Generally, countries around the world have benefitted from globalization occasioned by rapid developments in technology and increased integration of persons, businesses, and economies around the world. One of the notable gains of this integration is the plethora of opportunities it offers people to become more productive while improving their living standards. However, not all countries, including Nigeria have provided adequate infrastructures for citizens, especially the disadvantaged, to harness these opportunities, enhance income and contribute their fair share of taxes in return. Hence, the need for social inclusion. This article, therefore, focuses on the importance of social inclusion in tax revenue mobilization.

Aptly put, social inclusion centers around the provision of an enabling environment and creating equal opportunities for the improvement of the well-being of citizens. This is consistent with the definition provided by the United Nations in its report1 . The report defined social inclusion as ''the process by which efforts are made to ensure equal opportunities – that everyone, regardless of their background, can achieve their full potential in life. Such efforts include policies and actions that promote equal access to public services as well as enable citizen's participation in the decision-making processes that affect their lives''.

The Interplay between Social Inclusion and Social Contract

In achieving a socially inclusive society, a government must evaluate whether the social contract with its citizens is effectively executed. Undoubtedly, to enable a mutually beneficial social contract, the government must fulfil its side of the bargain by providing the relevant infrastructure that would stimulate citizens to be productive and pay taxes on income earned. Where a government does not fulfil its end of a social contract, it would suffice to say that it should also not expect so much from its citizens in return. For instance, a country that is characterized by high unemployment, a poor educational system, poor healthcare facilities, etc., should not expect its citizens to develop the relevant cognitive and physical abilities required to leverage the wave of globalization in becoming productive. This analogy underscores the importance of committing to the social contract in achieving social inclusion.

The World Bank emphasizes investments in child education, accessible health care, the creation of opportunities for the youth, and an efficient tax system as some of the components of social inclusion. Thus, the government may need to consider whether its approach to discharging its social contract reflects these elements.

Evaluation of Nigeria's Social Contract

The Nigerian government has made efforts to fulfil its obligations to Nigerians, over the years. However, more needs to be done concerning education, public health infrastructure, transportation, employment, and technology. While there are many reports highlighting the infrastructure investment gaps, more action is required from the Government in implementing the recommendations from the reports and enacting policies that will guarantee improvement in the quality of life. The need for the Nigerian Government to bridge the infrastructure gap is further heightened when its efforts are measured against key indices in the following focal areas;

  • Education: The United Nations International Children's Emergency Fund (UNICEF) reported that ''one in every five of the world's out-of-school children is in Nigeria''. The report further revealed that 10.5 million children between the age of 5 to 14 are not in school. Gender, geography, poverty, religion, insecurity, etc. were cited as some of the barriers to child education.

    The educational sector is further plagued with a lack of funding. For example, the allocation to education in the 2022 budget was 5.6%, which is far from the United Nations Educational, Scientific, and Cultural Organization's recommended benchmark of 15 to 20%. The allocation was in contrast to the FG's resolve to increase the allocation by 50%. UNICEF has criticized this allocation and highlighted the negative consequences on enrolment and retention of school children. Other known barriers to education are the incessant strikes by school associations and dilapidated learning infrastructures. The long-term impact of underfunding education is the reduction in the number of youths contributing to the tax-paying workforce and the vicious circle of decreased tax revenue resulting in more underfunding of education.

  • Health Care: The indices on the state of the health sector are damning. According to the World Health Organisation (WHO), the recommended doctor-to patient ratio is 1 doctor to 1000 patients. However, the Nigerian Medical Association revealed that Nigeria currently has a 1 doctor to 4000/5000 patients ratio. Further, the country has consistently fallen short of the budget allocation of 15% to the health sector based on a 2001 African Heads of State declaration. This may explain the poor state of government-owned healthcare facilities and the reason why most Nigerians pay out-of-pocket to access healthcare in private hospitals, while those who do not have the means either succumb to their health challenges or become incapacitated. Thereby, impeding their ability to contribute productively to the economy and pay taxes on income earned.
  • Employment: The rate of unemployment has been on an upward trend in recent years. According to the Nigerian Bureau of Statistics, the unemployment rate climbed to 33.3% from 27.1% in Q2 of 2020 and 23.1% in Q3 of 2018. Experts have projected that the unemployment rate would rise in 2022. Some of the reasons attributed to the high unemployment rate are; a lack of enabling environment for the private sector to thrive, lack of foreign direct investments, and inadequate funding for small and medium-scale enterprise businesses, etc.
  • Technology: Nigeria may have recorded giant strides with the spring of start-ups that can attract funds from foreign investors. However, the country is still deficient in terms of technology infrastructure; which may have contributed adversely to the growth of critical sectors of the economy. This underscores the relevance of technology in modern economic development. Some experts have argued that the technological development of a country can be measured by the quality of its infrastructure. Using this parameter, Nigeria ranked lowest at 0.31% based on a World Bank year-on-year growth rate analysis on the quality of infrastructure.
  • Tax Revenue Generation: Nigeria's tax-to-GDP ratio has hovered around 6-8% in recent years, making it one of the lowest in the world. According to a report by the OECD2, Nigeria recorded its highest tax-to-GDP ratio of 9.6% in 2011. Since this feat, the country's tax-to-GDP ratio has ranked poorly among that of other countries. Based on OECD's statistics, Nigeria's tax-to-GDP ratio ranked least (at 6%) in 2019 out of 30 countries, while Tunisia, Seychelles, and Morocco ranked highest with tax-to-GDP ratios of 34.3%, 34.3%, and 28.4% respectively. Some of the reasons attributable to the low tax-to GDP ratio are; tax evasion, corruption, lack of voluntary tax compliance, and inefficient tax administration; including a lack of robust reforms addressing the challenges in the informal sector. The World Bank has revealed that countries must attain at least 15% in tax-to-GDP ratio to be able to raise tax revenues to meet the basic needs of their citizens.

There are strong concerns that the inadequacy and poor state of existing infrastructures may have encouraged a lack of trust in government policies and the tax system. Analysts who share this view argue that few Nigerians, who have the means, have resorted to catering for the basic amenities that should have been provided by the government. Thus, encouraging a widening of the income gap and discouraging tax revenue mobilization. It is not a surprise that the lack of critical infrastructure is part of the reasons why Nigeria is poorly ranked at 131 on the World Bank's ease of doing business index.

Taxation and Bridging the Social Inclusion Gap

To promote social inclusion, the government should ensure the following;

  • Implementation of public reforms which promotes equal opportunities and improvement in the quality of life; e.g., investments in child education, provision of affordable health care and transportation systems, affordable and accessible loans to SME businesses, etc. Government must also be conscious of achieving this objective by shifting its expenditure pattern from recurrent to more of productive or infrastructural-related expenditures to aid inclusive growth. A shift towards productive expenditures will significantly contribute to creating investment opportunities for citizens, promoting trust in government and its policies, and aiding tax revenue mobilization.
  • Implementation of fiscal reforms to encourage social inclusion. The reforms should focus on eliminating barriers to efficient and effective tax administration, promoting tax mobilization, and expansion of the tax base. Government should also introduce reforms that would address the tax challenges of the informal sector; this may include the adoption of a presumptive tax system based on reliable and fair estimates of the incomes of taxable persons in the informal sector
  • The adoption of an equitable tax administration system minimizes the compliance burden on taxpayers, encourages voluntary compliance, and optimizes tax collections. The government can also consider transitioning to less distorted taxes (e.g., excise tax, VAT, etc.).
  • Investments in technology infrastructure especially in critical sectors of her economy, such as; education, health, transportation, agriculture, etc. The use of technology will aid learning, improve processes and provide a platform for talents, especially at the grassroots; to tap into the wealth of opportunities in becoming innovative and productive. Further, technology can be used to mitigate tax evasion in vulnerable sectors of the economy such as; hospitality, gaming, casino, etc., while expanding the tax net.

"The policies of a government play a critical role in molding social behavior. Thus, ensuring social inclusion is pivotal in promoting income equality and stimulating appropriate social behavior that drives tax revenues and accelerates economic development. Government must therefore provide the relevant infrastructures and ensure that its underlying policy objectives include creating equal opportunities and improving the living standards of its citizens."

What is Obtainable in Other Jurisdictions

  • Denmark and Sweden: Denmark had the highest tax-to-GDP ratio of 46.5%3 in 2020 among OECD countries. The country recognizes the relevance of education; by providing various incentives to stimulate interest in education; such as subsidized tuition and free education for intending students within the European Union. Further, the country provides other incentives targeted at promoting social inclusion such as; sickness and maternity benefits and unemployment benefits.

    In Sweden, the tuition fee is free for children up to the university level. Sweden also offers child allowance and free health and dental care for persons under 18 years of age. The country's tax-to GDP ratio was 42.6% in 2020, making it one of the top 7 OECD countries with a high tax-to-GDP ratio.
  • Georgia and Tajikistan: These countries have achieved double tax-to-GDP4 ratios in the past 20 years by simplifying their tax systems. More specifically, some of the measures implemented by Georgia in achieving this feat included; streamlining the multiplicity of its taxes, reducing its tax rates, simplifying tax laws, eliminating abuse of tax rules by the government, and placing the burden of proof on the government only, in tax disputes.
  • Egypt and Tunisia: Based on a report by the IMF5 , Egypt and Tunisia leverage technology to discourage the use of cash and encourage financial inclusion. Tunisia had the highest tax-to-GDP ratio of 34.3% in Africa in 2021.

Conclusion

The policies of a government play a critical role in molding social behaviour. Thus, ensuring social inclusion is pivotal in promoting income equality and stimulating appropriate social behaviour that drives tax revenues and accelerates economic development. Government must therefore provide the relevant infrastructures and ensure that its underlying policy objectives include creating equal opportunities and improving the living standards of its citizens.

Footnotes

1. https://www.un.org/development/desa/socialperspectiveondevelopment/issues social-integration.html

2. https://www.oecd.org/tax/tax-policy/revenue-statistics-africa-nigeria.pdf

3. https://www.oecd.org/tax/tax-policy/revenue-statistics-highlights-brochure.pdf

4. https://www.imf.org/en/Blogs/Articles/2022/07/06/middle-east-needs-fairer-taxes- to-aid-growth-and-ease-inequality

5. https://blogs.imf.org/2022/07/06/middle-east-needs-fairer-taxes-to-aid-growth-and- ease-inequality/

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