In its latest Poverty and Shared Prosperity Report for 2022, the lender states that the impact of raising taxes in developing nations unlike in developed nations is less likely to reduce inequality.
“Households' welfare often change across economies when different taxes and transfers, including subsidies are accounted for. These in richer economies reduce inequality to a greater extent than in poorer ones,” the report reads.
It notes that, this despite the wide variation in both starting inequality and degree of fiscal redistribution that exists within each income category.
In Kenya, the government has indicated its plan to raise taxation through increased VAT and Excise Duties in efforts to increase revenues to meet its budget.
However according to the report, apart from piling pressure on the rising cost of living, the action widens the already existing gap between the rich and the poor, further economic transformation into an upper middle income status.
The gap between the rich and the poor in the country has remained unchanged since 2015 despite narrowing between 2005 and 2015.
According to data by Oxfam, about 130 richest individuals in Kenya have more wealth than 33 million Kenyans combined, with the richest one per cent accumulating seven times more wealth than the poorest 50 per cent of the population between 2020 and 2021.
This is a trend the lender projects to grow if current regimes do not reconsider effective fiscal and monetary policies which are much lenient to the consumer.
The government through both the National Treasury and Kenya Revenue Authority has had plans to up the VAT from the current 16 per cent to harmonise that of Uganda and Tanzania at 18 per cent.
There is also a proposal to increase the cost of excise stamps by up to 300 per cent.
The Excise Duty (Excisable Goods Management System) (Amendment) Regulations, 2023 proposes to raise the stamp fees for cosmetics from 60 cents per stamp to Sh2.50, from March 1.
Stamp fee for fruit juices and non-alcoholic beverages such as sodas will go up to Sh2.20, from 60 cents.
Those affixed on beer bottles will double, from Sh1.50 to Sh3, while those for spirits, wines and tobacco products have been proposed to go up to Sh5, from the current Sh2.80 per stamp if approved.
The proposal has so far triggered mixed reactions from various players including the Retail Trade Association of Kenya (RETRAK) which noted that it would be an added burden to consumers as the additional cost will be passed to them.
Retrak says this will further hurt consumers already hit by economic shocks stemming from high inflation levels driving up basic commodity prices and the weakening shilling against the dollar which have prompted costlier imports.
