By Abdulrauf Aliyu
Nigeria’s new tax reforms are bold, necessary, and long overdue. By exempting the vast majority of workers from personal income tax, streamlining levies, and offering incentives for employers, the government has signalled a willingness to modernise a fiscal system that for too long has been cumbersome, inequitable, and corrosive to public trust. As an advocate of these reforms and as someone fundamentally inclined toward tax policy rather than tax administration, I welcome the progress. Yet progress without purpose can be hollow. What Nigeria urgently needs now is not only a clearer, fairer set of tax rules but a renewed social contract in which taxation buys citizens something real: protection against the risks that life inevitably brings.
At its core, taxation is not simply about extracting revenue; it is about pooling risks and redistributing resources in a way that strengthens society’s resilience. Progressive tax theory teaches us that the legitimacy of a tax system does not rest solely on rates or brackets, but on the value citizens perceive they receive in return. When people understand that their contributions fund schools, hospitals, unemployment support, or predictable income when jobs are lost, they are more willing to comply voluntarily. When those returns are absent or invisible, resentment and evasion flourish.
The new Nigerian tax law rightly embraces horizontal and vertical equity. Workers earning the national minimum wage or less, whose taxable income falls below roughly ₦800,000 per year, now owe no personal income tax—a recognition of ability to pay and an effort to ease the burden on the poor and vulnerable. Employers are given deductions for wage increases and for retaining staff, and small businesses below a ₦100 million turnover threshold face zero corporate income tax. These provisions smooth the tax terrain and, in theory, encourage investment and job creation.
But here is the rub: the reforms ease tax burdens but do not yet provide meaningful protection when incomes vanish. A tax exemption on severance pay of up to ₦50 million is a nice gesture, but it is a one‑time event. A severed income does not make up for not having an income. Millions of Nigerians live hand to mouth; paying rent, school fees, and food with the thin margin that comes with informal or precarious employment. In this context, losing a job is not just a shock; it is a systemic risk, a cascade that can plunge households into poverty.
Contrast this with how advanced economies treat unemployment and income risk. In the United States, unemployment insurance is a federal‑state system financed by employer payroll contributions. It typically replaces a meaningful share of prior wages—often around 40–50 per cent, and sometimes more during downturns—over a period of months. In Germany, the welfare state replaces a significant portion of income and couples cash support with retraining and job search assistance. Nordic countries, from Denmark to Sweden and Norway, go further still: unemployment benefits replace a large fraction of previous earnings and are integrated with active labour market policies that cushion job transitions and keep skills aligned with evolving economic needs.
These social insurance mechanisms do not exist by accident. They are grounded in a recognition that, in a modern economy, labour markets are inherently volatile. Firms downsize, industries restructure, technologies disrupt, and workers cannot individually insure against these systemic forces. The state, through collective pooling of risk financed by taxes or contributions, provides that insurance. In doing so, it buttresses not only individual livelihoods but aggregate demand, economic stability, and social cohesion.
The economics here is clear. Keynesian and post‑Keynesian models alike emphasise the role of automatic stabilisers—fiscal mechanisms that expand during downturns and contract in booms without discretionary action. Unemployment insurance is a textbook stabiliser: when workers lose jobs, benefits transfer into household budgets, consumption is sustained, and the economy avoids self‑reinforcing spirals of contraction. In countries with robust safety nets, recessions tend to be shallower and recoveries quicker precisely because household incomes are buffered.
Nigeria’s current tax reforms, for all their virtues, do not yet encompass such stabilisers. They operate primarily on the supply side—reducing the tax burden on labour and capital, simplifying compliance, and incentivising formal employment. These are essential elements of a modern tax code. Yet supply‑side reforms must be paired with demand‑side protections if they are to deliver holistic resilience.
It is worth emphasising that social insurance does not have to be Scandinavian in scale to be effective. Singapore, frequently invoked in Nigerian policy debates for its low taxes and business‑friendly environment, offers targeted jobseeker support and reskilling schemes. These are not lavish benefits but pragmatic transfers tied to active labour market engagement. Malaysia, a middle‑income economy nearer to Nigeria in structure and capacity, has pioneered an employment insurance scheme under its Social Security Organisation, combining cash benefits with retraining support. These examples show that social protection can be calibrated to context, affordable, and integral to a functioning labour market.
Critics often argue that Nigeria cannot afford unemployment insurance or that broad social protections are luxuries for richer nations. This argument overlooks a critical point: lack of social insurance itself imposes economic costs—hidden and diffuse, yet profound. Without income support, unemployed workers deplete savings, default on rent and credit, withdraw children from school, and reduce consumption sharply. These individual actions aggregate into weaker economic activity, slower growth, and deeper inequality. They also erode human capital and diminish trust in public institutions.
Moreover, there is a governance component. Tax morale—the willingness of citizens to pay tax voluntarily—is positively correlated with confidence that taxes fund services and protections people value. A state that asks citizens for compliance but cannot guarantee basic security corrodes that morale. When citizens see taxation leading to roads that remain unfinished, hospitals that lack basic supplies, schools that are under‑resourced, and no safety net when a job is lost, the perceived value of compliance diminishes. That is perilous for any taxation system, but especially for one trying to broaden its base in a country where informal employment and mistrust of government are already high.
Advocates of tax reform in Nigeria have made a difficult and necessary case: that the tax system should be fairer, simpler, and more growth‑friendly. I stand firmly within that camp. But advocacy for tax reform must evolve into advocacy for a more complete fiscal system—one that recognises that taxes are not just levies but investments in collective resilience. We must begin to ask not only how much individuals pay, but what they can expect when unemployment, illness, or old age erode their capacity to earn. Progressivity in rates is important; progressivity in protection is equally so.
Policy design must rise to this challenge. A modest national unemployment insurance scheme, financed through a mix of employer and employee contributions, is technically feasible. Even replacing 30 per cent of prior wages for six months would offer a life raft to millions and, simultaneously, a stabiliser for the macroeconomy. Linking tax incentives for firms to training, retention, and re‑employment outcomes would make reliefs more effective, tying them to economic dynamism rather than accounting benefits. Embedding automatic stabilisers into the budget framework would reduce the need for ad‑hoc palliatives that are often politically fraught and fiscally inefficient.
None of this transforms Nigeria into a European welfare state overnight. Nor does it need to. But it does signal a more mature approach to fiscal policy—one that recognises taxation as a two‑way street, not a compulsory toll without return. If Nigeria’s tax reforms are to be more than administrative rearrangements, they must be part of a broader social pact in which citizens see their contributions translate into security, opportunity, and dignity.
Until that pact is articulated and institutionalised, tax reform will remain an incomplete narrative, and Nigerians will continue to pay taxes that feel transactional rather than transformational. A system that fails to protect citizens when life knocks them down has, in essence, failed to grasp one of the most basic purposes of modern fiscal policy: to ensure that when ordinary people lose their footing, the state does not walk away.
