Dear Advocate of Reasoning,
As the month winds up, this edition will draw us back to what we have covered. In case you missed any of our previous editions in October, we explored three key topics: the intricacies of the wealth tax targeting the affluent, the Central Bank of Nigeria’s decision to reverse its Forex policy, and the unintended consequences of government interventions in the economy.
As we conclude this month’s edition, we invite you to revisit these important discussions to stay informed and engage in the ongoing dialogue about the economic landscape in Nigeria.
Should the Government Tax the Rich More?
Under President Tinubu’s leadership, Nigeria is undergoing significant tax system changes with the goal of increasing tax revenue from 11% of the GDP to 18% within three years. While the intent is to ensure fair contributions from the wealthy, it prompts the question of whether the affluent have been shouldering a significant tax burden already. For instance, the Value Added Tax (VAT), which affects all stages of production and is poised to increase costs for businesses, primarily impacts items consumed more by the rich. The recent proposal to potentially lower corporate income tax is a positive move to boost economic growth, yet Nigeria’s tax revenue as a percentage of GDP remains lower than the OECD average due to many firms and individuals not actively paying taxes.
Overloading the wealthy with taxes presents risks, as history has shown that high taxes can lead the rich to seek ways to protect their wealth or evade taxes entirely. Moreover, Nigeria is grappling with economic challenges like high unemployment rates, necessitating a focus on creating an attractive environment for investors. Excessive taxation of the rich could deter them, pushing them to seek more favourable economic climates elsewhere. While tax reforms are crucial for Nigeria’s growth, a balanced approach is necessary to ensure the nation’s prosperity. The emphasis should be on establishing an equitable tax system for all and fostering an environment that encourages the flourishing of both businesses and individuals.
Lessons from Nigeria’s Forex Policy Reversal
Governments often resort to market protectionism to shield local industries, but the recent experience of the Central Bank of Nigeria (CBN) with forex restrictions reveals the pitfalls of this approach. The CBN initially restricted access to foreign exchange for 43 categories of goods in 2015 to promote local production. However, this policy backfired as it led to increased demand for forex in the parallel market, causing currency depreciation, rising prices, and a dysfunctional forex market.
This happened because importers turned to the parallel market for forex, driving up costs and, in turn, consumer prices. The CBN eventually admitted that the restrictions caused inflation. Moreover, the policy raised production costs for local industries dependent on imported materials.
In response to these distortions, the CBN recently lifted the restrictions, aiming to boost forex market liquidity, stabilize the exchange rate, reduce costs for local businesses, create job opportunities, and ensure price stability. The policy reversal is a step toward a market-driven economy and a clear message against market protectionism, emphasizing the importance of allowing market forces to dictate economic outcomes while the government facilitates rather than restricts.
Unintended Consequences of Government Intervention
President Tinubu’s launch of a conditional cash transfer program in Nigeria, aimed at spending N1 trillion to provide N25,000 per month to 15 million households, intends to uplift the impoverished and enhance their well-being. However, past experiences have taught us that such programs can become costly mistakes, wasting public resources and failing to reach their intended beneficiaries while creating new problems.
Conditional cash transfers (CCTs) have been employed in various developing countries with varying degrees of success, involving cash assistance to poor households contingent on certain conditions, such as education, health, and nutrition. Yet, Nigeria’s CCT program faces significant challenges, including the source of funding. The country’s alarming debt situation, with a high debt-to-GDP ratio and a debt service-to-revenue ratio that exceeds recommended thresholds, raises concerns about how the government can afford to invest in an unsustainable program of this magnitude while ignoring pressing debt obligations and other essential needs. The history of such social projects should serve as a cautionary tale for the government, highlighting the potential pitfalls of handouts for the poor.
This is Voice of Reasoning and this is from the The Liberalist.
Stay free and keep reasoning.