Dangote’s tax hike challenge

No the business mogul, Aliko Dangote, 58, has not set up a new plant, nor has he started a new business. Africa’s richest entrepreneur has done a quiet crusade to get the Federal Government to raise the nation’s Value Added Tax (VAT) (a form of tax on the sale of items and services)from a relatively low rate of 10 per cent per annum to about 15 per cent. This might seem absurd coming from a business juggernaut that would be put out by as much as an additional N30 billion in annual taxes if the government accedes to the call. Dangote’s new found conversion to taxation as a means of stanching the Federal Government’s leaky finances is not totally altruistic.

The corporate maven himself admits that he believes that a more robust and stable federal budget would create an economy with sufficient disposable income to support the steady growth of the domestic manufacturing sector. Said Dangote at a recent gathering in Lagos, “There must be a breathing living economy for there to be a good number of breathing living companies”.

Dangote estimates increasing VAT to at least 10 per cent on all goods and services in the country could add another N900bn to the federal kitty, thereby wiping out the budget deficit and creating a surplus within N500bn in the first year of the hike. The nation’s budget deficit in 2013 was a hefty N264billion and grew by a further 23 per cent to N324 billion in 2014 (the fiscal deficit as a per cent of national output last year was -1.24 per cent). Spending more than what the country was earning was gradually becoming an increasingly unhealthy national habit or was it? Maybe not.

The Dangote proposal has its merits but it also has its pitfalls. During periods of depressions tax hikes raise additional revenue for government and if such government keeps expenditure relatively constant the budget deficit fizzles out. However, there is a converse consequence. Higher tax rates tend to slow down consumption which implies increasingly lower individual spending, output and employment.

In other words higher tax rates reduce the expenditure multiplier (an index of the number of times a unit of money gets spent) and shrinks the domestic economy. With unemployment (before the recent dodgy recasting of the unemployment rate to 7 per cent) at 24.7 per cent, a tax nudge could worsen both output and employment and companies such as Dangote Cement, Dangote Sugar, Dangote Flour and a squadron of other non-Dangote related establishments could be hit by a double whammy of higher tax pay outs and lower product demand, which ultimately would lead to lower tax revenues in years ahead.

Admittedly, there is something quirky about the country having one of the lowest VAT rates in the West African sub region, but this could be attributed to a historical overdependence on oil exports as a principal source of funding the federal budget. Be this as it may, the immediate challenge for good federal housekeeping is not by jerking up tax rates but by tidying up the whole sleaze in fiscal spending, and removing the cobwebs of corruption that result in roads being constructed at four times the cost of similar roads in Kenya, and workers earning incomes for loafing around ministry corridors and gossiping whole- heartedly at the expense of diligent annual tax payers.

Indeed, Nigeria has not yet taken full advantage of the possibility of widening the domestic tax base by ensuring that all those that earn regular incomes of some sort or the other pay taxes conscientiously. Several individuals worth tens of millions of naira routinely either evade or avoid taxes on an annual basis. Several shop owners in major cities such as Lagos, Aba,  Port Harcourt and Kano  do not pay Personal Income Tax (PIT) but expect to enjoy the benefits of services provided by such fiscal revenues, this is one of the economists worst perennial headaches, the problem of economic ‘free riders’ or people who enjoy what they do not pay for. Therefore, before the government stirs the hornets’ nest by raising sales taxes by a further 5 per cent it should first consider broadening its tax base by bringing more people into the domestic tax payment cycle. Furthermore the government should review existing tax waivers and phoney pioneer status loopholes that should be plugged firmly and permanently. Over the years, several firms have used these dubious concessions to pad profits while feeding foreign bank accounts that have given little, if any, benefits to the local economy.

Dangote’s admonition on raising VAT rates is sensible and plausible but in a period of crippling recession it is simply not expedient. Taxes are raised when incomes rise and are cut when incomes fall. Economists consider this to be equivalent to the ‘in-built’ stabilizer of a well calibrated machine. Dr Dangote’s prognosis might be right but his prescription might be worse than the ailment, no matter how well intentioned.