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« Science and Technology: Active Filters (Lab Report) | Main | Ozodi Osuji Lectures #22: Introduction to Corporate Finance »

November 03, 2005

Ozodi Osuji Lectures #21: Introduction to Public Finance

by Ozodi Thomas Osuji, Ph.D. (Seatle, Washington) --- In the preceding twenty lectures on politics I established why human beings need political systems. A political system has to be managed. People make demands on their political system. The political system translates demands made on it into public choices and public policies. Public policies must be financed. The money to finance public policies must come from somewhere. Where is that money going to come from?

Public finance addresses the question: where will revenue to fund public policies and run the political system come from? It is one thing to talk about what government should be doing and another to be able to finance them. In the real world, every activity has costs and someone must pay for it.

We live in a world of scarce resources, a world with opportunity costs. Resources are finite; resources devoted to one area are not available for other areas; therefore, we must make public choices. We must decide what areas we devote more resources and what areas less. To start with, we must have the resources. How do we obtain the money to run our governments?

Public finance ought to be taken very seriously in Nigeria and, indeed, in all of Africa. You see, Africans expect an awful lot from their governments. They don’t always concern themselves with where and how their governments would obtain the resources to finance the enormous demands they make on them.

Not only do many Africans not bother themselves thinking about where their government obtains resources, they do not even want to pay taxes. They just want their government to do certain things for them and complain when those things are not done for them. But they do not ask where their government would obtain the revenue with which it would do those things. In fact, in those instances where taxation exists, many Africans do their best to avoid paying taxes and yet these folks expect their governments to deliver public services to them. This is infantile thinking and behavior. Adult thinking and behavior knows that we must pay for whatever we get out of life, for life does not give human beings free food. There is really no free lunch in life, as economists never cease telling us.

To the best of my knowledge, many Nigerians do not like to pay taxes and generally do not declare their income completely so that they would be appropriately taxed. This resistance to paying taxes has a long history in Nigeria. In 1929, the British colonial government tried to tax folks in Alaigbo and the people went on a war path. The women literally rebelled. To them, government should not ask them to pay tax.

One then must ask: how on earth is government supposed to obtain the revenue with which to run its activities? Or don’t we need governments? The Igbos did not have Alaigbo wide government and were not used to paying annual income taxes to support governments. The idea of taxes was foreign to them.

Well, if you are going to have governments, as we must in the modern polity, you must have taxes to fund them. We have no choices in the matter, unless, of course, we revert to primitive anarchy and have no governments. In the modern polity, the question is not whether there should be taxes or not, but how much taxes? The real question is whether twenty percent or more of the individual’s annual income should be taken in taxes?

There is nothing as certain in modern life as taxes, changes and death. One might as well get used to these facts, for one cannot avoid them. Trying to avoid them is futile, reality ought to be accepted as it is and efforts not made to deny it.

In Nigeria, those who claim to be in private business seldom pay appropriate taxes; when they do pay taxes at all, they pay the most minimum tax. Each local government area has basic taxes for the people especially those assumed to be farmers and are poor. These taxes amount to a few dollars per individual. No government can maintain itself in existence with such paltry revenue. Therefore, if business men who make lots of money pay these basic individual taxes, they are cheating the government of useful sources of revenue with which to operate its activities.

Nigeria’s governments’ personnel are generally too lazy to go chasing people for taxes. This situation results in very little revenue collected from taxes. The end result is that Nigeria’s governments end up with little or no revenue to fund their public policies.

Nigeria is fortunate in that despite not obtaining appropriate tax revenues, there is revenue from oil. Nigeria relies almost exclusively on oil for its revenue to run its activities. The Federal government of Nigeria’s budget is funded primarily through oil revenue (over 90%). The states come to the federal government, hats in hand, begging for money with which they run their state governments. Some of these governments rely exclusively on their share of the federal revenue sharing to run their state governments. That is to say that they do not generate their own incomes with which to run their governments.

Question: if the states are funded by the federal government, how can they be independent of the federal government? Nigerians talk a lot of wanting true federalism in the country, how can that be possible if they entirely depend on the federal government to fund their governments? He who pays the piper dictates the tunes. As long as the Federal government funds state governments, states cannot be really equal with the federal government.

We cannot have true federalism unless each state figures out a way to fund its own activities independent of the federal government. Where the federal government has money to extend to states, it should do so on a competitive bases, as in the USA where states and non profit organizations compete for Federal grant monies with which to run certain designated projects and must account for how every penny of such money is spent to the Federal government.

In the Nigerian context, the Federal government obtains its money from oil revenue. Since oil comes mostly from Southern Nigeria, it follows that money from one section of the country is used in running all the country. Obviously this may not seem fair to those areas where oil is coming from. Clearly, we have to figure out a different way of funding the federal and state governments other than reliance on money from oil producing states.

From a purely rational calculation, it is silly to obtain ones revenue from only one source, oil. Oil is an exhaustible resource. Suppose oil is exhausted, then what? Suppose the West finds alternative sources of energy to power its economy, and stop buying Nigerian oil, then how is Nigeria going to fund its activities? Sooner or later, solar energy will become the main source of energy in powering Western economies and at that point Nigeria would not be able to sell its oil and would, one supposes, join the failed states of Africa?

Prudence suggests that one should not put all of ones eggs in one basket. The Nigerian economy must be diversified, so that revenue would be obtained from several sources to run the governments. But then again thinking and planning seems not one of the strengths of Nigeria’s present chop-chop politicians.


Generally, governments obtain their revenues from taxes. Individuals and businesses engage in economic activities and make profits. Out of their profits governments tax them. Taxing means taking people’s incomes and with such monies run governments. Taxation is a critical source of government revenue.

There are several types of taxes: individual income taxes, corporate or business taxes, sales taxes, value added taxes, property taxes and royalties. Let us briefly explain these.

Each individual is a unit of economic activity. He has annual profits and losses. Each year (actually, monthly or quarterly) he declares, or should declare, his total income to the various governments in the country: federal, state and local. These governments determine how much of the individual’s income should be taken in taxes. There is no ideal percentage that governments should take in taxes. The polity, through its legislators, makes the decision as to how much to charge individuals and businesses in annual taxes. The range is as low as twenty percent to as high as fifty percent in Scandinavia.

From a purely rational point of view, it makes sense for the government to take at least 20% of each individual’s annual income in taxes.

Governments must obtain money to run its affairs and that money ought to primarily come from individuals and businesses.


There is an advantage to individual taxation. If individuals’ pay taxes, they are more likely to be interested in how their governments spend their money. They would want proper accounting procedures used in accounting for how their monies were spent. They want to know how public officials spent their money and whoever misspent a penny of the people’s taxes ought to be sent to jail for no less than twenty years (hard labor).

At present, Nigerians really do not pay large taxes; at least, not enough to support their governments hence do not feel the pains of running their governments. As noted, their governments are run with oil money. Since individual Nigerians are not paying for their governments, they do not feel the burden of having governments. Why should their governments account to them how they are spending their money, when they are not paying taxes?

If people paid taxes and government officials were required to account for how they spent public funds, perhaps, the ridiculous high incidence of corruption in Nigeria would be reduced?

In my view, 20% is the minimum individual Nigerians should expect to pay in Federal annual income tax. State and local taxes should not exceed 15%. Therefore, one anticipates a scenario where 35% of the individual’s income goes to federal, state and local taxes. With this revenue stream guaranteed, governments can do those things that we expect them to do.

We cannot expect governments to do certain things for us without giving them the resources to do them. It is ridiculous not to pay taxes and then expect governments to provide society with public services like education for all children under age 22 (K through bachelors degree, or technical degree), public health insurance, national security, activities now generally accepted as rightfully performed by the government for all citizens.


Corporate taxes are taxes levied on businesses. Corporations are considered separate persons and their profit and loss are calculated as if they are individual human beings profit and losses and taxed accordingly. Sole proprietors and partnerships do not pay corporate taxes, but, instead, the owners of such business are assumed not separate from them; their businesses profits and loss are taxed as the individual owners’ incomes.

Different countries have different corporate tax structures. A rule of the thumb is to tax them as we tax individuals. If the total tax on the individual in a polity is 35% annually, corporations should also pay 35% annual income taxes. This would breakdown to something like this: 20% federal corporate taxes, 10% state corporate taxes and 5% local government area corporate taxes. (State and local taxes are, of course, paid in the state where the individual and business is located; given this lucrative source of revenue, states and localities would be struggling to attract businesses to them and to make themselves business friendly.)


Some governments, federal, state and local, obtain revenue from sales taxes. A unit of government, for example, may levy 5-10% tax per dollar on goods and services sold in it. Sales taxes are also added to restaurants and hotel bills.

Ideally, no unit of government should have more than 5% sales tax. Assuming 5% sales tax per unit of government in Nigeria, this would translate to 5%, federal sales tax, 5% state sales tax and 5% local government area sales tax, for a total of 15% sales taxes. 15% sales tax seems fair enough. Governments must obtain revenue to fund their activities.

Sales taxes tend to be regressive since they essentially tax every person at the same rate. It does not matter how much income the individual has, when he buys something he must pay the same sales tax on it. This seems unfair since the rich can afford to spend more money than the poor. One way to mitigate this apparent unfairness is to eliminate sales taxes on food, or reduce it on food, while charging more on luxury goods. If a man is buying a Rolls Royce at $250,000, he is obviously rich and one does not see why he should not be required to pay 35% sales tax on that unnecessary item of conspicuous consumption.

Property taxes are generally levied on houses, lands and other properties (real estate). In most American cities, city governments collect property taxes on houses in their area of jurisdiction. Generally, the city levies say $1 or $2 per $1000 worth of the house. Let us say that a house is worth $250,000 (current appraised market value); the city would tax that house $250/$500 annually. With this money, cities perform their city activities, including running schools.


Value added taxes (VAT) are very tricky to calculate, for it is difficult to determine what constitutes value added. Let us say that a restaurant bought food items and added value to them to prepare the cooked food it sells to its customers. How do you determine the worth of the value added to the raw material before they were cooked? Be that as it may, governments tend to have VAT on assorted manufactured goods. This source of taxation is very controversial.


Sometimes, governments permit private businesses to mine minerals and pay them a certain percentage of the sold minerals. Let us say that oil companies explore and mine oil in a country and sell them at $60 dollars per barrel of crude oil. The government may charge them 33% on each barrel of oil they sold. This source of revenue is considered royalty.


Governments, particularly state and local governments, charge licensing fees for assorted services, such as car registration, drivers’ license, professional/occupational licensing, business licensing, airport taxes, seaport taxes, city parking, using national parks etc. At the municipal level, cities charge licenses for activities in the city. There are a myriad of items that governments charge money for and these generate funds for governments. For example, to use national/state parts (forest reserves) fees are charged. These generate monies to operate the activities for which fees are charged for.


Given the problems with the various forms of taxes, some people ask for what they call flat taxes. In flat taxes, the government levies every person the same flat rate, say 20% on their annual income, irrespective of the amount of money made. This is different from the present progressive tax structure we have in most capitalist economies.

In progressive taxation, the amount paid tends to be lower at the lower end of the income continuum and higher at higher levels. Let us say that a person makes $10, 0000 a year and is taxed at 10% whereas a man makes $100, 0000 a year and is taxed at 20% a year.

Russia has flat taxation of 17% on all income levels. Russia is hardly a country to be emulated by Nigeria given that its economy is in shambles, besides Russia is a newcomer to the capitalist game and really does not know what it is doing. The West is our realistic source of example.

Advocates of flat taxation seem to have interesting points but our goal in this lecture is not to debate the finer points of the economy and taxation policy. Such debates are left to more advanced lectures.


Governments sometimes borrow money with which to fund their projects and repay the borrowed money in the future. The most common form of governmental borrowing is bonds.

Federal, state and local governments borrow money through issuing bonds. Let us say that a local government wants to build a secondary school and does not have money in hand to do so. Let us say that the cost of construction of the school is assessed at $2 million dollars. The local government council and chair passes a resolution to borrow $2 million dollars in the form of bonds. It obtains State approval for it to do so. It then arranges with a financial institution, such as a bank to sale the said bonds for it. The bonds are printed by those who specialize in such things. The units could be $1000 each. What this means is that a citizen and or business that has money to spare goes to the bond seller and buys one bond for $1000, or two or more bonds (each at $1000).

The buyer of said bond has, in effect, lent the government money and the government promises to repay him (his principal) in so many years (usually 10-30 years). In the meantime, the government pays him annual interests on his money (anywhere from 3-5%). Each year, the individual receives five percent or so on his lending to the government and at the end of the agreed upon time (bond maturity date) the government gives him back the face value of his principal ($1000 per unit purchased.). Let us assume that the individual bought 1000 units of the said bond and gave the government $1000, 0000 dollars. Each year he obtains 5% (that is $50,000) and at the end of the agreed time, say, thirty years, he receives his $1 million back.

Governments that borrow a lot of money in the nature of bonds will not only pay a lot of annual interests (debt finance) but will repay the principal. So how do they obtain the revenue to pay the interests and the principal upon its maturity? Would the financed project, in our example, a secondary school, make some profits with which to pay off the debt finance and principal? Suppose the project so financed is a bridge, would it make sense to charge tolls on it so as to recoup the cost? (Onitsha Bridge needs to be rebuilt, how is it going to be financed? Would bonds make sense? Would tolls make sense?)


National governments like the Nigerian government can borrow money from foreign banks and or from international financial institutions like the World Bank (usually for long term financing, say thirty years), International Monetary Fund (for short term financing (say a few months to a few years). The Big banks like Chase Manhattan, City Bank and Bank of America have money to lend money to governments. The Federal government can borrow from these International Monetary Institutions for its activities or for its states and local governments.

Nigeria owes many foreign banks lots of money. In the news is Obasanjo government’s efforts to either refinance its debts, at a lower interest structure or have some of them forgiven it, written off by the European banks they are owed. These debts are usually guaranteed by the lending banks home governments, so, in effect, writing off the debt means that the home country agrees to repay the commercial banks that Nigeria owes. European governments, the so-called Paris club, agree to pay their commercial banks the amount of money Nigerian governments had borrowed from them. In effect, European taxpayers agree to give Nigerian crooks money to lavish on themselves.

(Do you think that this is a good idea? Should Euro-Americans be financing our local crooks in Nigerian government? Should our irresponsibility be paid by foreigners? I am just wondering whether we should be treated as children. Shouldn’t adults pay back what they borrowed even if they wasted it?)

There are many other sources of public financing, but the above ones are the most usual ones.


Politicians and leaders must be aware of how their governments obtain their revenue and pay attention to how such money is spent. When we deal with basic accounting, we will point out that leaders must be able to read financial statements, budgets, monthly financial reports etc and be able to supervise how government spends its money.

The average citizen must accept the need to pay taxes if he wants to have a government. The question is not whether there should be taxes or not, but how much is necessary to produce the revenue the various governments in a polity need to function annually?

The polity decision makers must determine what constitutes appropriate level of taxation and then enact it into law. Once made law, taxes must be collected. Vigorous efforts must be made to collect taxes. The internal revenue service (IRS) must collect every penny due to governments in taxes by the various sources of taxes.

Those who fail to pay their appropriate taxes ought to be arrested and prosecuted to the fullest extent of the law. Twenty years in prison for tax evasion, I think, is the least punishment that ought to be meted out to tax evaders.

The details of how to collect taxes from individuals, businesses, restaurants, stores etc is beyond the scope of this lecture. This lecture merely wanted to call attention to the fact that governments need revenue to fund their activities and mention some of the means of generating government revenue.

Ozodi Thomas Osuji

Posted by Administrator at November 3, 2005 12:24 PM


nigerian banks were known to generate their earnings through import financing, after the consolidation process can i be comprehensively educated on how banks will be generating thier revenue/earnings aftermath of this.

Posted by: andrew nwaobasi at December 28, 2005 02:26 PM

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