‘If Buhari wants more tax revenues, he must grow the economy

By Olu Fasan

Recently, President Muhammadu Buhari, through his Chief of Staff, Abba Kyari, queried the chairman of the Federal Inland Revenue Service, Dr. Tunde Fowler, for failing to collect enough taxes.

In a letter dated August 8, Abba Kyari asked Fowler to explain why there were “significant variances between the budgeted tax collection and the actual collection for the period 2015 to 2018” and why “the actual collections for the period 2015 to 2017 were significantly worse that what was collected between 2012 and 2014”.

Fowler was ordered to provide “a comprehensive variance analysis”!

In his reply, Dr. Fowler blamed the variances on low oil revenues, due to the fall in world oil prices and reduction of crude oil production. He also attributed the shortfalls to the poor state of the economy, which was growing at a minuscule rate of below two per cent and even went into recession in 2016, which slowed down general economic activities and, thus, revenues from Company Income Tax, CIT, and Value Added Tax, VAT. “Tax revenue collection is a function of economic activities,” he pointed out.

This is an interesting issue. But Dr. Fowler is on the right side of it. What’s really puzzling is that President Buhari could even contemplate blaming the FIRS boss for the shortfalls in tax revenue, knowing that oil prices have dipped precipitously over the past five years, and that the economy has been comatose since 2015.

Every oil-dependent country is subject to revenue volatility that results inevitably from oil-price volatility. It’s thus, not rocket science that, with oil export accounting for over 70 per cent of Nigeria’ revenues, a sharp and sustained drop in oil price, from about $100 per barrel to under $50, would result in a drastic fall in oil revenues. Equally, when the country is stuck, as it is, in a very low growth economy, with severe curtailment of economic activities and job growth, it’s obvious that its revenue generation would suffer. But Buhari’s administrative query to Fowler ignores all that. It comes across as if saying that even if economic activities have declined significantly, tax revenues must remain stable or even grow. That betrays ignorance of the critical nexus between tax intakes and economic growth. The history of economic development tells us that once a state establishes a tax system, it must then grow the economy. After all, it’s only when businesses are booming, trade is flourishing, investment is growing, and good jobs are being created that more taxes can be generated. This is because as companies and individuals enjoy greater commercial success and economic prosperity, they pay more taxes. So, the formula is simple: A leader who wants more tax revenues must grow the economy!

That formula is, however, missing in President Buhari’s management of the economy. Of course, Buhari wants large tax revenues – why wouldn’t he? – but he has shown little interest in growing the economy to boost the tax coffers. His handling of the economy since 2015 has not been driven by the desire to grow the economy, but, rather, by the economically-inefficient and growth-stifling policies of exchange rate control, import prohibitions, state-led expansion of local production without productivity and, of course, all wrapped up in the utopian ambition of self-sufficiency!

What’s more, President Buhari has shown a visceral disregard for economic expertise. His recent appointment of a high-profile economic advisory council is, of course, welcomed. But lest we forget that he ran Nigeria throughout his first term without any economic expertise; indeed, he once disparagingly described economists as “so-called experts”. Even his current cabinet includes no credible economists; the key economic ministries such as finance and trade, are headed by people with no appreciable knowledge of applied economics.

So, let’s face it, President Buhari was wrong to blame Fowler for any low revenue collection, and Fowler was right to point out that tax revenue collection is a function of economic activities, of economic growth!

To be sure, with a tax-to-GDP ratio of just eight per cent, the worst in Africa, Nigeria has acute and chronic problems with revenue mobilisation. But tax revenues are easier to mobilise if an economy is growing, companies are making robust profits and most people are employed in high-productivity jobs, earning good pay. Of course, having an efficient tax system is a sine qua non of an effective state. But without a growing economy, without a prosperous citizenry, you simply cannot have robust revenue collections. It’s basic logic!

So, the presidency is unfair to Dr. Fowler by expecting him to conjure up tax revenues from the air. But, even so, Fowler has, evidently, performed well within the constraints of the low-growth economy. Recently, the chairman of the Revenue Mobilisation, Allocation and Fiscal Commission, Elias Mbam, commended FIRS for contributing 59.7 per cent of the revenues to the Federation Account in three months. Similarly, the registrar and chief executive of the Chartered Institute of Taxation of Nigeria, Adefisayo Awogbade, said FIRS’ strategies and initiatives were improving revenue collections, adding: “The FIRS has done credibly well and needs to be commended by government and all well-meaning Nigerians”.

Expert opinion suggests that Fowler and FIRS have done reasonably well. By contrast, it’s the Federal Government that has failed woefully, incapable of pulling out all the stops to grow the economy. Yet, if President Buhari wants more tax revenues, he would need to do more than just blaming the revenue service. He must grow the economy!

– culled from Vanguard