Push for higher tax-to-GDP ratio untenable, data shows

While the Finance Bill, 2024 might have been the straw that broke the camel’s back, President William Ruto’s incessant call for improved revenue collection has not been consistent with the size of the economy.

The re-enactment of the 2016 US Capitol Building raid on the Kenyan Parliament shows the extent to which taxpayers have been squeezed to rescue a country riddled with debt amid constrained revenues.

President Ruto is on record saying Kenya’s tax-to-gross-domestic-product (GDP) ratio is not the same as other nations.

Japan, Morocco, and South Africa have been the constant comparisons.

However, what the Head of State fails to mention is that these economies, when compared to Kenya, also have higher GDP per capita, which is a more accurate comparison.

In his address to the nation on Wednesday last week following bloody riots the previous day by youthful protesters over the Finance Bill, 2024, President Ruto said when he came into office, he found a spiralling public debt threatening to ground the economy.

“We have made significant progress in pulling the nation back from the brinks of debt distress. Our debt situation is better managed and our budget now has space for investment in programmes aimed at easing the hardship of vulnerable people in creating opportunities for our young people,” he said.

The President has constantly used the country’s debt, now at Sh11 trillion, to justify increments in taxes.

“For about 12 years, we have been running about eight to nine per cent fiscal deficit. This means you are spending money that you are not collecting, so you keep digging a bigger hole to fill the other one, and now we have a debt that is heading towards unsustainable,” said President Ruto when he hosted the Harvard Business School class of 2025 at State House, Nairobi recently.

He insisted that he would not “preside over a bankrupt country.”

“Japan’s tax-to-GDP is at 34.8 per cent. In Kenya, we are at 15 per cent,” said Ruto.

South Africa and Morocco are the other economies he has compared Kenya to, saying their tax-to-GDP ratio stands at 27 and 32 per cent respectively.

“You know people in Kenya are being told that you are paying more in taxes than other countries. That is not true. We are paying the same taxes as other countries in our category,” he insisted.

The President said he intends to have the country’s tax-to-GDP ratio at 22 per cent by the time he leaves office.

But if you look at the economic performance of the said countries, Kenya is not as wealthy as they are.

For example, Japan, whose tax-to-GDP ratio is 34.8 per cent has a GDP per capita of $33,834 (Sh4.4 million) according to the International Monetary Fund (IMF). This is compared to Kenya’s $1,949 (Sh253,370) as of 2023.

While President Ruto’s narrative has always been based on the tax-to-GDP ratio, which gives the impression that Kenyans are not paying their fair share of taxes, a more agreeable metric should be a combination of both GDP and GDP per capita.

World Bank explains that growth in GDP and GDP per capita are considered broad measures of economic growth.

“GDP per capita provides a basic measure of the value of output per person which is an indirect indicator of per capita income,” says the global lender.

While GDP is the measure of the quantity of goods and services in an economy with no indicators of how wealthy a majority of the population is, GDP per capita can tell how prosperous a nation is and can be indirectly used to argue for increased taxes.

“GDP per capita is an important indicator of economic performance and useful unit when making cross-country comparisons of average living standards and economic well-being,” notes the World Bank.

“Higher GDP per capital often signifies affluent market, making it an attractive destination for investments in sectors like luxury goods or high-end services.”

Kenya’s GDP stands at $107,440 million (Sh13.9 trillion), according to the World Bank, which also puts the size of Japan’s economy at $4.2 trillion (Sh546 trillion), which is 40 times the size of Kenya’s.

Morocco, on the other hand, has a GDP of $141 billion and a GDP per capita of $3,672 (Sh477,360), while South Africa has a GDP per capita of $6,253 (Sh812,890) and a GDP of $377.8 billion (Sh49 trillion).

From these numbers, the pattern is that economies with a higher GDP and GDP per capita also have a similar tax-to-GDP ratio.

A higher GDP does not necessarily translate into a higher GDP per capita considering India, for example, with a population of 1.4 billion, has a GDP per capita of $2,484 (Sh322,920), not far from Kenya, which has a population of slightly above 50 million. India has a tax-to-GDP ratio of 11.7 per cent.

A bigger population, however, more often translates into a higher GDP. This is one of the reasons why Kenya’s economy is bigger than some of its neighbours like Rwanda and Uganda.

Rwanda, whose GDP per capita is $1,000 (Sh130,000), according to IMF, has a GDP of $14 billion (Sh1.8 trillion).

It, however, managed to increase its tax-to-GDP ratio from eight per cent in 1992 to 15.8 per cent as of 2020.

However, this figure has now stalled at 15 per cent as per the 2022-23 financial year, which is an indication that a country cannot be taxed beyond the size of its economy.

“Rwanda undertook tax administration reforms with significant improvements in collection efforts, auditing procedures and scrutiny of large taxpayers,” IMF explains how Rwanda improved its tax to-GDP ratio,” says the World Bank.

It adds: “Direct taxations contributed around five per cent of GDP of the increase driven by personal income tax. Goods and services taxation added over 4.5 per cent of GDP to the increase (through excise increases in the late 1990s and the introduction of Value Added Tax in 2001).”

The Affordable Housing Levy, enhanced contribution to national insurance, progressive increase in National Social Security Fund (NSSF) contributions and an additional eight per cent Value Added fuel tax to 16 are some of the new taxes that the Ruto administration added in its first budget in 2023.

In the Finance Bill, 2021 which has since been withdrawn, motor vehicle tax calculated at 2.5 per cent of the value of the car was among the taxes proposed that was later scrapped amid public outcry.

During the debate on the Bill, nominated MP John Mbadi criticised the Kenya Kwanza administration’s desire to collect more, saying it is discouraging investment.

“When we passed the Finance Bill 2023, what effect did it have on collections? You are discouraging collection by imposing excessive high taxes,” he said.