Why Kenya Kwanza’s tax measures can backfire

Monday, November 20th, 2023 10:30 | By
Why Kenya Kwanza’s tax measures can backfire
President William Ruto during a past function. PHOTO/@HusseinMohamedg/X

Treasury mandarins must delve into the psychological and economic repercussions of this tax regime on the back of wobbling fiscal space, exacerbated by a challenging economic climate.

Crafting policies that not only address revenue needs, but also that stimulate economic growth, demands a keener eye on the ripple effects of taxes on businesses and individuals.

Unfortunately, it seems that concerns raised by both citizens and traders regarding the potential hindrance to growth under the new tax regime have hit a snag.

The debate, particularly surrounding the contentious issue of fuel costs intensified by the doubling of Value Added Tax (VAT) from eight to 16 per cent, is beginning to reveal its far-reaching effects.

As former US President Winston Churchill aptly put it, taxes are an “evil” — a necessary one, but an evil nonetheless. The recent warning from the National Treasury of a potential loss of up to Sh133.5 billion in projected revenue for the current financial year, due to decreased demand for fuel and a drop in the number of motor vehicles, underscores the severity of the situation.

In response to the new tax measures, Kenyans are proactively adjusting their consumption patterns, particularly in products such as beer, spirits and cosmetics, which have borne the brunt of these changes. Industry leaders, including London Distillers chair Mohan Galot, echo concerns voiced by Kenya Breweries, warning of a potential collapse in the sector.

Galot’s warning about the upfront payment of excise duty and heightened taxation makes it impossible to sustain manufacturing and serve the market paints a grim picture of the economy.

These signs, as Galot suggests, indicate that the centre may no longer hold, pointing to a pressing need for a reassessment of the current taxation framework.

Amidst these challenges, the State would be wise to heed the economic wisdom in Prof Arthur Laffer’s curve, after high taxes hit Kenyans hard making them grapple with reduction in their take-home pay.

Laffer argued that this means less total revenue is imminent as tax rates rise and that the economic effects of reducing incentives to work and invest by raising tax rates damages the economy.

The age-old reminder by Prof Laffer about the potential decline in citizens’ motivation to work harder under excessively high tax rates is becoming evident, with employers scaling back efforts, entrepreneurs hesitating to invest and innovation stagnating.

Further, individuals are resorting to strategies to minimize taxable income, while others explore less savoury means to avoid contributing to revenue. The growing reluctance to use of paybill numbers by traders and a shift towards cash or straight M-Pesa transactions highlight the impact of higher taxes on daily transactions.

While the Laffer Curve is just a theoretical construct and the tax regime subject to debate, it serves the administration as a reminder of the delicate balance policymakers must strike. This is because finding the sweet spot in taxation will be essential to incentivize entrepreneurs to sustain economic growth.

But faced with the consequences of the current tax regime, the leaders have no choice but to consider changing their approach, hoping that valuable lessons about the delicate balance between taxation, incentives and economic prosperity have been gleaned.

This change is essential to ensure that citizens can pursue their dreams and contribute to the nation’s success without feeling unduly burdened by excessive taxes.

Churchill advised that for a nation to try to tax itself into prosperity, it is like a man standing in a bucket and trying to lift himself up by the handle.

The road ahead is challenging with Sh2.58 trillion in ordinary revenue projected tax receipts hanging in the balance. A change in tack is not merely an option but a necessity for charting a course towards sustainable economic growth and prosperity.

—The writer is the Business Editor, People Daily

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