The fourth and longest-serving US Chief Justice, John Marshall, had a controversial opinion ahead of his time.
He said that to tax the power is also the power to destroy. The Kenyan tax regime agrees with him.
In April, Finance Minister UKur Yatani presented the Finance Law 2022 to propose methods by which the state intends to generate revenue.
The bill makes some progressive proposals. The proposal to eliminate tariffs on inputs for the assembly of motor vehicles will encourage local manufacturing and increase employment.
In addition, the proposal to eliminate tariffs on the use of raw materials for pharmaceutical products and their manufacture is good.
As with any tax system, what it gives with one hand, it takes with the other. The bill proposes increasing the capital gains tax from 5 percent to 15 percent and increasing excise taxes on beauty products, bottled water, fruit juices, beer and other beverages.
The bill proposes that in cases where there is a dispute between the tax collector and a taxpayer, the taxpayer must first pay 50 percent of the disputed amount.
A government’s ambitious plans must be funded by equally ambitious revenues.
Given the call for an annual finance law, the Treasury tends to make two mistakes.
First, it assumes that the only and best way to generate revenue is through taxation. Even then, in most cases, they focus on tax rates and don’t seem interested in reducing waste, eliminating tax evasion, and increasing the tax base.
Kenya is losing over Sh100 billion in tax write-offs alone, which has been costly for the entire tax system.
The second mistake is that tax changes are often unpredictable and short-term. This makes their implementation hasty, inefficient and difficult to measure.
But this year those missteps are amplified. In 1974, US economist Arthur Laffer introduced a concept that became known as the Laffer curve. It states that revenue is zero if the tax rate is zero. If you increase the rate, sales will increase to a certain level.
However, as you keep increasing the tax rate, revenues start to fall as people look for ways to avoid or evade taxes.
Basically, no one wants to give 100 percent of their income as taxes, so a tax rate of 100 percent would also result in zero revenue.
Economists agree that our tax system has exceeded the equilibrium of the Laffer curve. We’re going to the regressive side of the curve now; High tax rates with very low income.
In recent years, the government has increased VAT on fuel and basic household goods, as well as excise taxes and duties on several products.
As early as 2017, the government noticed that non-tax revenues were starting to grow faster than traditional tax revenues. That year, the government reported a 78 percent increase in non-tax revenue
Revenue from beer consumption fell directly from 40 billion to 18.7 billion, possibly reflecting the high excise duty on the product. This is a fact that the Finance Act 2022 ignored.
A study by the Institute of Economic Affairs reports that overall economic growth has declined over the past 10 years and so has revenue as a percentage of growth.
Basically, the more we have increased taxes in the last 10 years, the less effective the strategy and the resulting income have been.
The Treasury Department’s 2017 review of public spending showed that VAT and excise taxes increase poverty and have a small, negative effect on inequality. The review found that after accounting for VAT, the poverty rate increases by more than five percentage points.
Excise taxes alone generate only half the revenue that VAT generates, but increase poverty by about a percentage point.
This perhaps explains why the public is bitter and scorns the 7 percent GDP growth reported last year. you are poorer
The author is the CEO of Elim Capital. @Odhiamboramogi