BREAKING: Nigeria’s total external trade rises to N41.44 trillion in Q2 2026

Nigeria has set a fiscal target to collect tax worth about ten percent of the economy's size in 2023, aiming to increase that share to eighteen percent in coming years. While the goal sounds reasonable, it overlooks a crucial distinction between building a bigger tax state and developing a larger taxable economy. These two are not synonymous, and only the latter can make a country prosperous.

The target itself can describe four different outcomes. It might indicate more Nigerians becoming productive, formal, and taxable— a genuine success, or the government simply drawing more from the limited pool it already has access to, such as salaried workers and listed companies. Alternatively, it could reflect inflation-driven tax receipts while the real economy remains stagnant, or an increase in collections without any growth in the economy itself.

This single number fails to reveal which scenario is at play, yet we treat it as a straightforward measure of the government's performance. A historical perspective illustrates this point. Even wealthy nations like Europe and North America collected less than a tenth of their national income in tax during their industrialization period in the 19th century.

It wasn't until the 20th century that they reached a third or more of their national income in tax, long after they had already achieved wealth. Similarly, South Korea and China grew faster while collecting less tax relative to their economies than Western states. In these cases, a taxable economy first needed to be built, and only then did the tax take rise.

Nigeria's situation now is different: the pressure is to raise tax collections before the economy follows. The recent tax reforms in Nigeria, which widened the tax base, simplified the tax code, and lifted low earners out of income tax, demonstrate a focus on building a larger taxable economy rather than just extracting more revenue.

However, the public focus on the eighteen percent target might inadvertently measure the wrong success. If Nigeria achieves this target by increasing tax burdens on formal businesses, raising consumption taxes, and placing more pressure on salaried workers, while leaving the informal majority untouched, the economy could stagnate, and the country might not move closer to a trillion-dollar economy.

The real reason Nigeria collects a low tax share is the informality of its economy— the absence of records, registrations, and titles. The lasting solution to raise the tax take lies in formalizing the economy first, which will naturally lead to an increase in tax collection. Ultimately, the transition from an oil-funded state to one funded by citizens' taxes will change the relationship between the government and its people, moving from a state funded by crude to a more accountable state funded by its citizens.