Opinion and Analysis
Times Towers, Kenya Revenue Authority headquarters. PHOTO | FILE |
NATION MEDIA GROU
By ANZETSE WERE
In Summary
- Taxman should widen base to rope in individuals and businesses that do not pay up.
Last 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 move 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 ones to strengthen revenue generation.
But 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.
First, 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 per cent, followed by value added tax at 28 per
cent.
Second, 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 Kenya
Revenue Authority can do more to expand the tax base, curtail 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 per cent 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.
The IEA makes the point that of the total labour
force (15-64 years) of slightly more than 10 million, less than 20 per
cent bear the burden of the pay-as-you-earn tax.
Therefore, the idea here is that government focus
should not be on introducing new taxes or increasing them, effort should
be placed on creating more jobs 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 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 in
the form of corruption by public officials, there will be limited
incentive to be tax compliant.
Citizens 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.
Anzetse is a development economist; anzetsew@gmail.com.
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