Tax Rises Pose Greater Economic Crisis

Times Tower

June 5, 2018//-In the words of Abraham Lincoln, a crisis is looming, and given the truth, the Kenyan people can be depended upon to resolve it.

Economists and tax experts agree that Kenya is no doubt a high tax burden country – the State is too being for the taxpayer to fund – and is one of the structural causes of its stunted growth. Kenya’s highest sustained per capita growth rate in modern memory is 4.5 per cent achieved in 2006-2008 and never to be seen again.

Kenya’s Tax-to-GDP ratio stands around 20 per cent, the highest within the region whose average stands at 14.8 per cent, and also among the highest in Africa whose average is 13 per cent.

To explain it in a clearer sense, the Kenya Revenue Authority (KRA) collects Sh3.7 billion every day in taxes whilst Ethiopia which is ranked as one of Africa’s fastest growing economies with the second largest population and a non-resource dependent economy like Kenya, collects only Sh2 billion every day.

To analyse this structural problem further, we can use the sub-Saharan Africa average trends since there is no available information from KRA on the breakdown showing the contribution of various taxes to overall revenue contribution.

In sub-Saharan Africa, income taxes contribute about a third in overall revenue collection with more than half coming from corporate income taxes. Looking further, it’s the top hundred firms who pay more than half of corporate taxes, which is more than a quarter of all income taxes.

With the proposed Income Tax Bill 2018 introducing a higher corporate tax of 35 per cent for firms that earn more than Sh500 million a year, a number of these top 100 firms that pay more than a quarter of total income tax in response will be scaling down their operations in Kenya because the incentive to earn more has shrunk.

The proposed income tax bill also introduces a new tax rate of 35 per cent for individuals earning more than Sh750,000. But majority of individuals who fall under this tax bracket actually belong to those top hundred firms that will most likely be scaling down their operations in Kenya.

Apart from raising income taxes, speculation is rife that a proposal raising VAT from 16-18 per cent is also expected.

Now the big question about tax increment in Kenya is about the return on investment for the taxpayer whose government spends Sh6 billion every day?

Despite the high level of looting of public money, where a third of the budget is lost through corruption, there is also unprecedented level of wastage of public money for an economy like ours which ranks among the bottom 25 per cent poor economies in the world.

One of the glaring example of massive wastage is that, according to data from the registrar of motor vehicle, 15 per cent of vehicles registered in Kenya are in the name of public sector institutions.

To paint the picture better, the total number of vehicles in Nairobi alone is more than all vehicles in the whole of Ethiopia. 15 per cent of all vehicles registered in Kenya is actually more than the numbers of cars in Malawi – bought and fuelled by the taxpayer.

So the fundamental question is, does the benefit of collecting more taxes exceed the benefit of leaving that money with the taxpayer to spend and invest in the economy? Because there is no roller coaster that goes up only, at some point it has to go down.

Despite Treasury pushing for fiscal consolidation to halt and reverse out of control government spending, government is still expected to spend more than Sh6 billion every day in the next financial year.

So unless Kenya undertakes a radical scaling down of government spending translating into tax cuts, it will continue to reside among the bottom 25 per cent poor economies in the world.

Photo Gallery

Log in | Designed by Village Pixels