a passing knowledge of the Laffer Curve knows. In the case of Kenya, under the direction of the IMF, Kenya increased its kerosine VAT to around 15% and as a result consumptions (and taxes collected) collapsed. This article was written before the deadly tax riots of summer 2024 in Kenya. Full article here: https://freedomandprosperity.org/2024/blog/big-government/kenya-crashes-on-the-laffer-curve/#:~:text=The%20Laffer%20Curve%20is%20the,changes%20to%20what's%20being%20taxed.
6). Instead of more "compliance" or efficiency with collections, the Nigerian state should be cut. For example having about 40 miniseries and making sure each state has a minister and having a bloated federal bureaucracy because of the federal character (i.e. affirmative action). More should be pushed to the states. In this whole debate, I am open to states even saying they want to generate more with the proviso that the federal government can't spend more.
I've probably taken too much time in all these replies. But its all good!
3. ) For your response to no. 3: But I think you should be equally concerned with efficiency of tax collection. Or we should just neglect collecting taxes all together .
4. ) Yes African economies should be obsessed with economic growth and devt . Very crucial . But it is also suicidal to neglect festering inequality . Growing and unchecked inequality will kill off , whatever economic growth achieved. A possibility of social tension leading to chaos is real. A delicate balance can be made between the two. It is not an extreme form of a mutually exclusive event in my view.
5) I don't believe economic laws are like the laws from exact/physical science . So they are not 100% universal . No they are not. Timing matters . The timing , the frequency , the difference in impact and the response of governments to cycles of market failures across countries are one of the reasons that these laws are not universal.
Take for instance , the subsidies given to farmers in Europe and North America, from the lenses economic law ( of price system) , that is a breach. But they still do it. Wine grower and producers destroy wine not because the wine is bad but to prevent a glut that will depress price.
Take for instance , the responses of the Federal Reserve to various financial crises and juxtapose that with the responses of some typical developing countries' central banks to their financial crises. There are clear differences.
Yes , I am pro-market . I also know some limits of price systems that call for substantially different state interventions. This is one of the evidences of non-near universal agreement of economic laws.
In fact , considering the fact that economists have several points of congruence in methodology and principles. They also have marked differences of some principles. And this represents another proof of non-unanimity of economic laws.
3). I dont deny that some basic taxes or revenue might be needed. My contention is that as of right now, Nigeria more than generates enough. It needs a drastically smaller federal government. Even as the economy grows, without "tax reform" or trying to increase the tax drag net more revenue would come in. Many Nigerians can't wrap their minds around the fact that economic growth in and of itself is capable of producing more revenue without any phony "tax reform" or increasing rates.
4). Growth is the best antidote to any worries about inequality. IMO, this is a talking point transported from Western technocratic circles were many Nigerians attend all their conferences, NGO events etc and bring this point. If you want to combat unearned economic privilege, if you want to lift the lot of the common man, economic growth should be the obsession. China did it. Let me ask: would you have a problem with which focuses on economic growth in which a graduate earns $300k a year while many billionaires exist and that graduate is living their best life? (I mean, the logic of inequality there is massive inequality which calls for government intervention to stamp put but in absolute terms the graduate is doing fantastically very well)
About the argument over universal economic law, you said this: "Yes , I am pro-market . I also know some limits of price systems that call for substantially different state interventions. This is one of the evidences of non-near universal agreement of economic laws."
I'm sorry but you are not! Do far more in depth reading. BTW, the idea that economic law is not universal is called "polylogism" (Google it). I assume you are a harmless person, this train of thought can lead to dark places.
Also one more point to add: even with is the miserly reductions in corporate taxes, Nigeria's statutory rate even after the rate drops slowly over the next 2-3 years would still firmly be in the revenue maximizing region of the Laffer Curve for corporate taxes. Which is another way of saying, even with the slow drop in rates, Nigeria's rate would be no where close to the growth maximizing area of the curve.
Nice one sir . Well researched and written. I have two comments . One for the main article . I will make the second one for the additional comment you made.
First Comment:
A. You asked if the new Tax Act is pro-poor ? Yes I believe it is . If we believe, the income per head in Nigeria has been dropping both in nominal and real terms , and this per capita income will not witness a leap, maybe a crawl going forward, then excluding low income earners from paying tax is a good move.
B. Your discussion on Tax Administration is apt. I sincerely hope the administration can pursue its goals and implement them, especially the digitisation and all related matters . The major spat I foresee may come from those MDAs who hitherto used to handle the revenue collection themselves but have now seen that taken away from their control.
C. The fiscal people , especially the National Assembly people need to read this paragraph on rebuilding the fiscal state. It is a whistle to pause and think. Essentially, if the fiscal authorities can take a look at different scenarios in future from now , they may be able to plan appropriately.
D. On the Taxation and Growth , this is nicely done and technically researched. I love the economics of taxation you brought into it, especially the idea of the Laffer Curve. Before this reform effort by Tinubu's administration, the duplicity/multiplicity of taxes were a menace. They are still but I believe as the reform dividends kick in, they will dissipate. Multiple taxes make things more expensive than they would normally be. Any attempt to erase them is welcome . Multiple taxes cloud both investment and financing decisions. Having rogue collectors or collecting system does not help broader public finance.
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I will add my second comment below your additional notes.
A couple of thoughts (sorry if it ends up being long) on the current "tax reform" and just some of the things I observed:
1). Virtually all the discussion was about VAT and redistributing revenue. No talk about its effects on savings, investment, productivity and economic growth. That says a lot about the nature of the Nigerian state and the quality of discourse.
2). To the best of my knowledge, no one made any reference to the Laffer Curve and how one cant just wish to have more revenue and it comes just like that through some wishful thinking without a fairly sophisticated understanding that this is not a wish-it-on-paper-and-it-happens issue. Even if some might not agree with the curve and its theorems, addressing it at some length shows that one has done their homework and thought through things.
3). Perhaps more disturbing to me and why even though I support the measly corporate tax reductions I ultimately don't support this bill. It aims to increase the portion of national output which the Nigerian federal government consumes with the aim being 18% of GDP.
We must keep in mind that Nigeria has been in the middle of economic stagnation for a decade. Which is another way of saying that a massive tax hike bill just took place in the middle of a decade old stagnation.
Lets even say what I just said is dismissed as the rantings of a "market fundamentalist", lets look towards Keynes. Yes, Keynes supported counter cyclical policies in these kind of circumstances, but even Keynes never supported tax increases under these circumstances. Even by Keynesian logic (which Tinubu implicitly subscribes to in his fiscal policies), more that doubling the tax net in the middle of a decade old economic stagnation is wrong policy.
Further more lets even do a worldwide comparison of the percentage of national output consumed by the central government (not sub-nationals) in a number of emerging markets:
China: 11.6%
Taiwan: ~12.5%
Singapore: ~13.7%
UAE: ~7.1%
Indonesia: ~10.2%
Malaysia: ~11.8%
As we can clearly see, they don't excessively consumer their national output. And we wonder why they are growing in leaps and bounds.
Truth be told. The whole 18% (their minimum) figure is an IMF fiction which has more to do with ensuring that international creditors are paid than anything to do with productivity, economic growth and the welfare of Nigerian people. But the Nigerian technocratic class has been gaslite into thinking that attempting to double the tax drag net in the middle of a decade old stagnation would bring growth.
4). Whether Nigerians realize it or not, in crafting such a bill they are competing with the almost 200 countries of the world for resources and business. I just did not see that awareness anywhere talking in terms of global competitiveness.
I know Feyi has argued that this till is good in high earners. I beg to differ. His logic is that its a small crop of Nigerians who earn so high. But one has to think about it in terms of such a crop increasing if the economy improves (which I am not sure with this bill).
The 25% kicks in around $30,000. Nigeria should have raised that rate to as high as $80,000 or even $100,000. Ill give another reason. Doing such can be a very good way of attracting in talent and capital into the Nigerian economy; goes back to what I say about discourse about global competitiveness totally missing from this whole debate.
One should stack the personal rates against rates in emerging markets - Nigerians love to talk big but sell themselves short. For example, I did a quick back of the envelope comparison against Singapore. Nigeria's rate for the lowest earners kick in at less than $1000 at a higher rate while Singapore has a far higher rate for its highest earners.
Nigerian policy makers thinking in terms of global competitiveness should have decided for example, that they want a far more market friendly and competitive personal tax rate than every emerging market nation, BRICS, G7, and G20. With how the Nigerian executive can arm twist the legislative to get what it wants, it could have gotten this.
5). On the corporate tax rate front, I think this is the lowest hanging fruit which Nigeria (and in fact the African continent) is not taking advantage of. I know the fashionable talking point is about "race to the bottom". But a country like Nigeria should go for an Irish style low corporate tax rate of at least 10% (maybe even 5% and 0% in some industries) and on top of that have a super deducting regime regime (say 250%) in which say the cost for setting up factories, deploying capital equipment are instantly written off immediately. I know all the fashionable international organizations would wail all day and night about Nigerians unfair tax practices and how 15% is a holy rate no one is allowed to go below - they should be ignored and politely told to get get lost.
For example, an aspect of the tax bill I actually liked but I felt could be far better was a schedule of industries which get VAT rebates etc. IMO, VAT rebate is deeply weak and mediocre. Fuse that schedule with an Irish style low tax rate and instant super deducting as I suggested and this could literally change Nigeria's economic fortunes forever. Furthermore, it probably would set off a domino on the African continent. I can see countries like say Kenya, Ghana and say Tanzania immediately moving to copy this when they see how it makes Nigerian very competitive overnight.
6). I've said something for a very long time and this bill only confirmed it. Nigeria lacks a privately funded think tanks that can for example analyze the recently passed tax bill and analyze it, score it and begin pointing out to the population where the dead bodies are in the bill.
For the most part people had to believe what the gentleman who shepherded the bill said. I'm not saying he lie or was dishonest in the goods he sold. But this is not how this game works.
7). Lastly, I don't hide my preference for a drastically smaller federal government. Tinubu claims to lean in such a direction - I've always had my misgivings about the coherence of his views in this regard - but he just signed a law which if it goes as advertised (that is, the central government consuming more of national output), such totally undercuts what he says in this regard or what he might try to do in this regard.
A.) I agree to your points 1, 2 & 6. They speak to the state of public intellectual discourse. And I am happy people like you have decided to take on this challenge to think , analyse , write and proffer solutions . May your ilks continue to grow.
B.) For your argument on the measly corporate tax reductions, I disagree . Yes , reducing the corporate taxes can make investors to come in. Yet, we need to have an understanding of where we are coming from; especially the current state of the tax revenue. Nigeria needs revenue , a hugely marked tax cut may be dangerous . Gradual reductions make sense to me, if we add other corporate tax incentives already given by the govt into the equation.
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On the whole, many thanks for these great write-ups
Thank you very much for reading, and for your thoughtful comments - all very well received.
Thank you very much for the feedback. Its very much appreciated. I hope that with the little we do here and there by commenting and writing articles, discourse would be improved and whoever should be reading some of the things posted in a forum like this and by participants like me, they are reading all these even if silently and not engaging and using all the information however they see fit.
But I feel I need to address what you said about corporate tax rates and revenue.
Ill humbly submit that one of the most damaging legacies of Tinubu introduced into Nigeria even before he became president is the obsession with government revenue. This is straight from the Lagos playbook in which IGR is seen as some kind of achievement and the end be all. Instead of measuring economic health and vitality in terms of economic growth, numbers of businesses and factories brought it, numbers of jobs brought in etc, government revenue has substituted such to a degree that should not exist in a country that badly needs growth and numbers.
To the corporate tax rate issue.
Under point #2 above, I talked about the so-called "Laffer Curve". A general and crude idea is that beyond a certain point on a parabolic curve (as this article illustrated), attempts at tax collection begin to show diminishing returns, and government tax revenue actually begins collapsing despite higher rates. This curve implies that a revenue maximizing point exist and even a growth maximizing point exist on this parabolic curve. Being able to derive exactly where on the curve such exist for each economy is not an exact art and not something which using data and equations we can produce figures but in a qualitative manner (e.g. collapse in revenue despite higher rates or reduction in growth around a point of tax rates etc).
A secondary implication is that actually in many cases (once one does not reach exactly 0% or in that region), reducing tax rates actually increases tax revenue on NET. The reason is simple. With lower taxes, consumers, businesses etc have more funds to spend on investments and keep as savings which expands businesses from which the tax base of businesses and individual tax payers increase.
Critically, different Laffer Curves exists for whether its income taxes, consumption or sales taxes like the VAT, or even corporate taxes. But they all share similar characteristics generally described above.
The implications of the Laffer Curve described above generally describe so called pro-growth tax policies.
I used the example of Ireland and argue that Nigeria (and in fact African countries) should be looking to imitate the Irish example (with modifications). Its a policy which can be implemented relatively easily with a few tweaks here and there to the tax code but could have revolutionary effects on Nigerian African economic trajectory.
Irelands corporate tax rate today is somewhere between 12% and 14% (I cant remember the exact rate).
Ireland began moving in a low corporate tax rate direction in the late 1980's and is probably one of the most decisive policy changes that catapulted it from a rural and poor Western European backwater less 1.5 generations ago to the forefront of Western Europe and having one of its highest GDP per capita figures.
Very critically!
One would think it "lost" all the "tax revenue". Rather, despite low rates, Irelands corporate tax revenue is always reaching record highs with it simply not knowing what to do with it.
Below are Irelands corporate tax rate figures since around the year 2000. As one can see, despite the dips around the time of the financial crisis, its grown by a factor of 5X despite "low rates" and what conventional wisdom would say about "revenue loss":
Year Corporate Tax Revenue (€ billion)
2001 4.16
2002 4.80
2003 5.16
2004 5.33
2005 5.49
2006 6.68
2007 6.39
2008 5.07
2009 3.90
2010 3.92
2011 3.52
2012 4.22
2013 4.27
2014 4.61
2015 6.87
2016 7.35
2017 8.20
2018 10.4
2019 10.9
2020 11.83
2021 15.23
2022 22.65
2023 23.84
I know that there is a debate about Irelands corporate taxes only incentivizing trillions in foreign corporate profits sitting in Ireland with accusations that its a "tax shelter." While all that might be factually correct, if you carefully look at what I said in my previous post I talked about how Nigeria can have a corporate tax regime that tilts in the direction of the real economy through super depreciations.
Ill argue that yes even if corporate tax revenue would be forgone its more than worth it and a cheap price to pay for a country like Nigeria. Corporate tax rates nowadays on average (Ireland is kind of an exception to this rule) are never a big portion of government tax receipts. Forgoing that in exchange for unparallel economic growth is a criminally cheap bargain. In exchange, you get modern factories and increase your capital stock which makes your workers and economy more productive, you get very high rates of growth and increasing wages and standards of living over time, all the worlds best brands want to invest in your economy, very critically it attracts and incentivizes domestic capital which might be on the sidelines, you stop draining your best talent etc etc.
P.S: a low corporate tax regime also has to be fused with other economic reforms (e.g. property rights and investor security) like I outlined here: (https://open.substack.com/pub/tobiwalker/p/nigerias-economic-sin?r=27v54&utm_campaign=post&utm_medium=web), but such would be decisive economic turn and would break this deeply disgraceful spell of a decade of economic stagnation.
Great points. Jokingly , we may have to pardon Mr. Tinubu's 'obsession' with increased revenue, being an accountant, he believes a good top-line would reasonably produce a nice bottomline.
1. That said, having revenue is not bad. Every economic entity requires positive revenue/income to survive. For a country like Nigeria , it is crucial . Yet , I understand it is a balancing act between - incentivising and disincentivising investors. But we need revenue .
2. The present tax law has also excluded SMEs earning less than 50M naira in annual revenue. This is a big deal as SMEs are estimated to contribute around 48% of the Nigerian GDP, they account for a large percentage of businesses (96%) and employment (84%).
3. There are other potential gains from the new tax regime : A gradual reduction in corporate tax plus an expected efficiency gain in tax collection is a BIG LEAP. For a country that suffers from massive tax avoidance and even invasion , efficiency in tax collection will help fix some leaking pipes.
4. In addition, since taxation is not only about revenue generation, it is equally a useful tool in addressing inequality and (re)distribution of income.
5. Even Laffer Curve has been proved to work more in economies with more formal sectors anddd efficient tax compliance. I understand that higher Marginal Tax Rate ( MTR) could discourage capital owners from further investment , yet a gradual reduction is just fine. Especially with the small size of the top earners and the corporate payers. So a massive tax cut may be of small effect based on the large informal sector.
6. The real focus should be on efficiency in tax collection and compliance. More revenue will come in that may even reduce the constant allure of deficit monetization by the Central Bank of Nigeria. From another perspective, a growing compliance signals less default risk incidence to Nigeria lenders.
Ill be as brief as possible in addressing all your points:
1). Government taking more revenue out of an economy slows down growth. There is the concept of opportunity cost and "the unseen", revenue taken in is what funds obscene public sector pay packages and 100 car motorcades which are used to terrorized every day Nigerians or having almost 50 ministries of which at least 50% of their work is pure inefficiency. This instead could have been used by businesses to fund expansion, employ more people etc.
Nigerian need to let go off this obsession with "revenue", this thing is deeply abnormal and bizarre. You basically are making the case for politicians to steal your hard earned money.
2). I'm happy for that aspect though I feel its not internationally competitive and if this new law fails to bring in enough revenue and using inflation to fund deficits continue, inflation creep can render such useless for many businesses over the years to come.
3). I don't care for governments being more efficient at tax collection.
4). You can either select growth and economic development or you can select obsessing about inequality and redistribution. You can't have both. Such goals are incompatible and cant be reconciled.
Ever noticed how China for example, a so called communist state, put the inequality and redistribution talk on the back burner and obsessively went in on growth and wealth? I think it safe to say Chinese across all income levels are better off today. Africans should kills the talk about inequality and redistribution. Growth must be the obsession or Africans would have another century of looking like idiots.
5). Economic law is universal whether is the same whether in the time of the Roman Empire, the Industrial Revolution, or todays booming East Asia.
Its the same whether is among the Zulu people, the Han Chinese or the Amerindian tribes of central America. Its also the same whether its with the lest developed nations or among the most developed nations.
This point merits addressing. One of the key subtle messages of the economic field towards Africans is that "you Africans are a totally different case, what works elsewhere and in many cases people use in an almost copy and paste fashion can never work with you." Many Africans have subconsciously bought into this deeply dangerous and psyche damaging assumption. Which might account for the painfully poor state of economic discourse in nations like Nigeria.
About the Laffer Curve which is the main in the context of this issue. Very interestingly a few years back there was a episode from Kenya (the country which the Tinubu governments sees as some kind of example for tax to GDP ratio BTW) which basically verified what anyone with a passing knowledge of the Laffer Curve knows. In the case of Kenya, under the direction of the IMF, Kenya increased its kerosine VAT to around 15% and as a result consumptions (and taxes collected) collapsed. This article was written before the deadly tax riots of summer 2024 in Kenya. Full article here: https://freedomandprosperity.org/2024/blog/big-government/kenya-crashes-on-the-laffer-curve/#:~:text=The%20Laffer%20Curve%20is%20the,changes%20to%20what's%20being%20taxed.
6). Instead of more "compliance" or efficiency with collections, the Nigerian state should be cut. For example having about 40 miniseries and making sure each state has a minister and having a bloated federal bureaucracy because of the federal character (i.e. affirmative action). More should be pushed to the states. In this whole debate, I am open to states even saying they want to generate more with the proviso that the federal government can't spend more.
I've probably taken too much time in all these replies. But its all good!
I have to come back again briefly , lol.
3. ) For your response to no. 3: But I think you should be equally concerned with efficiency of tax collection. Or we should just neglect collecting taxes all together .
4. ) Yes African economies should be obsessed with economic growth and devt . Very crucial . But it is also suicidal to neglect festering inequality . Growing and unchecked inequality will kill off , whatever economic growth achieved. A possibility of social tension leading to chaos is real. A delicate balance can be made between the two. It is not an extreme form of a mutually exclusive event in my view.
5) I don't believe economic laws are like the laws from exact/physical science . So they are not 100% universal . No they are not. Timing matters . The timing , the frequency , the difference in impact and the response of governments to cycles of market failures across countries are one of the reasons that these laws are not universal.
Take for instance , the subsidies given to farmers in Europe and North America, from the lenses economic law ( of price system) , that is a breach. But they still do it. Wine grower and producers destroy wine not because the wine is bad but to prevent a glut that will depress price.
Take for instance , the responses of the Federal Reserve to various financial crises and juxtapose that with the responses of some typical developing countries' central banks to their financial crises. There are clear differences.
Yes , I am pro-market . I also know some limits of price systems that call for substantially different state interventions. This is one of the evidences of non-near universal agreement of economic laws.
In fact , considering the fact that economists have several points of congruence in methodology and principles. They also have marked differences of some principles. And this represents another proof of non-unanimity of economic laws.
3). I dont deny that some basic taxes or revenue might be needed. My contention is that as of right now, Nigeria more than generates enough. It needs a drastically smaller federal government. Even as the economy grows, without "tax reform" or trying to increase the tax drag net more revenue would come in. Many Nigerians can't wrap their minds around the fact that economic growth in and of itself is capable of producing more revenue without any phony "tax reform" or increasing rates.
4). Growth is the best antidote to any worries about inequality. IMO, this is a talking point transported from Western technocratic circles were many Nigerians attend all their conferences, NGO events etc and bring this point. If you want to combat unearned economic privilege, if you want to lift the lot of the common man, economic growth should be the obsession. China did it. Let me ask: would you have a problem with which focuses on economic growth in which a graduate earns $300k a year while many billionaires exist and that graduate is living their best life? (I mean, the logic of inequality there is massive inequality which calls for government intervention to stamp put but in absolute terms the graduate is doing fantastically very well)
About the argument over universal economic law, you said this: "Yes , I am pro-market . I also know some limits of price systems that call for substantially different state interventions. This is one of the evidences of non-near universal agreement of economic laws."
I'm sorry but you are not! Do far more in depth reading. BTW, the idea that economic law is not universal is called "polylogism" (Google it). I assume you are a harmless person, this train of thought can lead to dark places.
Also one more point to add: even with is the miserly reductions in corporate taxes, Nigeria's statutory rate even after the rate drops slowly over the next 2-3 years would still firmly be in the revenue maximizing region of the Laffer Curve for corporate taxes. Which is another way of saying, even with the slow drop in rates, Nigeria's rate would be no where close to the growth maximizing area of the curve.
Nice one sir . Well researched and written. I have two comments . One for the main article . I will make the second one for the additional comment you made.
First Comment:
A. You asked if the new Tax Act is pro-poor ? Yes I believe it is . If we believe, the income per head in Nigeria has been dropping both in nominal and real terms , and this per capita income will not witness a leap, maybe a crawl going forward, then excluding low income earners from paying tax is a good move.
B. Your discussion on Tax Administration is apt. I sincerely hope the administration can pursue its goals and implement them, especially the digitisation and all related matters . The major spat I foresee may come from those MDAs who hitherto used to handle the revenue collection themselves but have now seen that taken away from their control.
C. The fiscal people , especially the National Assembly people need to read this paragraph on rebuilding the fiscal state. It is a whistle to pause and think. Essentially, if the fiscal authorities can take a look at different scenarios in future from now , they may be able to plan appropriately.
D. On the Taxation and Growth , this is nicely done and technically researched. I love the economics of taxation you brought into it, especially the idea of the Laffer Curve. Before this reform effort by Tinubu's administration, the duplicity/multiplicity of taxes were a menace. They are still but I believe as the reform dividends kick in, they will dissipate. Multiple taxes make things more expensive than they would normally be. Any attempt to erase them is welcome . Multiple taxes cloud both investment and financing decisions. Having rogue collectors or collecting system does not help broader public finance.
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I will add my second comment below your additional notes.