Taxes of Bow-Tie

Special taxes should be introduced on luxury items so that there will be more revenue to provide goods and services for the generality of the people.

And to cater for those who are not gainfully employed in terms of making sure that every child in Nigeria attends schools.

The statement above was credited to Dr. Abraham Nwankwo, Director General of Nigeria’s Debt Management Office (DMO) and the quiet member of the trifecta in the Nigerian government that used to be the Axis of Bow-Tie (SLS has since left government leaving only Akin Adesina and Nwankwo).
Whenever I hear someone is trying to raise taxes, my ears perk up – I’m a low tax kinda guy and I prefer that taxes must be justified and actually bring in revenue. I even proposed a PJ-BAD tax on private jets a couple of years ago, a Pigouvian Tax.
By floating the idea of a tax on luxury items, Dr. Nwankwo guarantees that the tax will be popular among Nigerians, most of whom don’t buy luxury items anyway. The problem comes with the second part of his statement – that the taxes will be used to do all sorts of wonderful things like unemployment benefits and sending kids to school (never mind that we already have an education tax in Nigeria).
I’m afraid I have not so good news for Dr. Nwankwo – if this is how anyone is planning to fund education or a social welfare programme, then it means kids are not going to go to school. The simple reason for this is that a tax on luxury items is a tax on behaviour and if you tax behaviour, behaviour will change. Of course, if the purpose of the tax is to change behaviour, then by all means tax that behaviour until people change. A good example of this is taxing petrol to get people to drive less in order to reduce pollution.
So, you tax luxury items because you think there’s a need to reduce that kind of consumption if it causes negative externalities in society. That is fine. If you set the tax high enough, the offending behaviour will disappear along with the tax revenues.
But people in government never stop getting excited at the prospect of taxing something to raise revenues. Indeed Dr. Nwankwo hints at this as well:
But the emphasis is that we do not have more borrowing space because GDP has increased; we do not service debts with GDP, but with revenue and revenue is suffering some setbacks in terms of its sizeability to the GDP
The government desperately wants to borrow more money to meet revenue shortfalls but to do this it has to find more tax revenues fast to be able to service the debts. Things are starting to get hairy and there’s a limit to borrowing to pay back borrowing. It’s also embarrassing that we call ourselves Africa’s largest economy and we barely raise any taxes.
Back in 1990, America decided to implement a luxury tax to balance the budget under George H.W Bush. Things like jewellery, yachts, fur coats, private jets and fast cars were going to be taxed. So what happened?

In 1990 the Joint Committee on Taxation projected that the 1991 revenue yield from luxury taxes would be $31 million. It was $16.6 million. Why? Because (surprise!) the taxation changed behavior: Fewer people bought the taxed products. Demand went down when prices went up. Washington was amazed. People bought yachts overseas. Who would have thought it?

According to a study done for the Joint Economic Committee, the tax destroyed 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry and 7,600 in the boating industry. The job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. So the net effect of the taxes was a loss of $7.6 million in fiscal 1991, which means the government projection was off by $38.6 million.

It was such a failure that the tax was repealed in 2 years. America went from a next exporter of yachts to a net importer since the taxes made it cheaper to buy boats abroad and even leave them there.
It’s going to be interesting to see what kind of revenue generating taxes the government will cook up in the coming days, especially after the elections. But if its stuff like this, then it’s a waste of time. Most of the owners of private jets in Nigeria for example, already use all sorts of sophisticated ownership structures to avoid the jets being traced back to them. Beating taxes like this will be a walk in the park for them. Unless the definition of what is classified is ‘luxury’ is constantly changing, there is no way for such a tax to raise money sustainably.
So how should the government raise taxes? The answer is staring them in the face (see here) and the fact that this is not even being talked about suggests to me that the avoidance is deliberate. Almost all the local content companies in Nigeria do not pay any taxes due to them having ‘pioneer status’. The Task Force set up by the President on the petroleum industry (headed by Nuhu Ribadu), specifically flagged this problem (Page 19):
The Task Force was informed that at least five companies:
Allied Energy, Midwestern Oil & Gas, Brittania Oil Nigeria
Limited, Suntrust Oil Company Nigeria Limited; and Niger
Delta Petroleum Resources Limited have been granted
pioneer status by the Nigerian Investment Promotion
Commission (with others pending or undetected) for their
exploration and production activities.
The Task Force finds that the granting of pioneer status to oil
operators for an activity that is well established for over 40
years inappropriate. The loss of revenue from the grant of
pioneer status to oil operators is an avoidable loss and it is
recommended that any such further consideration be stopped
forthwith and the current ones set aside and or revoked.

That report was submitted in 2012 and since then there have been more companies with ‘local content’ assets.

This debate on taxes has only just started and it’s going to be very interesting to see how the government approaches the issue.

We continue to observe

FF

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2 thoughts on “Taxes of Bow-Tie

  1. Pingback: Because Pastor Adeboye says so | The Kaleidoscope

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