On Tax Policy, Frames and Winning Negotiations

So I was having a conversation recently and the fellow presented the ever present argument on the need for the Nigerian government to increase the VAT rate as Nigeria’s 5% is one the lowest in the world. The person then went on to ask

Nigeria needs to raise money quickly as oil revenues shrink. VAT is one of our biggest federal revenue contributors and we have a really low rate. The government wants to bridge the revenue gap by increasing the tax rate. Are you telling me that such a policy is bad?

I will come back to the specific VAT conversation, but the quote from my friend above offers the opportunity to share something I learnt about negotiating and getting the best out of a negotiation, whether with your employer, employees, government, your parents or your children — practically anyone. The technique is called framing. It essentially reduces the positions that can be held on an issue, irrespective of context and complexity to two clear cut positions. It doesn’t matter whether these two options are only options or even if they are the best options. Once you continue the conversation, argument or negotiation on their basis, these two options essentially becomes the frame you are limited to and are forced to make your choices on. It doesn’t matter which option you chose — the other person has succeeded in framing the conversation and has won out in the negotiations.

So what must you do when faced with such framing? Sidestep it and bring all the options back to the table. You can even decide to postpone the conversation so you can research more into the context and complexity to enable you present a much larger frame and thereby increasing your own chances of getting the best out of the negotiations.

So if you read what my friend said again, you will see framing at work. He has tried to reduce government’s policy options to raise tax revenue to either increasing VAT rate or not and tried to get me to agree or disagree within this frame. I’m sure we all recognize attempts like this when discussing policy options the government should take — people are constantly attempting to frame the conversation to suit the outcomes they prefer. So how did I respond?

First I broadened the conversation to go beyond VAT to all tax — personal income, corporate tax, LG taxes and VAT. And showed him the following stats:

First, Nigeria’s VAT rate is 5% while the global average is 17.9%. So yes, our VAT rate is low. But then let’s consider the next table.

Some global Corporate Tax Rates with Nigeria’s own for context

Clearly, on corporate income tax, Nigeria’s rates are not low either by global average or by countries who are doing well economically and have a good tax to GDP ratio.

The clue is in the next table that shows tax compliance rates in Nigeria.

Tax Compliance Rates in Nigeria

Clearly, the compliance rate is the big issue. So here is my submission;

The question we should be asking is not if we should increase the rate of any of the taxes with inflation at almost 20% and in a recession, but to why the collections system is so poor that tax compliance is less than 15% across all tax categories. Are the tax authorities able to determine what to collect? Are the systems for collection in place and effective? Does the tax levels reflect our level of economic development? Do the tax authorites prosecute defaulters? Can they prosecute? Are the tax waivers transparent enough and non-discretionary enough for tax authorities to easily identify those who are enjoying exemption and those who are evading and avoiding taxes? Why is government itself unable to fully comply with income tax laws?

When we are really ready, we will face these and other more pertinent questions, rather than looking for an easy way out for government by increasing the tax burden of those who already pay.

For the records, here’s what was collected in the almost N100Trillion Naira economy of Nigeria in 2015

Tax Collected in Nigeria in 2015

That’s roughly 6% with other resource rich states such as Algeria (7.7%), Angola (5.7%), Dem Republic of Congo (5.9%), Equatorial Guinea (1.7%), Saudi Arabia (5.3%) and UAE (1.7%). The global average is 22%.

By the way, I’ve done some framing in this piece too.

A Beautiful Mind