CHALLENGES AND BURDENS OF THE TAXMAN

The adept use of taxation as a development tool is critical to economic growth, argues CHARLES IYORE

The burdens of the taxman have not in recent times, been more obvious than in the 45-day premiership of Prime Minister Liz Truss in the United Kingdom. It showed how holding on to the wrong notions of the commonwealth, the bad use of taxation as a tool of economic development, and the inability to adequately engage private capital, can quickly unravel the tapestry of an organized society.

The world over, national asset management is burdened by an increasingly complex tax system that discourages investment, limits returns, and creates a significant administrative load on managers and taxpayers.

This issue affects both the public and private sectors, with government agencies facing budget constraints exacerbated by inefficiencies, and private investors being deterred by uncertainty and the cost of

compliance.

In the United Kingdom (under PM Liz Truss), reduction in income and corporate tax rates, (reason: because the Tory party is not a taxing party), the refusal to tax the windfall profits of the energy companies (during

the COVID lockdown) (reason: because profits to the Tories is not a crime) and the over dependence on the altruistic goodwill of brits (compassion) to deal with the living gaps of the lockdown. These actions translated to many budget line items being underfunded and the public sector borrowing requirement

(PSBR) increasing significantly.

The rise in the cost of government borrowing, as a consequence, slowed down the economy and dragged it into a recession.

The building of the economic production base is the core task of government, in her administrative configuration. Governments must significantly reduce agricultural waste at the primary level, and develop

agro-allied industries which together form the base for improving the higher echelons of the national production pyramid.

In Nigeria, there has been a high level of disorder, since government disbanded commodity boards without any ordered replacement alternatives.

As an example of sub-optimization, farmers chasing urban profit have been fuelling food inflation, and the disorder of the aggregation of “cash crops” and “food crops” means that efforts to diversify the economic

base have left too much to be desired.

The use of boards of trade (partnerships between the public and private sector) in 10 or more aggregation centres, working with syndicates in the crop belts, can do a lot to optimise yield in these activities. This

should follow in the manner that the local buying agents and marketing boards aggregated produce in the regions.

The different levels of government have been unable to define the risk and profit profiles of these activities and seem more interested in taxing immature linkages. They should however, be taking their time to develop these critical linkages. (reason: very high employment coefficients).

Against that background the challenges in national asset management are,

in the public sector: Aging infrastructure, many public-sector bodies struggle with aging assets and a backlog of maintenance,

which increases operating costs and reduces asset value.

Legacy IT systems, outdated technology is a major systemic issue, leading to fragmented and unreliable data across different departments. This hinders effective, long-term strategic planning for infrastructure

projects.

Skills gap, a lack of trained staff and high employee turnover in asset management roles, prevent agencies from fully adopting modern asset management programs and new technology.

Short-term focus, public-sector asset management (PSAM) leaders are often pressured to focus on short-

term results rather than on long-term, 20- to 50-year asset lifecycle plans (rolling development plans). This hinders sustainable and efficient management.

Budgetary constraints, public asset managers face aggressive budget cuts, and public funds are often tied up in inefficient or underused assets, preventing strategic reinvestment. (allocation based on cronyism

rather that need: fiscal –irresponsibility).

In the private sector, regulatory complexity, asset managers face a constantly changing and ever more stringent regulatory

environment.

Keeping up with new rules, including increasing environmental, social, and governance (ESG) obligations, is a major operational challenge and can be expensive.

Fee compression and market volatility, high operating costs, intense competition, and volatile markets put pressure on asset managers to deliver results while lowering their fees, which squeezes profit margins.

Legacy infrastructure, many private firms still rely on legacy technology and fragmented data systems. This makes it difficult to implement modern solutions like AI, automate processes, and consolidate data effectively. (the development of wide areas of free internet access can improve this).

Talent shortage, the industry is grappling with a skills gap and fierce competition for talent, particularly for expertise in new technologies like AI and sustainability.

Shift in investor preferences, there is a strong movement towards passive strategies, ESG-driven investments, and private markets. Asset managers must adapt their products and offerings to meet these changing demands.

The burdens of the taxman. The adept use of taxation as a development tool to impact national economies, is critical to impelling

economic growth and if not done, the following can occur:

Inhibiting investment, high tax burdens (multiple taxation as a case in point) make savings and investment less attractive for both individuals and businesses. This reduces the capital available for crucial infrastructure and economic development projects.

Encouraging capital flight, the threat of new taxes, such as a wealth tax, can prompt high-net-worth individuals and investors to move their assets abroad.

Increasing administrative costs, a complex tax system requires businesses to spend more on compliance and administration, diverting resources that could be used for investment and innovation.

Risk and uncertainty, frequent or sudden changes to the tax framework undermine investor confidence and make long-term financial planning difficult.

Higher costs for infrastructure projects, tax policy can directly increase the cost of infrastructure with the cost being passed on to consumers.

Reduced returns, in the private sector, high operational taxes combined with increasing global tax regulations increase compliance costs for asset managers, which ultimately reduces returns for investors.

Distorted investment decisions, tax policy can inadvertently influence where and how assets are invested.

Reduced pension savings, speculation and changes to pension tax relief can discourage individuals from saving for retirement, undermining a key source of national long term capital for investment.

Alternative investment options. The investment space has been changing over time, as regulatory authorities (governments) grapple

with ensuring that spending rounds (budgets) and attracted investments add value in visible and significant ways, that can raise national productivity.

This has been the case since the Wall Street crash of 1929, when the use of unitization of debts and equity (securities) expanded the inclusion of investors, big and small, to debts and equity public offerings.

That innovation has also been abused by securities traders, who buck markets and turn transactions into mere paper chase (junk securities). Many alternative investment options to traditional investment

instruments, have been introduced since then, to better relate capital outlay to outputs.

Investment options ranging from detailed calculation of internal rates of returns (IRR) in venture capital transactions, through various creative business options in corporate financing, to private equity asset re-organization, which take assets out of public ownership and rebuild them without the constraints of annual reporting cycles. These have become the potent tools of choice, for extracting latent value and rapidly delivering growth. (From MSMEs to big corporate transactions).

Governments around the world, (mostly western economies) have come the realization of the need to develop partnerships with key alternative investment players, and hence have developed regulatory and reporting frameworks, flexible enough allowing these new asset classes to thrive. (The

Norway shift from hydrocarbons dependence is an example of imaginative pivoting away from

economic “monoculture trap”).

For an economy, the size of Nigeria, with a footprint over the West African sub-region, what size of funds (in Naira), can be deployed for the smallest shifts of the dial of productivity?

Where and how should the funds be applied and what kind of imagination would be required to form the required capital?

In broad outline, investments must be directed with purpose, profit must be driven by volumes rather than wide margins of products and securities prices, and the many moving parts of the value chains should be identified and aligned. (mergers and acquisitions, a useful tool).

There is a lot of spare capacity in Nigeria, and the imagination to make the economic pyramid seat on its base rather than the top-heavy unstable position, as it is now, on its tip, is the preferred change.

Where are we now?

The first step of the leadership was to demonstrate political will, by removing fuel subsidy, which had

less than a general good effect on the economy, that was quickly followed by the assembly of a team

able to hold its own and are continuing to improve on their gelling skills together, for the common good.

The journey from the cold, when airlines were withdrawing flights and services was dealt with by meeting outstanding debt obligations and significantly improving the debtor quality of the country.

The background to these initial gains was a return to first principles of the cashier (CBN), This along with the reduction of impunity amongst accounting officers in the bureaucracy is defining a solid framework. The impact, however, on life and living standards will come only with activities in the

economy driven by gainful employment (jobs).

The orchestra conductor will however have to get the band sections to all sing from the same hymn

sheet, otherwise known as the directive principles of state.

There is also the little problem of lethargy of the citizens, developed over long periods of civilian

leadership licentiousness, followed by military dictatorship, and back to civilian licentiousness.

Getting this knee off the neck of the common man is still tricky as many do not know that they are free to do what they want, without connection to power figures.

The detailed conversations for this leg of the journey must increase, and would not always be best served by disorderly media and social media exchanges.

We must get the communication and sequencing of events right, to deliver renewed hope.

Iyore is Principal Partner, Dion and Associates Limited dioncta@aol.com.