Frontier Markets

Is Kenya’s Tax Policy Optimal?

By Anzetse Were

KenyaLast week a slate of new taxes were effected increasing the prices of goods such as bottled water, cars, beers and cigarettes. Although these items can be viewed as luxury items rather than essential commodities, the tax hike calls Kenya’s tax policy into question. The government has made it clear that it seeks to expand its tax base and rope in more individuals and businesses into the tax net as well as introduce new taxes to strengthen revenue generation. However, does the current tax policy contribute to or detract from revenue generation as well as economic growth?

On one hand are those of the view that current tax policies are subpar for several reasons. Firstly, some analysts argue that of the 2.4 million people who are formally employed, only 1.4 million (including corporations) are taxed. This is important because, according to the Institute of Economic Affairs (IEA), of the total tax revenue collected by the government over the last decade, the largest contributors are income tax, about 40% followed by VAT at 28%. Secondly, even of those taxed, the limited reach of the taxman, and laxity and corruption therein, facilitate tax evasion. For example, many businesses especially in the informal sector are not taxed; this should be rectified. Thus those in this camp are of the view that KRA can do more to expand the tax base, curtail tax evasion and collect more revenue.

On the other side of the equation are those of the view that Kenyans are over-taxed. In a country where 45% of the population lives at or below the poverty line, how much money can be extracted from such a population in the form of tax? Further there are tax equity questions; IEA makes the point that of the total labour force (15-64 years) of slightly over 10 million, less than 20% bear the burden of paying PAYE tax. Therefore the idea here is that government focus should not be on introducing new taxes or increasing taxes, effort should be placed on increasing levels of employment so that a larger portion of the labour force is formally employed and therefore can be taxed. This could eventually create scenario where higher overall employment widens the base of those taxable such that individual tax burdens can be reduced.

Another issue that ought to be considered in tax policy is the Laffer curve. The curve suggests that as taxes increase from low levels to higher levels, tax revenue collected by the government also increases. However, if tax rates increase after a certain point this reduces incentive to work hard or work at all, thereby reducing tax revenue. Where does Kenya’s tax policy sit on the Laffer curve? Such research ought to be done to determine if the current tax policy is optimal or not.

Finally, and perhaps this is the most compelling point: if Kenyans are of the view that their taxes are being misused and misappropriated in the form of corruption by public officials, there will be limited incentive to be tax compliant. Kenyans have the right to expect the provision of services from government in return for paying taxes. At the moment, there are far too many corruption cases pointing to the blatant misuse of public funds as a result, there is little reason for the average Kenyan to feel compelled to pay taxes. Therefore, the onus falls on government to demonstrate that taxes are being used appropriately and efficiently. Perhaps then incentive will be created in every individual and business in Kenya to be tax compliant.

This article first appeared in my weekly column with the Business Daily on December 6, 2015

Anzetse Were is a development economist based in Kenya and a weekly columnist for the Business Daily.  Twitter: @anzetse, email: anzetsew@gmail.com

About Anzetse Were

I'm an optimistic cynic. Born in Africa, raised all over the world, I have a passion to see Africa take its rightful place in the world. Long weary of the Africa bashing, continental character assassination and negative branding I am determined to ask: What can Africa do right particularly with regards to economic development? Most of my pieces will be on Africa's economies. Some pieces will be more formal than others but the guiding thrust is to become one of the growing voices that believe in Africa...We're here to stay. Follow me on twitter: @anzetse

Discussion

One thought on “Is Kenya’s Tax Policy Optimal?

  1. Reblogged this on World Peace Forum.

    Like

    Posted by daveyone1 | December 11, 2015, 8:37 pm

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