Nigeria’s drive to raise tax revenue by widening the tax net faces a fundamental constraint as millions of workers and businesses earn too little to contribute significantly to government coffers, making economic productivity as important as tax compliance.
The government estimates that Nigeria’s tax-to-GDP ratio has risen to 13.5 percent, from less than 10 percent at the start of the President Bola Tinubu administration, and is targeting 18 percent as its tax reforms take effect.
Closing that 4.5-percentage-point gap would require the government to collect substantially more revenue relative to the size of the economy, putting greater focus on both tax administration and the ability of businesses and individuals to generate taxable income.
The central question is therefore whether Nigeria can achieve its tax ambitions simply by identifying more taxpayers or whether it must first create a larger pool of profitable businesses and better-paying jobs from which sustainable tax revenue can be generated.
“Nigeria can’t sustainably tax its way to significantly higher revenue without first expanding the number of people and businesses earning enough to contribute meaningfully to the tax base,” said Yvonne Afolabi, a Lagos-based tax and investment expert.
According to Afolabi, tax reforms should go alongside investment in small and medium-sized businesses, infrastructure, skills and productive sectors of the economy.
“The objective should not be to extract more tax from the existing formal base, but to grow the base itself,” she said.
The argument comes as Africa’s most populous economy rejigged its tax regime for the first time in decades with the aim of improving compliance, broadening its base, and making tax administration more efficient.
Taiwo Oyedele, minister of finance and coordinating minister of the economy, has repeatedly argued that Nigeria’s revenue problem is not primarily that tax rates are too low but that too few eligible taxpayers pay taxes.
The government has also stressed that the reforms are designed to improve fairness in the system rather than simply increase the burden on individuals and businesses already paying taxes.
That position addresses the compliance side of Nigeria’s revenue problem. But the country also faces a productivity challenge.
The latest available labour-force data show the scale of that challenge. Available data from the National Bureau of Statistics showed that 93 percent of total employment was informal in 2024.
The unemployment rate, meanwhile, stood at 4.9 percent by the end of 2024 under the revised labour-force methodology.
The figures highlight an important distinction in Nigeria’s tax debate: being employed does not necessarily mean earning enough to generate significant taxable income.
A large informal workforce means millions of Nigerians are economically active through self-employment, small businesses and other activities that may generate income but remain difficult to capture fully through conventional tax administration.
Nigeria’s tax challenge is therefore not simply to move more people into the tax register. It is to increase the amount of income and profit generated by the people and businesses already participating in the economy.
That requires investment. Businesses with access to affordable finance, reliable electricity, transport infrastructure, digital connectivity and skilled workers are better positioned to increase production, employ more people and generate sustainable profits.
As businesses grow and workers earn more, the pool of taxable economic activity expands.
The Bank of Industry provides one indication of the potential role of financing in that process.
The development finance institution said it disbursed a record N636 billion to businesses in 2025, its highest annual financing volume, supporting more than 7,000 businesses.
The Presidency said the financing supported or sustained about 1.6 million jobs.
The figures illustrate how access to capital can support productive activity, although the amount of financing disbursed or number of jobs supported does not by itself establish how much additional tax revenue the businesses will eventually generate.
The more important question is whether such financing allows enterprises to move from survival to sustained growth.
Nigeria needs businesses capable of increasing turnover, investing in equipment, employing workers and generating taxable profits, rather than simply expanding the number of registered enterprises.
This is particularly important for small and medium-sized businesses, which account for some 96 percent share of economic activity but often face high financing costs, unreliable infrastructure and other constraints that limit their ability to scale.
Without addressing those constraints, stronger tax enforcement could increase the number of registered taxpayers without producing a proportionate increase in revenue.
But Nigeria cannot simply wait for businesses and incomes to grow before collecting more taxes.
The government needs revenue now to finance infrastructure, education, healthcare and other investments required to raise productivity. This creates a fiscal cycle in which taxation and investment have to reinforce each other.
A wider and more efficient tax base can provide the government with resources to invest in the economy, while investment in businesses, infrastructure and human capital can create the jobs, incomes and profits needed to sustain a larger tax base.
That makes the government’s 18 percent target more than a test of the tax authorities’ ability to identify and collect from taxpayers.
It is also a test of Nigeria’s ability to expand the productive economy from which those taxes are generated.
“As more Nigerians move into productive employment and SMEs become more profitable and formalised, government revenue naturally increases,” Afolabi said.
For Nigeria, the success of tax reform may ultimately be measured not only by how many taxpayers are brought into the system, but by how much taxable economic activity the economy is able to create.
The more businesses that grow, the more workers who move into productive and better-paying employment, and the more income and profits they generate, the stronger and more sustainable the country’s tax base becomes.
