Tax reforms, renegotiating the “social contract”, By Uddin Ifeanyi

The immediate implications of the federal government’s new tax reforms have been widely discussed since President Bola Ahmed Tinubu signed the four (4) Tax Reform Bills into law on 26 June. The provenance of some of the new legislation has been similarly questioned of late. Underlining much of the debate is the acknowledgment that the incidence of tax has moved from small companies (businesses with annual gross turnovers and total fixed assets below ₦100 million and ₦250 million respectively) and low earning poor individuals (with wages equal to or below ₦800,000 annually) to every other economic actor. The burden on this latter category – including from a higher capital gains tax (CGT) rate through an increase in the personal income tax rate – is higher still.

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The longer-term consequences of the reforms matter more. On balance, the federal government gains from a higher tax burden on richer domestic economic actors what it has ceded by narrowing the incidence of tax. Technically, this checks the fiscal box that insists that for a tax regime to generate stable revenue for government it must be based on a person’s ability to pay. Besides not only are higher taxes for higher earners fairer, they also promote income equality.

Nonetheless, the genius of the lawmakers who designed the Nigeria Tax Act is best appreciated when the slew of new tax laws is thought of as a political construct. Ahead of elections, in 2027, an increase in the tax burden across board would have been the political equivalent of the Japanese seppuku. But by excluding the bulk of the country’s poor from paying taxes, the Tinubu government squared this circle well. It helps even more that the social “classes” on whom the heavier tax burden now falls are some of the more apolitical in the country. The weight of obtaining the requisite voting documents ahead of polling days, the elevated risks of violence at polling stations, and the fact that they can afford to run power generators that keep their cable televisions running on polling days have seen most members of this class of Nigerians stay cooped up in their houses on polling days.

Do higher tax burdens change these dynamics? Can they? One argument that I recently came across is that by raising the cost (through higher taxes) to the local elite of running the country, we ought to have a fairer shot at curing the incidence of poor governance. Essentially, the hope here is that our elite, first, will hurt from the larger outflows to government from their wallets, and will then begin to quibble at any government’s wasteful spend of their hard-earned monies. Stripped of its ideological integuments, this argument nods to the thinking of philosophers such as Thomas Hobbes, John Locke, and Jean-Jacques Rousseau. It folds up the answers to four fundamental questions in its framing of the problem: “What confers legitimacy on governments?” “Why do the citizens obey laws?” “Why are taxation, policing, and regulation justified?” And “Do governments lose legitimacy if they fail in their obligations to their citizens?”

This idea of a “social contract” – that society functions because individuals trade some personal freedom for collective security and mutual benefit under legitimate authority – has an older incarnation in the country. It used to be, it is said, that the Nigerian elite surrendered its power of oversight over its governments in the understanding that governments would spend earnings from oil exports and not from taxation. Unaccountable, governments bred kleptomania and squandered scarce resources. With oil revenues no longer adequate to feed its ravenous appetite for waste, government is renegotiating its obligations from the earlier contract.

However, to think that a higher tax burden will restore oversight responsibility to the citizenry via a more conscious elite is most likely to misunderstand “class” relationships in the country. If culture trumps strategy every time, then it is a safe bet that it will have the same effect on politics. Our current cultural practices are based on what Alan Fiske describes as “Authority Ranking”. As Steven Pinker explains it, “In the minds of the people who respect an authority ranking, the hierarchy is legitimate and natural, and it entails reciprocal obligation for those lower to defer and to those higher up to protect”.

From this observatory, it is clear that a prebendal culture is not going to change overnight because a long-dormant political clade learns to squeak a tad more noisily, pressured by new straitened financial conditions. Our best bet, instead, is to hope that the desired changes from the expected increase in taxes and the quality of elite participation in politics resulting from it will take place over a shorter period than it has taken to agree our current social contract. More likely, though, is that a state already crumbling under the weight of the contradictions inherent in the current contract will find this added burden (the straw that breaks the famed camel’s back) too hard to bear.