
Tax policy change is always a topical issue that raises
questions related to equality, increased revenues, and other general topics
about changes and development of the state and its policy. Pivotal to these
discussions is the question of how to formulate an efficient tax structure that
mobilises adequate resources for the financing of public services without
thereby compromising efficiency or equity. New regulations to alter the
existing structure of the tax table of personal income brackets and rates are
limited by the structural problems that have arisen in the last decade. These
efficiencies when added to the effects of inflation and the absence of frequent
revisits, have made the system less progressive, as was when it was designed
hence the need to reform.
The changes mentioned above are revolutionary and are based
on the principles of fairness and relevance of change. Through the reliefs and
allowances integration into tax bands and rates, the governmental reforms are in
a bid to eliminate the complexity of the tax system while maintaining the
simplicity of the existing tax structure and the rates are more in tune with
today’s economic standards. Some of these goals seek to reverse the current
scenario, where lower and middle-class workers shoulder more of the load than
their higher-paid counterparts. Moreover, the reforms focus on reducing fiscal
drag and the loss of progressivity in the system as taxpayers are pushed up
into higher brackets through inflation without any corresponding real increase
in income to preserve the progressive nature of the system for the poor.
This article examines what informs these proposed changes,
whether they will improve equity, and responding to commonly held beliefs. It
also tries to see how the reforms are expected to achieve only the objective of
revenue mobilization while aiming at revenue mobilization for fiscal balance
and growth, the tax system is seen as a tool for fiscal sustainability and
social justice. By analysing the effects of various household income classes,
we shall try to give a comprehensive assessment of the possible effects of
these vital policy measures.
Historical Context and the Need for Reform
The present personal income tax table was adopted in the
year 2011 and the non-resident income tax table was adopted in the year 2010.
Due to high inflation rates and a lack of periodic reviews, the mechanism has
been rendered less useful over the years causing what is famously known as
“fiscal drag”. Fiscal drag is a situation where taxpayers are driven to higher
tax bands due to inflation CB = 40 With no real, decrease in their purchasing
power. This situation has had certain rather negative implications, especially
for lower and middle-income employees. For instance, a Nigerian citizen who
receives N400,000 per month is now in the same category as anyone who receives
N20 million per month in terms of taxes paid. Such a change has made what used
to be a progressive tax system become a regressive one in the process.
Still, another major concern is the difference between
individual and corporate income taxation. At present, the effective rate of
enterprise tax is approximately 1.9 times the top marginal rate for
individuals, hence encouraging corporate maneuvering between forms and evading
formality. The rationale behind the new TA is that the existing reliefs and
allowances will be integrated into the tax bands and rates to make the current
tax structure fair and less complicated.
Addressing Misconceptions About Higher Tax Burdens
A common analysis known today is the view that employees
will face paying more tax under the new set of changes. This point can simply
be refuted as a myth for anybody earning an income for the majority of earners.
Experts predict that those, who make less than N1,700,000 per month, will be
subjected to lower PAYE tax. However, that for workers earning the minimum wage
and slightly above it will be entirely exempted from taxes. These adjustments
are expected to benefit more than 90 per cent of Public and Private sector
employees.
The step up in the tax structure in the proposed system is a
guarantee that individuals with higher-end income will part with more,
ultra-rich billionaires including taking a maximum marginal tax rate of 25%.
This approach complies with vertical equity where those with high income are
expected to contribute a larger portion of their income as tax.
Enhancing Exemptions and Reliefs for Low-Income Earners
One of the proposed reforms is the exclusion of N800,000 per
annum (about N67,000 per month) from tax. The opponents claimed this threshold
doesn’t afford any protections to minimum wage earners based on the current
minimum wage of seventy thousand naira per month. However, other additional
relief measures help to complain about this problem. For instance, allowing a
rent relief of up to N200,000 per annum effectively removes people earning up
to N1 million a year or about N83,000 per month from paying tax.
The reforms also target the issue of marginal tax rates which can be referred to as the ‘cliff effect’ system. As it exists now you will see a fellow earning N30,001 in a month, receiving less net pay than a fellow earning N30,000 because of taxes paid. The presented tax table eliminates this issue, and all people will be able to gain something from the first tax bracket.
Simplification and Efficiency in Tax Administration
It explains that the idea of simplifying reliefs and
allowances into a more ranged tax band structure is also among the proposed
changes, through which the government seeks to ease the burden of tax regulations. This can be done purposely on how to remove unnecessary
bureaucratic hindrances to enhance the ease of doing business and encourage
compliance by industry. A model that is easy to understand leaves fewer papers
to prepare and decreases the time spent on the administrative part by both the
taxpayers and the tax authorities and with this may bring about increased
efficiency and eventually a collection of more revenues.
Quantitative Impact Assessment
To illustrate the impact of the proposed reforms, consider
the following examples:
1. Low-Income Earners:
- Current System: A worker earns N70,000 per month, and this
earns him or her an amount of N2,000 in PAYE taxes.
- Proposed System: The worker would also be exempt from tax by
a N800,000 general exemption and N200,000 rent allowance.
2. Middle-Income Earners:
- Current System: An employee who earns N1.2 million annually
(N100,000 monthly) pays about 10% of his or her income as tax.
- Proposed System: The effective tax rate is reduced to nearly
7 per cent and the expected taxation cost is reduced.
3. High-Income Earners:
- Current System: A person who earns up to N20 million
annually is grouped with the same tax rate as a person who earns up to N5
million yearly.
- Proposed System: The leading rate of taxation goes up to
twenty-five per cent for the super-rich to guarantee more progressiveness.
Implications for Economic Growth and Formalization
Decreased tax differentials between corporate and personal income taxes are expected to stimulate formalization. The business anticipates that its effective tax rate for most employees will decrease, driving up disposable income, consumer spending, and economic expansion. Also worth noting is that by eliminating arbitrage opportunities, the reforms provide a ‘fair’ ground and foster business entities’ formalization.
Trends, Opportunities and Limitations
While the proposed changes offer significant benefits,
potential challenges must be addressed:
1. Public Awareness:
The belief that taxpayers will shoulder a more significant
proportion of the burden is one of the myths about the reforms.
2. Implementation Capacity:
The authorities of taxation must be provided with all the
necessary means and education to solve the problem fast.
3. Periodic Review:
To avoid such occurrences in future there is a need to
reform the tax tables; this should be done based on economic status.
Conclusion
The proposed changes in the number and rates of the
personal income tax are reasonable solutions that deal with fiscal drag,
problems of equity, and inefficiency of the existing system. These reforms are
utilised because they ensure that more than 90 per cent of the workers these
reforms reduce their taxes and the high–income earners pay more revenue. These
changes when effected properly could result in improvements in equity and
promotion of economic growth besides being a tool for tendering the tax system
into a tool for broader socio-economic transformation.
These changes are essentially tax system formalisations, closing the excruciatingly wide gap between the personal income tax and the corporate tax, thus making the Nigerian tax system fairer and more progressive for the country's workers.