Excerpt : Focus on rebuilding the economy, not tax collection.
MORE TAXES WILL KILL THE ECONOMY
President Ruto wants Kenya Revenue Authority (KRA) to increase tax collections, up from Ksh 2 trillion in 2021/22 to Ksh 3 trillion next year and urged them to double the amount to Ksh 6 trillion by 2027. He also wants all Kenyans above 18 years to register for KRA’s Personal Identification Number (PIN). His logic is simple. Collect more taxes and the economy will grow. Besides, he will have more money to repay the public debt, and invest more in development. And he believes it is doable because President Kibaki has done it.
However, a cardinal rule during a recession is to not raise taxes since many individuals and businesses are suffering. Employers struggle to keep their business in operation and pay their employees. Individuals are concerned about a loss of income and paying their bills as the country records the highest joblessness in the region. The cost of living has skyrocketed and a majority of Kenyans can barely afford to buy food. When the economy is struggling, you cut taxes; when it’s booming, you raise them. That is basic Keynesian economics.
A major reason for the high cost of living is taxation, driven in the past decade by an insatiable appetite of the Government to live beyond its means. This led to massive borrowing to bridge the huge fiscal deficit. The Jubilee administration took over a public debt of sh 1.6 trillion, and raised it in 10 years to shs 11 trillion, including commitments. The argument was similar. The President wanted more money to invest in development – railways, roads, ports etc – and he argued the returns will soon be felt in the economy. Since our taxes were not enough for his plans, he opted for binge borrowing.
If President Ruto is not careful, his ardent desire for trillions more in taxes will spur increased spending in anticipation of taxes, leading to more debt, and
take us down the same route. His pledge during the campaigns was to revive the economy by lowering taxes, improving business environment, helping businesses to grow so that they can hire more people, increase incomes and wealth. Subjecting Kenyans to tax pressures will be counter-productive, and will subdue aggregate demand in the economy. In fact, it is time to pursue tax reforms radically in this country in order to level our business environment with countries in the region. It will also be necessary to review taxes downwards for small and micro businesses.
But are we collecting less taxes? The best measure globally is the tax revenues as a percentage of our Gross Domestic Product (GDP). This ratio for Kenya now averages 17%, more than the average for Africa of 16%. In Egypt and Ghana, the ratio is 12.5% and 11.3%. For Uganda and Tanzania, revenue collection is 11.4% and 11.7%, whilst Rwanda’s is 15%. Clearly, we are more efficient in revenue collection than most countries in Africa. In fact, our annual tax revenues are more than those of the other five East African countries combined.
The President averred that Kibaki increased tax revenues significantly. True, KRA collected sh 218 billion in 2002 but collected sh 845 billion in 2013. And the reason is the size of the economy. In 2002, our GDP was sh 203 billion but by the time Kibaki left, it was sh 707 billion. The growth in taxes was consistent with growth in the economy. The ratio was highest in 2014 at 19% but reduced in subsequent years to as low as 14% as Uhuru Government rebased the economy by increasing the GDP by 30% during his tenure. The near collapse of the economy in his last term was also partly to blame for declining revenues.
Kenya has been the leading business destination for investors in the past. We are losing the edge due to high cost of doing business, foremost being high taxes. It is worth noting that our tax rates are among the highest in Africa. President Kibaki shifted policy to the more equitable indirect taxes appropriately during his term and brough nearly all goods and services under Value Added Tax (VAT). Still, nearly 50% of our taxes come from direct taxes such as income taxes.
Our corporate tax rate of 30%, and taxes on employee income are among the highest in Africa. Comparative corporation tax rates are South Africa at 28%, Egypt 22.5%, Algeria 26%, and Ghana at 25%. Africa has the highest average statutory corporate tax rate among all regions, at 27.97 percent. Asia has the lowest average statutory corporate tax rate among all regions, at 19.62 percent. High tax rates stifles the economy and are part of the reasons several multinational corporations relocated from Kenya in recent years to countries such as Ethiopia and Egypt. In addition, the cheaper energy and freight costs enhanced the competitiveness of these countries.Tariffs on the vast majority of goods entering Egypt are below 15 percent. Manufacturers enjoy various export subsidies and assistance, including free or subsidized energy supply to enhance competitiveness. In Ethiopia, the Government removed tariffs and taxes levied on imports of food commodities such as wheat, sugar, rice, and edible oils to stabilize the rising food inflation in the country, from September 2021.
The Government should prioritize cutting its expenditure, and focus on facilitating businesses to grow. At the same time, it is necessary to review taxes in order to reduce the high cost of living. Jubilee spent nearly sh 25 trillion in 10 years and left the economy in shambles. If the President wants to save money, he should prioritize rationalization of his government, eliminate wastage and inefficiency. He can also seal corruption loopholes and save sh 2 billion daily. He needs not unleash KRA on a weak economy.
While it may be desirable to expand the tax base, it is illogical to get every Kenyan above 18 to register for PIN as potential taxpayers. Nearly 10 million are jobless, and millions more are farmers, pastoralists and jua kali folks eking a living.
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