Mr President, in the past few weeks, your administration has claimed that Kenyans are undertaxed. In the process, officers in your administration have come up with a ratio to demonstrate this fact: the tax-to-GDP ratio. In their submission, they claim that because our tax-to-GDP ratio of 15.3 per cent is low, we are undertaxed.
Tax-to-GDP ratio is a percentage calculated by taking the revenues generated from taxes, over the total GDP of the country. The tax revenue here includes income tax, both individual and corporate, value-added tax as well as duties, including customs and excise. With this understanding, it is clear that the ratio cannot be used to determine whether a country is overtaxed or not, with reasons.
The first is efficiency. Tax revenue can be low, not because of low tax rates, but because of inefficiency in collection. There are areas in the economy wherein we lose taxes not due to fraud but inefficient systems or overly complicated systems of tax collection.
In the end, the revenue collected speaks more to the collection systems and processes than to tax rates. In this case, a proper tax management system is necessary. I have recommended the globally recognised extensible business reporting language (XBRL) to your officers at Treasury to minimise leakages in financial and business reporting and enhance tax collection.
The second reason why tax collection could be low is rent-seeking. Last year, you mentioned that Kenya’s stamp duty collections are comparatively lower than those of our neighbours, mostly because of corruption. This was confirmed by your predecessor, President Uhuru Kenyatta, who went on record that a third of our expenditure is lost to graft.
The third reason is an economic theory known as the Laffer curve effect. In simple understandable terms, the Laffer curve theory stipulates that at a 0 per cent tax rate, you will have 100 per cent tax collection – everyone is willing to pay zero taxes. At 100 per cent tax rates, you will have zero compliance and collection — no one wants to give all their income to the government.
This means every tax man must find the sweet spot, a point of balance where the tax rates and collections give the most optimal collection. Consequently, you can have high rates, and low revenue collection because of poor compliance or negative effects in the economy. This was especially demonstrated when the Kenya Revenue Authority (KRA) increased the tax on mobile calls and data. Higher rates brought in less revenue.
You were misadvised
In the statements by your officers, they’ve said Kenyans are taxed less than South Africans and other major economies in Africa. I fear that on this one too, you were misadvised. VAT in South Africa is 14 per cent. Taxable income is 95,750 Rand per annum, equivalent to Sh57,000 per month. Low-income earners are protected against retrogressive taxation. With these friendly rates, South Africa has a tax-to-GDP ratio of 25.1 per cent. Tax collection has more to do with efficiency than rates.
In Nigeria, VAT is 7.5 per cent. Income tax for individuals begins at seven per cent and terminates at 24 per cent. Their tax-to-GDP ratio is five per cent. Nigeria’s tax rates are intentionally low to attract investment — a strategy whose outcome is evident.
In the East African Community (EAC), your administration is right in the comparison. All the EAC member states charge 18 per cent VAT with an average income tax of 30 per cent. Sadly, these higher rates lead to lower collections. No wonder most ratios in the region are lower than Kenya’s, with Tanzania’s being 11.8 per cent, Uganda at 11.1 per cent, DRC at 7.5 per cent and Rwanda at 15.06 per cent.
A wholesome observation reveals that our neighbours like Tanzania produce adequate food locally, and have comparatively lower prices for their food compared to Kenya. Consequently, even though they charge higher VAT, it is on items whose prices are already low. Kenya, on the other hand, is a net food importer, which means that before VAT is charged, the prices are already high.
There is a fallacy of fairness in our tax system. The Kenyan tax base is comparatively larger than most of its counterparts in Africa as I have demonstrated, but still lean compared to the total capacity.
The informal sector needs to be formalised for the government to know who is able to pay taxes. While the rates might look reasonable, we have layered taxes; too many levies, and duties that add up to push the cost of living higher. There are ridiculous charges by some government agencies and departments, which make mwananchi to feel the pinch when the treasury imagines the tax rates are reasonable and fair.
Mr President, with all these facts, it is proper to conclude that Kenyans are overtaxed, and need a reprieve.
As a way forward I would make three recommendations. First, I’m convinced you are the only one in this country who can successfully fight and uproot corruption. Killing corruption will get you to your targeted ratio of 22.5 per cent without any of the changes contained in the Finance Bill 2023. Repatriation of our monies stashed abroad will also go a long way in helping us pay off some of the debts.
Secondly, commence the process of eliminating some ludicrous taxes and rates and reducing the rates of VAT. I’m convinced a lower VAT will give you better revenue collection. I know some foreign institutions are on your neck to increase the rates. Take the cue from Erdogan and ignore them. You’ll survive just like he did.
Finally, what will save your government at this time is foreign direct investment. As a student of Mwai Kibaki, you will remember that circa 2003, he managed to get investment flowing into the country to spur the then-dying economy. Lower tax rates and interest rates will make the country attractive again. Get rid of the charlatans at the Ministry of Trade and hire a professional to get us investments.
Odhiambo Ramogi is an economist and CEO at Elim Capital Limited; @Odhiamboramogi