Walter Lippmann, an American and a political commentator once said “where all agree, none think much”. Considering our economic woes and the multi-dimensional poverty in the land, the recent utterances of our policy-makers indicates apparently that not much thinking is at interplay at that realm. Amidst of decayed infrastructure or its lack, sizeable number of our governors and policymakers are still drifting in the line of thought that, for them to bring the needed alleviation, they have to erode subsidy and increase the tax revenue.
The protectionism paradigm has left the consciousness of our policymakers because they are yet to discern that, on the global arena, deregularisation is no longer viable economic approach. The recent United State of America’s Inflation Reduction Act (IRA) has made it clear that Protectionism is back. Free market globalization is gone and, “The market knows best” mantra no longer holds sway.
A clear-eyed assessment of the global economic landscape surely would reinforce the conviction that it’s a façade for the continued exploitation of developing economy. The IRA exemplifies a legislation that embeds Tax credit (subsidy) so huge that the Internal Revenue Services (IRS) of United State of America (USA) is estimated to have 40% decrease in Tax revenue in the next ten years if all the subsidies are fully utilized. Its format and structure are incomparable with the Nigerian government’s Tax credit issued through Executive order that granted about NGN2.59Tr in 2021.
The tax credit was a misapplication of economic instrument as it was a knee-jack solution to fill certain infrastructural gap without envisaging probable headwind that could affect the selected companies. Aside from the error that the beneficiary companies were handpicked, the rational that brought it up lacked the thinking depth that precede usage of such strategic tools.
This article is not meant to x-ray the IRA fairly, but to push for the replication and domestication of the spirit behind that piece of legislation in Nigeria and most importantly imbue our policymakers with similar deep thinking on which IRA germinated.
Firstly, our Policymakers must know that we need to nurture and protect our economy, as what is not nurtured nor protected cannot grow. On the global stage, the economic war is in perpetuity, and will not abate. Every country wants to develop and grow at the expense of another, so approaching economic issues with a short-term reward-for-political-patronage or need-to-win-next-election mindset is putting the country in deeper economics woes.
The developed economies continually implement policies that compromises the competitiveness of the less developed countries. There are three instruments used to drive the protectionism agenda – currency management, subsidy and tax. We all know that our Tax system is broken, only few industries can survive in our clime as Tax expense is so huge (Statutory taxes and junk taxes -touts extortion) and our inefficient and corrupt sub-national institutions are not helping.
Poverty pervades the land because our politicians have not applied ingenious statecraft on the instrumentality of subsidy, tax, and currency management to create an environment where things get built and poverty is alleviated. While we wait for the implementation of Taiwo Oyedele’s Presidential committee report on Tax reform, we must know that the present Tax system will continue to keep the larger percentage of the population in poverty because it is systemically inefficient, the rates are too high and lopsided. When combined with inflation, which effectively acts as an additional tax on low-income individuals, the goal of reducing poverty becomes unachievable.
The reforms presently being prescribed should include a restructuring of the collection system such that the Junk taxes are regulated and brought to the pool for the common good. A greater focus should be on Transactional tax with a target to capture 95% minimum of transactions both in terrestrial and digital space.
In view of the global transaction economy dynamics, there is need for creativity in the administration of Income tax regime. We must confront the fact that Base Erosion and Profit shifting (BEPS) is one of the biggest depletion factors of our Tax revenue as a developing economy. Multinational Companies (MNC) have perfected ways of eroding profit from less desirable spaces by being creative with their transaction dynamics. Our regulators have tried to combat this menace within the ambit of enabling laws but the ugliness persist because of lack of global clout of our economy. In the realm of Transfer pricing (Arms-length compliant need transaction), the odds are stacked against us as a nation. MNCs now use transaction as a sponge to soak-away profit, thus deplete our forex liquidity and tax revenues. A close observation of the gulf between the aggregate turnover of companies and the Income tax revenue component is tell-a-tale.
One of the strategies we may deploy to enhance our competitiveness is to make our economic space a desirable destination for the global capital. There are several factors underpinning capital flow into an economy and retainment. It is dependent on how sweet and desirable our economy can be to global capital, including socio-political considerations. Tax rate is key, and we need to reduce our income tax rate to a single digit.
Let us borrow leaf from China, where maximum Company Income tax (CIT) is 25%, some companies are designated to do 10%, some 5% and so on. While reduced tax rate will enhance voluntary compliance, thereby reduce collection or administrative cost, it also has tendency to reduce pressure on our currency because the propensity for repatriation will be less. Combining this with encouraged Foreign Direct Investment (FDI) will potentially awash the economy with the forex liquidity we have been craving for.
Furthermore, currency is an instrument used to facilitate exchange of values within an economy. The value of a Nation’s currency in comparison to another country, is a measure of how the value of human capital and resources compares between them. In effect, it catalyses and dictates the flow of value, which goes a long way in determining the quality of life of citizens in a country. From another perspective, the value of one currency to another reflects faith reposed by the citizens in the country.
Putting it bluntly, the value of any currency to the other is an indication of aggregate level of patriotism and faith in a country. We are in this economic quagmire because most of our citizens have little or no faith in our currency, as patriotism has been eroded. Not less than 60% of Nigerians that are financially literate have assets or cash in other currency as a store of value.
Seemingly, the abysmal value of our currency to other major trading currencies has its root in the policy “The market knows best” – Deregularisation. Deregularisation as a policy is good only if its applied to encourage intra-economy competitiveness. Taking this policy as means to relate with other country, especially the one that are economically stronger, is completely suicidal. The IRA has now shown us that we are alone in that room; as the market doesn’t always know best! China has always been tagged currency manipulators because they refuse to float their currency. China, that is an undisputed manufacturing hub of the world refused to float but our government consider it a viable policy, certainly a critical variable is amiss in this line of thinking.
This is not a call for defending the unrealistic as it’s been done in the past, but for benchmarking of the value of the Naira to another currency in a way to be in sync with the overall economic targets. We lack the economic wherewithal to float the Naira, without restraint. The indices are not just there. Recall, the reason for British refusal to ditch Pound sterling (£) for Euro (€) is not solely for the protection of sovereign identity, but largely to retain the unrestrained ability to make fiscal decision that is necessary for continued prosperity of their citizen.
Right now, lesser percentage of the citizen want to store their value in Naira. Most products and services in upscale areas of the country are now priced either in United States Dollar or the British Pounds Sterling. Even, majority of the elites transact in United States dollars. It is such a low for our economy and, each day seems to define a new depth of low.
Moreover, a key strategy governments’ employ to prevent economic stagnation, under normal economic conditions, is the regulation of the Personal Consumption Expenditures Price Index (PCEPI) within specific limits.
This ensures that the majority of citizens retain discretionary income, by safeguarding their disposable income from being entirely consumed by essential living costs like food, housing, healthcare, attire, and transport. This goal is often achieved through the provision of subsidies.
Subsidies play a pivotal role in promoting social equity and are essential for maintaining a substantial and equitable distribution of discretionary income throughout the economy. Therefore, it can be asserted that the vitality of any economy is partially dependent on the amount of discretionary income accessible to a considerable portion of its populace.
In Nigeria, the implementation of subsidy regime either in power or petrol exposes us to vagaries of both internal and external manipulators. In the IRA the tax subsidy implementation is performance-attached, incisive and unambiguously target driven. This should be a motivation for us to also change the way we are handling our subsidy program. There is nothing wrong with subsidies, though a lot is wrong with our implementation.
Subsidies should be introduced at the retail level not at the manufacturing or wholesale level. Introducing subsidy through the producer or wholesaler point is a classic case of trickle-down economy and, we all know that what trickle down to the low-income group is insignificant, hence the prevalence of poverty despite huge subsidy. So the subsidy should be introduce at the last mile of the transaction or value-chain.
Poverty will be reduced, not through palliative but, through creating an efficient subsidy regime, effective and creative tax administration, good fiscal policy that engender good currency exchange rate. Moreso, we can go steps further to push-start people out of poverty by enacting legislation that will pull most of the dead assets into the main transactional stream. The plethora of dead assets puts substantive resources or assets of the economy into an inactive mode thus entrenching poverty.
Without sounding cartoonishly rhetorical, our choices of economic policy and fiscal foresightedness is not geared effectively to squarely tackle widespread poverty in the country. Our policymakers should be aware that the era of “market knows best” or globalization is obliterated, they are designed for continued pauperization of the developing economy.
A discerning analysis of IRA will reveal that the name “Inflation Reduction Act (IRA)” is misleading. The IRA is protectionist themed legislation that uses tax incentives or subsidies to re-industrialize and reinvigorate existing ones. It’s a classical piece of policy direction that emphasizes the idea that, running the economy without a protectionist mindset is a herald for keeping the economy under the water and the people impoverished. So, we should be guided along this line of thought.
Olatunde Bankole Bakre
Digital Ethicist and Managing Partner
Homo Economicus Limited
Lagos.
@latundebakre
olatunde@heconomicus.com
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