How Increasing Taxes Could Impact Nigerian Wallets

Why Increasing Taxes Will Make Nigerians Poorer: An Economic Perspective

Nigeria, boasting of 41 million taxpayers and a record-high N10 trillion tax revenue in 2022, plans to raise certain taxes, causing concern about weakening citizens’ purchasing power and heightening inflation.

This article explores these potential consequences and suggests alternatives to this tax hike.

Importance and Impact of Taxes in Nigeria

Taxes are essential for government revenue, enabling the provision of public services and regulation of economic activities.

Nevertheless, amidst the global COVID-19 pandemic, fluctuating oil prices, oil theft, the invasion of Russia into Ukraine, and the introduction of a new Naira note, Nigerians are grappling with several economic hurdles, all of which profoundly affect their purchasing power.

Tax Challenges and Economic Impact in Nigeria

In April 2023, President Muhammadu Buhari, nearing the end of his tenure, sanctioned the increment of certain taxes.

These include additional excise duties on alcoholic beverages, tobacco, and wines, ranging from 20% to 100%, alongside a new tax on single-use plastics.

Despite facing significant backlash, especially from the private sector, Nigeria’s tax-to-GDP ratio reached 5.5% in 2022.

It is significantly below the 16% average among 31 African nations reviewed by the OECD.

The State of Tax Revenue in Nigeria

In 2022, the Federal Inland Revenue Service (FIRS) declared that Nigeria generated N10 trillion ($22 billion) from taxes, sourced from a taxpayer base of 41 million.

However, Nigeria’s Personal Income Tax (PIT) revenue lags behind other African nations.

With a growing debt profile, set to potentially reach N77 trillion by June 2023, and a continued reliance on borrowing to finance budgets, Nigeria’s economic health appears vulnerable.

Pros and Cons of Tax Increase

While an increased tax regime – endorsed by the International Monetary Fund (IMF) – promises higher revenues to execute governmental programs and avoid burdensome loans, it threatens to weaken Nigerians’ purchasing power amidst climbing inflation.

Tax hikes could lead to job losses in the private sector due to higher operating costs and could discourage foreign investment, further straining Nigeria’s economic climate.

“Increased taxes have far-reaching implications. They will not only deplete citizens’ disposable incomes but also adversely affect businesses and foreign investments.”

Alternatives to Tax Increase

In the face of these economic challenges, the Nigerian government should consider widening the tax net, bringing more qualified taxpayers into the fold.

This strategy could increase revenue without exacerbating individual financial burdens. More stringent measures against tax evasion, alongside improving compliance with tax payments, could also bolster revenues without resorting to tax hikes.

Conclusion: The Role of Government and Citizens

The government, obliged by a social contract to fulfill its citizens’ needs, must ensure transparency and efficiency in tax administration.

Increased trust in the system will lead to better compliance and overall economic prosperity.

“The government must take the lead in demonstrating that taxes paid by citizens are utilized effectively. Trust in the system is a crucial factor in the success of any tax policy.”

Raising taxes may seem a straightforward solution to increasing government revenue, but it could exacerbate Nigeria’s economic problems.

As such, the government needs to explore alternative methods of generating revenue that won’t disproportionately affect citizens’ purchasing power or stifle economic growth.