Presentation by Dr. Nonso Obikili at the second annual Nigerian Tax Research Network meeting which took place in Abuja on 24th and 25th November 2018.

1. Modelling tax structure changes in Nigeria
Dr. Nonso Obikili
Turgot Centre for Economics and Policy Research
October 23, 2018

2. Summary
Very low and downward trending non-oil taxes as a share
of GDP implies need for structural tax reform
Politics requires that consequences of changes are
”known”
Modelling takes time. Need to have models ready in the
event they are needed
Sample framework: Using Sokoto state.

3. Tax problems - Tax to GDP ratio
Source: Budget office, NBS

4. Oil FG revenue as percent of Oil GDP
Source: Budget office, NBS

5. Non-Oil FG revenue as a percent of Non-Oil GDP
Source: Budget office, NBS

6. Oil vs Non-Oil GDP
Source: NBS

7. Implications
Non-oil GDP growing faster than non-oil tax revenue
Continuing dislocation between taxes and the non-oil
economy
Gap between hypothetical target and reality getting
larger
Marginal improvements are unlikely to be effective
Structural reforms needed

8. What does tax reform mean?
Re-organization of incentives and benefits
Who collects what?
Who keeps what?
Re-aligning incentives and benefits can have broad
impacts
Significant literature on tax farming
4% and 7% cost of collection of CIT and Customs
Potential gains from re-organization
Who gains or losses with changes?

9. Political realities
Tax reforms is a political process
Potential winners and losers decide outcome
Social planner must know how changes influence various
parties
Must know how each state and LGA will be impacted by
any changes
Answering these questions requires modelling which takes
time
In the event of benevolent politician, need model to be in
place instantly
Can you design reforms that increase the share of
”winners”?

10. Simplified two-agent model
One State and Rest of the Country (ROC)
One tax: Corporate income tax
Model:
Tax revenue collected by either state or ROC
Tax revenue shared according to formula
State collection/enforcement effort depends on expected
returns

11. Current Status
Revenue Collection → ROC
Revenue Distribution → Current revenue allocation
formula
State Effort → Expected returns approx zero.
e.g. Given current revenue allocation formula
A N10m increase in CIT from Sokoto companies →
N77,660 to Sokoto state government (0.7%)

12. CIT distribution model
Revenue Collection = αs State + αroc ROC:
[αs + αroc = 1]
Revenue Distribution = βsStatei + βroc (State + ROC):
[βs + βroc = 1]
State Effort = f(Expected return) = f(βs,
Expected(collection))
Status quo: αs and βs → 0.
Tax reform: What happens when you change α or β?

13. Question 1: In a static model, what happens to
SOKOTO revenues if you increase CIT derivation
from 0 to 13%?
If you increase βs from 0 → 0.13
Data needed:
State-level CIT collection.
Source: ideally FIRS
Estimate from NBS sampling frame
Current revenue allocation formula

14. 2018 Business survey

15. Estimating CIT distribution
Used NBS business sampling frame
Sokoto accounted for 6 of 1820 firms
4 of 6 were officially registered
Of all compliant firms: Sokoto accounted for 4 of 1561
(0.26%)
Simplifying assumption
0.26% of centrally collected CIT comes from Sokoto
in 2017: N3.136bn of N1,206.29bn

16. Question 1: In a static model, what happens to
SOKOTO revenues if you increase CIT derivation
from 0 to 13%?
Based on 2017 CIT collections
SOKOTO with βs = 0 → N8.99 bn
SOKOTO with βs = 0.13 → N8.394 bn (6.6% shortfall)
Will Sokoto support such tax reform? Probably not.

17. Question 2: In a static model, what happens to
SOKOTO revenues if you increase CIT derivation
from 0 to 13% and shift some
collection/enforcement responsibility to state?
If you increase βs from 0 → 0.13 and
increase αs from 0 → 0.5
Data needed:
State-level CIT collection.
Current revenue allocation formula
Estimate potential for SOKOTO CIT increase
Size of SOKOTO Economy

18. Question 2: continued
Potential static increase
Ordinarily: Could use surveys to estimate potential
increase.
Estimates of state GDP
Research on formalization
Simplifying assumption: 5% increase
Simplifying assumption: Everyone else increases collection
by 0%

19. Question 2: continued
Based on 2017 CIT collections and assumptions
SOKOTO with βs = 0 and αs = 0 → N8.99bn
SOKOTO with βs = 0.13 and αs = 0.5 → N8.416bn
Will Sokoto support such tax reform? Probably not.

20. Can you design reform package that works for
Sokoto?
Continuing from (2)
Assumption: Everyone else increases their collection by
5%
Sokoto still drops from N8.99bn to N8.816bn
ROC increases from N1,206.29bn to N1266.60bn (5%)
Transfer payments
Increased βs means SOKOTO gets less and ROC gets
more.
Transfer payments to Sokoto of N1bn to Sokoto leaves
Sokoto and ROC both better off.

21. More practical model
Dynamic model
Model all taxes
Model all states and LGAs
Properly estimate parameters of model
Model impact on wider economy

22. Conclusion
Dynamics of non-oil tax revenue to GDP growth imply
broad tax reform necessary
Reform based on changing roles and responsibilities for
collection and enforcement
Reform is largely political but will require modeling to
understand impacts of changes
Need modelling in place before politicians (maybe) come
calling

23. Thank You