Kenya: High Taxation Will Ruin Uhuru’s Big Four Agenda!

Published on 4th September 2018

There is a growing demand that Kenya’s government provides quality and sufficient roads, security, hospitals and schools, among others, but all these things are expensive. Governments across the world raise their revenue for such functions through taxation.

Basically, government can tax three things: income, consumption and/or wealth. In Kenya, the income tax and the consumption tax which includes Value Added Tax have been increasing over time. This has not been good for economy.

Firstly, the problem with consumption tax increase is that it tends to hit the poor- who form the majority, hardest.  For the poor to make ends meet, they tend to spend less. They also tend to spend on non-taxable commodities.

Secondly, empirical evidence shows that increase on income tax, including corporation tax, discourages people from working hence affecting productivity. These definitely have negative implications in overall tax collections. Besides, several economists now argue that countries with lower income taxes such as the United Kingdom tend to have faster economic growth.

In contrast, it appears that increase on wealth tax such as Land Tax - where tax is levied on the value of any serviced land - could be a better option for additional revenue than increasing taxes on income and consumption; as it targets a few rich people. Ideally, increasing wealth tax is unlikely to have adverse consequences compared to the hike in income and consumption tax.

However, increasing taxes on wealth is politically problematic and no sane government would want tread on such dangerous ground. The rich are so resourceful and they enjoy unparalleled influence across any polity such that it wouldn’t be at all difficult for them to galvanize a revolt.

There has been a proposal by some legislators that the government should extract more taxes from the rich instead of increasing taxes on fuel, albeit this is because legislators believe it is the rich who have money. The proposal does not seem to care that the rich are already under a heavy tax burden inherent in the progressive tax system. Moreover, it is important to note that the proposal of increased tax burden on the rich is not only discriminatory but also immoral.

The progressive tax regime is based on the principle of ability to pay as opposed to the benefit principle. In the latter principle, individuals pay taxes in proportion to the benefits they receive from government spending. By and large, government expenditures are disproportionate in the welfare functions which rarely benefit the rich. Also, if we target the rich for more revenue, they are likely to hide their money from the taxman and in doing so, fail to use their money in ways that are productive for job creation and economic growth.

So, how can the government raise the much needed revenues to fund the big four agenda?

It is the British novelist George Orwell who wrote that some ideas are so foolish that they could only come from intellectuals. The legislation to raise more revenue by increasing tax on fuel was not only insensitive but also self-defeating as it missed to see the likely depressing-ripple-effect in the economy from such action. It appears in the face of pressure for more revenue to fund government’s Big Four: jobs, food security, better healthcare and affordable housing, the treasury experts appear to have gone for the easy-commonsense-option, let’s raise taxes on fuel. The lack of innovation in this tax strategy is likely to give government high taxes on paper, but treasury will not collect anywhere near their target.

A nineteenth century British economist, John Maynard Keynes, cautioned governments against the appetite for tax increase as this would prove  He counterproductive in the long run. Accordingly, the recent fuel price hike as a result of tax increase could end up defeating the Kenya government’s tax objective. It is axiomatic that human beings act in a rational and self-interested manner. The taxpayers are likely to change their consumption behaviour as changes in fuel prices affect commodity prices, and the reduced consumption will in turn affect revenue collections.

Some economists have pointed out that there is compelling historical and empirical evidence that raising taxes does not necessarily bring in more revenue. In an essay titled, “Trickle Down Economics” and “Tax Cut for the Rich,” Thomas Sowell, an American economist and a Senior Fellow at the Stanford University, argues that the eighty years of twentieth century, through four different administrations in the United States, point to the fact that government collects more taxes when it lowers taxes. Sowell writes that in United States from the 1920s, President Calvin Coolidge, a Republican executed for tax cuts. In the 60s, President J.F. Kennedy, a Democratic lowered taxes. In the 80s, President Ronald Reagan, a Republican did cut taxes. In 2000, President George W. Bush, another Republican also reduced taxes. In all these periods, there was increase in economic growth, reduced joblessness as well as revenue received.

While the taxman continues overtaxing citizens, he still struggles to hit revenue targets. Isn’t it  time that President Uhuru Kenyatta considered doing away with this oppressive fuel tax and lowered other taxes to attract more economic activities for growth and more revenue to fund the big four agenda?

By George Nyongesa

[email protected]

This article has been read 12,144 times