Taxing Fairly or Fairly Taxing? Why Making Taxes Progressive is so Complex

Is it harder to tax fairly, or to fairly tax? This age-old paradox, timeless and yet ever-relevant, sits at the heart of modern tax policy. It’s a riddle we must solve, not just for efficiency, but for justice. Taxes—our contribution to the common good—fund our roads, schools, hospitals, and more, shaping the very societies in which we live. Yet, as we strive to correct the imbalances of inequality, we encounter a profound dilemma: the more progressive a tax becomes, the more intricate its design, and the harder it is to enforce. The paradox of progressivity is this: fairness fights complexity, and complexity fights fairness – a noble pursuit burdened by the weight of its own complexity.

The Tug of War Between Fairness and Simplicity

Progressive taxation—the idea that those who earn more should pay more—is, at its heart, an act of justice. It seeks to level the playing field, to redistribute resources in ways that uplift the vulnerable and hold the powerful accountable. But fairness has a cost, and in taxation, it is anything but simple.

To define who is "wealthy" requires thresholds, and thresholds require precision. To spare the poorest demands exemptions, and exemptions require constant oversight. Suddenly, the tax laws stretch from a simple framework into a labyrinth. Fairness, in tax systems, is complex by nature. Conversely, to exempt the poorest, we must define poverty. To tax the wealthiest, we must scrutinize their income streams. Take, for example, the challenges of crafting rules that ensure equity for all. Questions arise like:

• Should capital gains be taxed like salary/wages?
• How do we account for family size, gender, or regional disparities?
• What about corporations shifting profits across borders?

The result is a tax law that stretches to hundreds of pages, packed with terms that only the most seasoned accountants and tax lawyers can decipher. For taxpayers, this complexity breeds confusion. For tax authorities, it raises costs and opens avenues for tax evasion.

In developing nations such as Nigeria, where administrative capacity is limited, the consequences are even more severe. The very complexity designed to ensure fairness ends up eroding trust, raising the costs of enforcement, and leaving loopholes wide open.

The Burdens of Complexity

As tax systems grow more progressive, the burden of complexity is shared by all.

• Taxpayers are faced with a web of deductions, exemptions, and intricate rules that feel like a puzzle with no solution.
• Tax authorities, already stretched thin, must enforce these rules, combat evasion, and close loopholes, all while maintaining trust and cooperation.

The Personal Income Tax in Nigeria, while progressive, is also among the most complex tax systems. At its base level, taxpayers earning at or below the minimum wage are exempt from paying taxes. For those earning above the minimum wage, there are allowances, such as the Consolidated Relief Allowance, which is the higher of N200,000 or 1% of the gross income, plus 20% of the adjusted gross income (gross income less pension contributions). Beyond that, there are further exemptions such as contributions to the National Housing Fund, National Health Insurance Scheme, Life Assurance Premiums, National Pension Scheme, and Gratuities.

The real complexity begins when deductions have been made, and the taxable income must be computed. The income is taxed on a graduated scale as follows:

1. The first N300,000 is taxed at 7%
2. The next N300,000 is taxed at 11%
3. The next N500,000 is taxed at 15%
4. The next N500,000 is taxed at 19%
5. The next N1,600,000 is taxed at 21%
6. Any amount above N3,200,000 is taxed at 24%

Let's illustrate this with an example. Consider a taxpayer who earns a basic salary of N100,000, housing allowance of N20,000, transport allowance of N10,000, meal allowance of N10,000, and wardrobe allowance of N10,000, bringing the total monthly income to N150,000. This equates to a yearly income of N1,800,000 (N150,000 x 12). Since this income is above the minimum wage, it is subject to personal income tax.

The first step is to calculate the Consolidated Relief Allowance. This is the higher of N200,000 or 1% of the gross income, plus 20% of the gross income after pension contributions. In this case:

• 1% of N1,800,000 = N18,000
• 20% of N1,800,000 = N360,000 Thus, the Consolidated Relief Allowance is N200,000 (since it's the higher amount), and the total deduction is N560,000.

The taxable income after deducting the Consolidated Relief Allowance is N1,240,000 (N1,800,000 – N560,000). Next, we apply various tax exemptions. For "simplicity", let’s assume the taxpayer has exemptions totaling N80,000, leaving a chargeable income of N1,160,000.

Now, we apply the graduated tax rates to the chargeable income:

1. The first N300,000 is taxed at 7%: N300,000 x 7% = N21,000 (remaining income: N860,000)
2. The next N300,000 is taxed at 11%: N300,000 x 11% = N33,000 (remaining income: N560,000)
3. The next N500,000 is taxed at 15%: N500,000 x 15% = N75,000 (remaining income: N60,000)
4. The remaining N60,000 is taxed at 19%: N60,000 x 19% = N11,400

Thus, the total tax payable per annum is: N21,000 + N33,000 + N75,000 + N11,400 = N140,400.

Next, we determine the monthly tax payment. The annual tax of N140,400 is divided by 12 to give a monthly tax of N11,700.

However, the final tax liability is determined by comparing the calculated tax with the minimum tax liability, which is 1% of the gross income. If the calculated tax is lower than 1% of the taxpayer's income, the minimum tax is applied. In this case, the 1% of the gross income (N1,800,000) is N18,000 per annum, or N1,500 per month. Since the calculated tax of N140,400 exceeds this minimum tax, the taxpayer will pay the calculated tax of N11,700 per month.

Thus, while the system is progressive, it involves multiple layers of deductions and exemptions that complicate the calculation of the actual tax liability, making it a challenging system for taxpayers to navigate without professional guidance.

In countries like Nigeria, where limited administrative resources often hinder the efficient enforcement of progressive taxes, the complexity leads to inefficiency and corruption. The very intricacies designed to promote fairness are the ones that allow the wealthy, armed with skilled advisers, to exploit loopholes, leaving governments chasing shadows.

A Dilemma Rooted in Values

The tension between simplicity and fairness is not merely technical—it is rooted in our values. Regressive taxes, like VAT or consumption taxes, are easier to administer but disproportionately burden the poor. For instance, a struggling single mother pays the same VAT rate (7.5%) on deodorant as a millionaire — fair in form, but unjust in effect.

So where do we draw the line? Do we simplify systems, sacrificing justice, or do we embrace complexity for the sake of equity? This is the dilemma we face—a reflection of the values we hold dear.

In many cases, the complexity of progressive taxes leads to inefficiency. Globally, the story is the same. The U.S. Tax Code is a prime example — filled with deductions, credits, and loopholes that make it progressive in theory, but bewilderingly complex in practice. This complexity may offer avenues for wealthy individuals and corporations to shift profits to low-tax jurisdictions, undermining the system’s integrity, as some Multinational corporations do.

The Challenges of Complexity

• Administrative Burden:

Complex tax systems demand more resources for enforcement and compliance. Tax authorities need advanced systems, skilled personnel, and significant investment in technology to manage them effectively.

• Compliance Costs:

Taxpayers often struggle to navigate a maze of rules, leading to higher costs for professional advice and increased risks of errors or non-compliance.

• Evasion and Avoidance:

The more intricate the tax laws, the more opportunities arise for loopholes, creating an uneven playing field and potentially reducing revenue.

• Impact on Developing Economies:

For countries with limited administrative capacity, complexity can be particularly detrimental, resulting in lower compliance and weaker enforcement. Their already weak enforcement is exacerbated by complicated systems, leading to lower compliance.

Proposed Solutions to the Taxation Dilemma

So, how can we maintain the spirit of progressive taxation while avoiding the traps of complexity?

1.????? Simplification Without Sacrificing Progressivity

Reducing the number of tax brackets and standardizing deductions and credits can simplify the tax system while maintaining fairness and progressivity. A system with fewer brackets, such as three broad bands instead of five or six, would be easier to administer, while replacing complex deductions with standardized ones would streamline compliance. This approach, as proposed by the Presidential Committee on Fiscal Policy and Tax Reform (Committee) in the Nigerian Tax Bill 2024, aims to reduce the need for intricate calculations and enhance the overall efficiency of the tax system.

2.????? ?Leverage Technology and Digital Infrastructure

To simplify and streamline, we must harness the power of technology. E-tax platforms can automate filing and compliance, easing the burden on both taxpayers and authorities. Countries like Estonia have set the pace, and Nigeria's FIRS Tax ProMax and USSD code for tax payments follow suit. With data analytics and AI, we can spot discrepancies, close loopholes, and ensure fair compliance—all without adding complexity. It’s a vision in tune with the Committee’s goal of a seamless, data-driven tax system, where efficiency and fairness dance together in harmony.

3.????? Strengthen Institutional Capacity

Strengthening institutional capacity is key to a more efficient tax system. Investing in training ensures that tax authorities are equipped to handle complex systems. The recent proposal to unify Nigeria’s tax authorities under one umbrella—the Nigerian Revenue Service—marks a step in the right direction, supporting both revenue collection and staff development. Similarly, the proposed Joint Revenue Board promises to further enhance service delivery, should it become law. On a broader scale, regional collaboration, like the African Tax Administration Forum (ATAF), offers an opportunity for countries to pool resources and streamline tax management, creating stronger, more unified tax systems across regions.

4.????? Implement Hybrid Systems

Implementing hybrid systems can strike a balance between simplicity and fairness. Progressive indirect taxes, such as VAT with tiered rates or exemptions for essential goods, can reduce the regressive nature of these taxes. While existing VAT exemptions and zero-rated regimes already offer some relief, further efforts should be made to make them more progressive. Additionally, pairing flat taxes with income-based rebates or transfers could simplify administration while ensuring that equity is maintained, ensuring a tax system that benefits all, regardless of income.

5.????? Promote Transparency and Public Engagement

Simplifying tax codes and promoting public awareness are crucial for building trust and ensuring compliance. Clear, concise tax laws—free from unnecessary jargon—are easier to follow and enforce. This aligns with the Committee's proposal to harmonize existing tax codes into a single law, streamlining the system for greater clarity. Additionally, effective public awareness campaigns that educate taxpayers on their rights, obligations, and the benefits of progressive taxation can foster a culture of compliance and trust. While progress has been made, more effort is needed to engage and inform the public about the importance of a fair tax system lest we run into opposition like the present one with the Northern Governors Forum.

6.????? International Cooperation

Combating tax avoidance and evasion is vital in today's global economy, and international frameworks like the OECD's Pillar Two, which establishes a minimum global corporate tax rate, play a key role. These frameworks reduce the complexity of profit shifting, easing administrative burdens while ensuring fairness across borders. I am particularly excited by the Committee's proposal to include the 15% global minimum tax, as it aligns Nigeria with global efforts to curb tax avoidance and ensure that corporations contribute their fair share to national economies. This step will help close loopholes and create a more equitable tax system.

The Poetic Paradox of Taxes

Taxation is an art—a delicate dance between fairness and feasibility. As poet Robert Frost might say, it’s the road less travelled: challenging, winding, but ultimately worthwhile. We must accept that no system will ever be perfect, but in striving for progressivity, we honour a fundamental truth: society is not measured by its ease but by its equity.

So, is it harder to tax fairly or to fairly tax? Perhaps the answer is neither. The real challenge lies in continuously asking the question, and in finding ways to bridge the divide. Taxation is more than a policy — it’s a promise that no one will bear too much, and no one will be left behind. A promise worth making, even when it feels impossibly taxing (pun intended).