Bridging the financing gap and optimal tax rate


It starts with south bound crude oil prices. But it should have started much earlier. Public authorities in Nigeria seem to have rediscovered the concept of taxation. But can the push discourage savings at some point and bring forward images of Arthur Laffer, the Laffer Curve and supply side economics?

The spark for the issue to gain renewed prominence is the new tax on deposits in the banks. But the need for a proposition on optimal tax rates has been coming for years since oil receipts oriented government towards being less accountable to the people and less disposed to demanding taxation levels required for services the government was required to offer. With high oil prices that strategy was easier. But rapidly declining oil prices in the last one year has constricted revenue flows and thrown up a financing gap.

The natural outcome of the deficits on the current accounts has been scarcity of foreign exchange, especially when response to depreciating exchange rates is to retreat into controls with no recourse to the purchasing power parity as defining of where true exchange value should be. When divergence of nominal exchange rates from the purchasing power parity is so pronounced and a foreign exchange crisis is therefore evident a genuine crisis brews.

The urgency to bridge the financing gap which breeds these outcomes of discontent often pushes a rush to policy interventions. A typical intervention with such a gap is to raise taxes. In proceeding down such a track of raising taxes, speed can ordain thinking. But we also know that policy rushed can produce undesired and unintended consequences.

We can debate the value of policy stance being taken by policymakers about the need for a strong naira but the fact cannot be controverted that policy choices can result in iatrogenic outcomes where the prescribed medicine does more harm to the patient than the original disease being treated.

Highly regarded US Senator and Harvard Professor, Daniel Patrick Moynihan, made famous the idea of iatrogenic policy choice but we are the ones that seem, somehow, to make policies that deliver trouble routinely because of the low rigour in the policy process. Bearing this in mind, It would be helpful if discussion of the need for taxes to bridge evident financial gaps through new taxes takes into account two possible effects of raising taxes; impact on savings, investments and the growth consequent upon increased production. The other is the point beyond which a tax revolt results.

There are those who react to the N50 charged on deposits into accounts from an outright rejection of the idea of taxes when incomes are dropping. But that in my opinion is a throw up from many years of not paying taxes. There is also the fact that people never do cheer new taxes. When the idea of Value Added Tax was being considered, many gave the Emmanuel Ijewere committee a hard time. But that tax has been a good tax and generally a fair tax, if we take away issues of how fiscal transfers between the centre and the states from VAT receipts have been received.

I do think we need to raise taxes but ensure that those whose consumption does less for stimulating production pay more. The same should go for those who extract more rent than create wealth. But with a tax on deposits, we need to study more carefully its impact on savings.

What about the question of optimal tax rates and the rising tax incidence. Such questions bring to mind the reign of supply side economics and one of its chief disciplines, USC economist, Arthur Laffer.

The Laffer curve, as a template for gauging optimal tax rates and its author, who was a guru of the Ronald Reagan/Margaret Thatcher ideological partnership of the early 1980’s, does have value. Even though I have in the past argued that Laffer tried to “elevate” supply side economics to the level of a religion, for which I did not have an article of faith, it nonetheless has its value when considering raising taxes.

I think that at this stage in considering financing challenges, we need to find creative ways of raising taxes but be careful not to move so quickly for it is like putting an addict into a rehabilitation programme. The pacing matters. Besides, the Laffer curve held some fascination for me because Arthur Laffer, some 35 years ago, gave credit to a Nigerian PhD student of his for cracking the equation that led to the thesis.

Here I have to admit a certain preference for specific-use taxes where you can more readily relate the tax money to services enjoyed. Gasoline taxes for highway construction and maintenance, as the US example, is probably one classic case of specific-use taxation.

Communicating policy purpose and projected outcomes and benefits is very essential here. But it has not been a territory of great strength for the extant order in the Federal Government and so needs particular attention.