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Treasury wrong on tax formula

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A protester displays posters during anti-finance bill demonstrations on Moi Avenue, Nairobi on June 18, 2024.

Photo credit: Sila Kiplagat | Nation Media Group

On the Finance Bill, our National Assembly behaved like a house without windows. The majority side of parliament flatly refused to listen to the lamentations of both consumers and organised industry.

Yet what was at stake here was not just the large and the hurriedly effected mishmash of ill-conceived changes to our fiscal laws. The big issue is the disruption and chaos wrought on underlying structure of the fiscal system that is at issue here.

The gravity of damage and disruption to businesses starts emerging when you start counting the multiple number of amendments we have made on our fiscal laws at one go and in one fell swoop in this year’s Finance Bill.

Yet this is in an economy that has suffered nearly two decades of low levels of private sector investment, a declining manufacturing sector’s shares-to-GDP ratio, a persistent drop in private sector credit, a near collapse of money and capital markets, widespread distress in large sections of the banking sector, flat-lining production in the real sectors, and stagnant incomes.

As a society, we are reluctant to face the reality of Kenya’s economic stagnation.

The reason we think high taxes will save us is because the policy elite continues to shy away from the root and branch restructuring needed to get this economy going again.

I have said it in this column before and I will repeat it. Our public finances are in a mess because we adopted economic policies anchored on three wrong assumptions.

First, that by enriching the government, you can enrich the country and improve the living standards of its citizens.

The people are poorer

I read somewhere that there was a time in Pakistan when the consensus among economists was that economic conditions in that country exhibited a situation whereby the people and ordinary citizen was rich while the government was poor.

In Kenya, the government is poor and the people are poorer. The third wrong assumption is that you can just tax the people as much as you want and milk everything even where the economy has been suffered years of anaemic growth. 

Here is how Prof Njuguna Ndung’u justified the numerous amendments to the fiscal laws while presenting the budget statement delivered before the National Assembly last week.

First, that Kenya’s tax take is currently at a mere 11.5 per cent despite the fact that the economy has the potential to increase its tax take to a level of where the government can be collecting 25 per cent of GDP in revenues. 

Secondly, Prof Ndung’u argued that the economy is dominated by a large informal sector that does not pay tax, leaving the country to rely on a narrow tax base. 

He described the informal sector as a ‘hard-to-tax’ sector.

His third point: Tax exemptions have proliferated and Kenya is now at a point where what it loses in revenues and tax exemptions is estimated at 2.9 per cent of GDP.

‘Hard-to-tax’ sector

The professor’s point here was that we need to weed out all those tax incentives and subsidies from our fiscal system to help the State in its struggles with its fiscal arithmetic and make the government richer. 

Very strange in a context where we have been talking about rolling out a comprehensive special economic zones programme with new incentives — and an international finance centre modelled on the one in Qatar where we will also be seducing prospective investors with fresh and new tax incentives. Perhaps it is because the IMF is ideologically opposed to the special economic zones model.

Is the informal sector a ‘hard-to-tax’ sector as Prof Ndung’u argued? Have we just discovered that this sector is the albatross hanging around our necks and impeding our ambitions to achieving the policy elite’s new Holy Grail of expanding and widening the tax base?

The informal sector is not a tax shelter. It is a symptom of inability of successive governments to provide decent and durable jobs to citizens. Every so often, the policy elite reels out statistics showing how hundreds of thousands of jobs are being created in the informal sector.

While presenting the budget speech last week, Prof Ndung’u stated that this ‘hard-to-tax’ sector has about 17 million workers, accounting for 83 per cent of Kenya’s total workforce. His point was that by bringing this sector into the tax dragnet, government revenues will increase.

I ask: Do we even pause to ask questions about the quality of jobs and life in the informal sector in terms of working conditions, working hours or return on effort?

In depicting it as a ‘hard-to-tax’ sector and in targeting the informal sector with high indirect taxes, the government is engaged in predatory taxation.

Will the amendments lead to more revenues? Let’s wait and see. No theory can get over the basic fact, hard as granite, that high rates of taxation inevitably result in the citizenry resorting to tax evasion.