Addressing equity through taxation: a view from Kenya
Martin Napisa National Coordinator for Kenya’s National Taxpayers Association
19th Feb 2016
Tax revenue is a vital source of funding for essential services such as infrastructure, health and education. In Kenya tax revenue has increased in recent years but Martin Napisa, from the Kenyan National Taxpayers Association argues that action should be taken to make the tax system more effective and fair.
In recent years, the icy state of the world economy has led to a significant drop in foreign investment and aid flows to developing countries. As a result, these countries increasingly rely upon domestic tax revenues to fund basic services and amenities. Tax revenue is a more reliable and sustainable mechanism of financing that also frees countries from avoidable debt.
Kenya's tax revenues have grown astronomically over the last 10 years
Kenya's tax revenues have grown astronomically over the last 10 years - shooting from a modest KSh289.9 billion ($2.8bn) in 2005 to KSh1.001 trillion ($10.7bn) in 2015 - an increase of 245%. This ranks Kenya highest in the region on the tax-to-GDP ratio at 20%, compared to Tanzania and Uganda at 18% and 13% respectively.
Beyond the revenue-raising potential, domestic resource mobilisation particularly through taxation strengthens structures for domestic accountability, enhances governance systems and plays a critical role in boosting citizen ownership in government.
Research suggests that governments which rely more on taxes collected from their citizens are more likely to listen to and prioritise the needs and concerns of the taxpayer. Similarly, citizens who perceive themselves as taxpayers will more likely demand accountability in the usage of their money. Taxation creates an accountability mechanism where citizens have the legal obligation to pay their fair share of taxes to government, and in return the government is held accountable for
spending these public funds wisely.
A progressive tax system can significantly mitigate the adverse impact of inequality
A progressive tax system can significantly mitigate the adverse impact of inequality. This is especially important in Kenya, the strongest economy in the region, but also the most unequal.
A 2013 report by the Society for International Development (SID) entitled 'Pulling Apart', revealed that Kenya's top 10% of households own 42% of the national income, while the bottom 10% own just 1% of the national wealth. In a situation such as this, taxation can be structured to allow those who earn more to contribute a higher share of their income to tax.
Tax policy can also be used as an instrument to steer or direct behavior or consumption. Governments have introduced taxation to discourage the consumption of goods considered harmful to society. The famous 'sin' taxes are used worldwide to discourage habits such as alcohol, smoking or gambling.
While all these aspects have influenced the development and modernisation of Kenya's tax system, more needs to be done to deliver a structure that widens the tax base, spreads the tax burden and brings in more revenue for the Government.
At 40%, Kenya's tax gap - the difference between tax that could potentially have been collected and the sum brought in - is way too high, and indicative of a failing system. A large section of the population remain untaxed or undertaxed, and this contributes to the perception of over-taxation by those who do pay.
Some of the policy recommendations the government can undertake in efforts to address these challenges include:
- Formalising the informal sector through regulatory schemes while at the same time providing incentives to encourage voluntary formalisation;
- Reviewing the existing tax agreements with other countries to ensure they are not limiting the Government's taxing rights. Agreements with tax havens should be approached carefully and measures put in place to ensure that they are not open to abuse;
- Ensure that marginalised economic groups are not bearing the brunt of taxation;
- Zero-rating of goods should be expanded to include processed basic foods, maize and wheat flour, milk, bread and sanitary pads;
- Government should consider reinstating Capital Gains Tax;
- Eliminate the special category of public servants exempt from taxation;
- Government should rely more on taxes that take into account the different income levels of people, with those who earn more contributing a higher share of their income to tax than those earning less;
- Government should systematically lower the percentage VAT contribution to the total domestic income, as sales tax is more punitive on the poor than the rich;
- Develop a simple tax system that is easy to comply with; and
- Develop an affordable taxation system for informal sector which will encourage compliance.
Photo: Sam Tarling \ Oxfam