Who should the Nigerian government tax?

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Show me your tax code and I’ll tell you who you care about.

My sister and I found this line after reading about the recent decision by the Nigerian government to impose a soft drink tax as part of the strategy to boost government revenue. I have written extensively on taxes over the past few months, which is hardly surprising given the flurry of government activity on this topic.

Some takeaways:

  • Taxes are important, but they can distort the market. Whether the producer or the consumer bears most of the cost of the tax depends on people’s sensitivity to price changes and whether the producer makes enough profit to cover the tax.

  • Besides fundraising, taxes can also be an important way to incentivize and punish certain behaviors. The new government tax on sugary drinks will lead to lower consumption of a product with possible health implications.

  • People may choose not to pay taxes either because they think the government will not use the funds well, or because they can get away with it. For the second reason, people assess the possibility of getting caught for tax evasion and the penalties before paying.

In summary, the Nigerian government has worked to broaden its tax base from increasing VAT to taxing lottery players.

It’s interesting because raising taxes soon after a pandemic, as people get poorer and the country faces its deepest unemployment crisis, doesn’t precisely align with economic thinking. Then there is also the fact that this is a pre-election year, so naturally it should be political suicide for any government to raise taxes (Nigeria is truly a land of contradictions).

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