Navigating protectionism in modern economic landscape: Lessons from U. S.

Walter Lippmann, an American and a political commentator once said “where all agree, none think much”. Considering our economic woes and the multi-dimensional poverty in the land, the recent utterances of our policy-makers indicates apparently that not much thinking is at interplay at that realm.

Amidst of decayed infrastructure or its lack, sizeable number of our governors and policymakers are still drifting in the line of thought that, for them to bring the needed alleviation, they have to erode subsidy and increase the tax revenue.

The protectionism paradigm has left the consciousness of our policymakers because they are yet to discern that, on the global arena, deregularisation is no longer viable economic approach. The recent United State of America’s Inflation Reduction Act (IRA) has made it clear that Protectionism is back. Free market globalisation is gone and, “The market knows best” mantra no longer holds sway.

A clear-eyed assessment of the global economic landscape surely would reinforce the conviction that it’s a façade for the continued exploitation of developing economy. The IRA exemplifies a legislation that embeds Tax credit (subsidy) so huge that the Internal Revenue Services (IRS), of United State of America (USA) is estimated to have 40 per cent decrease in Tax revenue in the next ten years if all the subsidies are fully utilised.

Its format and structure are incomparable with the Nigerian government’s tax credit issued through Executive Order that granted about N2.59 trillion in 2021. The tax credit was a misapplication of economic instrument as it was a knee-jack solution to fill certain infrastructural gap without envisaging probable headwind that could affect the selected companies.

Aside the error that the beneficiary companies were handpicked, the rationale that brought it up lacked the thinking depth that precedes usage of such strategic tools. This article is not meant to x-ray the IRA fairly, but to push for the replication and domestication of the spirit behind that piece of legislation in Nigeria and most importantly imbue our policymakers with similar deep thinking on which IRA germinated.

Firstly, our Policymakers must know that we need to nurture and protect our economy, as what is not nurtured nor protected cannot grow. On the global stage, the economic war is in perpetuity, and will not abate.

Every country wants to develop and grow at the expense of another, so approaching economic issues with a short-term reward-for-political-patronage or need-to-win-next-election mindset is putting the country in deeper economics woes. The developed economies continually implement policies that compromise the competitiveness of the less developed countries.

There are three instruments used to drive the protectionism agenda – currency management, subsidy and tax. We all know that our Tax system is broken, only few industries can survive in our clime as Tax expense is so huge (Statutory taxes and junk taxes -touts extortion) and our inefficient and corrupt sub-national institutions are not helping.

Poverty pervades the land because our politicians have not applied ingenious statecraft on the instrumentality of subsidy, tax, and currency management to create an environment where things get built and poverty is alleviated.

While we wait for the implementation of Taiwo Oyedele’s Presidential committee report on Tax reform, we must know that the present Tax system will continue to keep the larger percentage of the population in poverty because it is systemically inefficient; the rates are too high and lopsided.

When combined with inflation, which effectively acts as an additional tax on low-income individuals, the goal of reducing poverty becomes unachievable. The reforms presently being prescribed should include a restructuring of the collection system such that the Junk taxes are regulated and brought to the pool for the common good. A greater focus should be on Transactional tax with a target to capture 95 per cent minimum of transactions both in terrestrial and digital space.

In view of the global transaction economy dynamics, there is need for creativity in the administration of Income tax regime. We must confront the fact that Base Erosion and Profit shifting (BEPS) is one of the biggest depletion factors of our Tax revenue as a developing economy. Multinational Companies (MNC) have perfected ways of eroding profit from less desirable spaces by being creative with their transaction dynamics.

Our regulators have tried to combat this menace within the ambit of enabling laws but the ugliness persists because of lack of global clout of our economy. In the realm of Transfer pricing (Arms-length compliant need transaction), the odds are stacked against us as a nation. MNCs now use transaction as a sponge to soak-away profit, thus deplete our forex liquidity and tax revenues. A close observation of the gulf between the aggregate turnover of companies and the Income tax revenue component is tell-a-tale.

One of the strategies we may deploy to enhance our competitiveness is to make our economic space a desirable destination for the global capital. There are several factors underpinning capital flow into an economy and retainment. It is dependent on how sweet and desirable our economy can be to global capital, including socio-political considerations. Tax rate is key, and we need to reduce our income tax rate to a single digit.

Let us borrow a leaf from China, where maximum Company Income tax (CIT) is 25 per cent, some companies are designated to do 10 per cent, some 5 per cent and so on. While reduced tax rate will enhance voluntary compliance, thereby reduce collection or administrative cost, it also has tendency to reduce pressure on our currency because the propensity for repatriation will be less.

Combining this with encouraged Foreign Direct Investment (FDI) will potentially awash the economy with the forex liquidity we have been craving for.

To be continued tomorrow.

Bakre is a Digital Ethicist and Managing Partner Homo Economicus Limited, Lagos. He can be reached via: (@latundebakre olatunde@heconomicus.com