Kenya needs taxes rethink to reflect economic realities

I briefly lived under a command economy when prices were controlled.  

Though a small boy, I can still recall the hoardings and the fanfare around Budget Day. Controlling prices led to shortages. Remember the recent shortage of fuel?  

When the economy was liberalised (and politics too), prices were freed and determined by the market, except for fuel, a more recent development. I support liberalisation of the fuel market. Is the price of the Intensive Care Unit (ICU) and blood controlled?  

One curious question is what happened to the tax revenues after liberalisation of the economy (soko huru)? One would hypothesise that the invisible hand of the market would lead to high economic growth and, by extension, more taxes. 

But slower growth after liberalisation led to lower tax revenues. Remember the economic chaos after Soko Huru and the fight for multipartism?  One driver of higher economic growth is innovation. Data from the World Intellectual Property Organisation (WIPO) suggests a spike in patents after our economy was liberalised, nudged by the International Monetary Fund (IMF). It’s another debate how many of these patents were commercialised. 

Look no further than Safaricom or boda bodas (motorcycle taxis) to confirm how innovation can be a source of economic growth, tax and social stability—ever wondered what all these M-Pesa agents and boda boda riders would be doing?  Remember, there must be something to tax, such as your labour (the income tax) or selling or consuming something (VAT and excise duty), among others. You can now explain why countries with low population growth are worried; workers pay taxes. 

Curiously, despite all the airtime that taxes get, academic researchers shy away from it, not seen as cool like strategy or finance. The fact that tax is an intersection of law, economics, accounting, law enforcement and politics probably makes it less glamorous. 

The fact that we have heard about taxes right from Sunday school, not so positively, might be another reason for its unpopularity. 

The unpopularity of taxes to the hoi polloi emanates from two other sources. One, too many taxes deny us the enjoyment of our hard-earned money.

Even more poignant is the failure to directly link tax to benefits. The Kenya Revenue Authority (KRA) can do more sensitisation.

We hear more of roads built by the Chinese and other funders, not taxpayers. We can see public goods like roads, rails or airports. But once we get them, we “stop seeing” them and focus on matters of bread and butter or ngwaci (sweet potatoes) and nduma (arrowroots).

No wonder politicians keep reminding us! Add the fact that we see tax misuse more clearly through corruption and waste.  The disconnect between taxes and their use has been our government’s soft underbelly. Remember the 2024 Gen Z-led protests?

Add the fact that the taxpayers and those who decide how our taxes are used are often different. Think of how much effort you put into making money that is then taxed. Compare it with the ease of sharing it in air-conditioned offices or hotels. It is more privileged to share the tax revenues than to earn them. That is why democracy matters, getting reps from the Member of County Assembly (MCA) to the president who understand the plight of taxpayers and, if possible, have paid taxes themselves and from sweat.  Remember, the government traditionally waits for you to start a business, start working, or do something, and then comes up with taxes.

Remember digital taxes? The government gets dividends from some investments, but it’s not a great investor; it prefers taxes.  

Its greatest investment should be in research and development (R&D). This is an investment with high returns through more taxes as new firms are spawned, bringing innovations.

How much do governments earn from Google, Meta, IBM, Microsoft, and BYD, among others, through taxes? What percentage of our GDP goes to R&D?  

Without enough R&D funding and, therefore, few innovations, the focus is on the few entities that make or ought to make money. 

Apart from salaries, it’s SMEs and, lately, cars. There is a belief that car ownership is a sign of wealth and tax. 

A recent example from tax authorities for vehicles with engine capacity not exceeding 1,500cc is a duty of 35 per cent, an excise duty of 20 per cent, VAT of 16 per cent, a railway development levy fund of two per cent, and an import declaration fee of 2.5 per cent of customs value.  Do your maths if you buy a car with a custom value of Sh100,000. I am also very curious to know if the custom value is the same as the market value.  

Clearly, the best way to raise more tax revenues is to create more taxpayers (read bigger and more profitable firms) and their employees who pay income tax. 

In our case, nurture SMEs into big firms. Yet, it’s foreigners who get the best incentives. Why not the indigenous investors who will always be here?  

One easy way to nurture our firms for growth is through tax incentives. Lower tax rates often lead to higher tax revenues in the long run, as Alice Laffer showed with her famous curve.

Reducing tax rates during COVID-19 did not significantly reduce our tax revenues. Lower tax rates stimulate the economy; we don’t keep that money in our pockets; we spend or invest it.

Do our tax authorities need any more convincing, even with the 2027 polls beckoning?