An incessant wave of new taxes may stifle economic growth, burden citizens, and undermine government objectives.
Kenya, like many other nations, grapples with the never-ending challenge of raising revenue to support its ambitious development goals and arguably to meet its fiscal obligations.
The Kenyan government, especially under this administration, has increasingly turned to taxation to generate revenue. However, the current government’s penchant for introducing new taxes and levies at an alarming frequency raises concerns about their sustainability and the potential counterproductive nature of this approach.
While it is crucial to expand government’s revenue base, a continuing wave of new taxes may inadvertently stifle economic growth, burden the citizens, and undermine government’s own objectives.
One of the most prominent issues arising from Kenya’s frequent introduction of new taxes is the increasing burden on citizens and businesses. The Kenyan tax landscape has grown increasingly complex over the years, with a multitude of taxes and levies ranging from Value Added Tax , income tax, excise duty, to various sector-specific taxes. The government’s ongoing introduction of new taxes compounds the problem by adding to this already convoluted system.
Individuals and businesses are finding it increasingly challenging to navigate this complex web of taxes. Compliance becomes more burdensome and the risk of inadvertently breaking tax laws grows higher. For small businesses, which make up a significant portion of Kenya’s economy, these tax complexities can be particularly onerous. The high amount and tax complexity discourages investment, deters business growth and contributes to the informal economy’s expansion, as some avoid the formal sector altogether to escape the tax net.
Beyond the burden on individuals and businesses, the frequent introduction of new taxes can have detrimental effects on the overall economy. When businesses face a higher tax burden, they may have less capital to invest in expansion, innovation and job creation. High taxes can stifle economic growth and reduce the competitiveness of Kenyan businesses in the global market.
Furthermore, excessive taxation can lead to inflation as businesses pass on the additional tax costs to consumers through higher prices. Inflation can erode the purchasing power of citizens, especially those with fixed or low incomes, exacerbating income inequality and poverty.
The government’s objective of widening the revenue base may be undermined by this tax-heavy approach. A shrinking economy with struggling businesses and reduced consumer spending can ultimately result in lower tax collections, as evident in many other countries. Additionally, the informal economy may thrive as individuals and businesses seek to evade taxes, further eroding the government’s revenue base.
For Kenya to realise its aspirations of becoming an economic hub and attracting foreign investment, maintaining a conducive business environment is essential. The constant introduction of new taxes, particularly without clear and predictable tax policies, can erode investor confidence. Investors require stability and predictability to make informed decisions about where to invest their capital.
When tax policies are unpredictable, investors are likely to adopt a wait-and-see approach, delaying or entirely abandoning investment decisions. This uncertainty can deter both foreign and domestic investment, limit job creation and economic growth. To attract long-term investment, Kenya needs a tax system that is transparent, consistent and supportive of economic development.
On another note, a consequence of the frequent introduction of new taxes is the expansion of the informal economy. As individuals and businesses seek to avoid the heavy tax burden imposed by the formal sector, they may resort to operating in the informal sector, where tax evasion is more feasible. This shift not only deprives the government of potential tax revenue but also perpetuates the problem of the informal sector, where labour rights are often neglected, and workers are vulnerable to exploitation.
The informal economy may appear to be a temporary escape from heavy taxation, but it comes with its own set of problems, including the lack of social security, job instability and limited access to formal credit. By focusing on overtaxing the formal sector, the government may unintentionally be promoting the informal economy, which is detrimental to long-term economic growth and social stability.
But there’s another danger. As new taxes and levies are continually introduced, the Kenyan populace may become increasingly discontented. Taxation is a sensitive issue that can lead to public backlash and social unrest. Citizens are likely to protest when they perceive the government as imposing excessive or unfair taxes without adequate representation or clear benefits in return.
In the past, we have witnessed public demonstrations and strikes in response to new taxes, such as the introduction of the Finance Act earlier in the year, which led to nationwide protests. This unrest not only disrupts daily life and hampers economic activity but also creates an atmosphere of political instability and uncertainty.
It is essential for the government to consider the social and political consequences of imposing an excessive tax burden on the population. Public discontent and unrest can have far-reaching implications for governance and political stability, ultimately hindering Government’s ability to implement its policies and achieve its objectives.
In light of these concerns, it is imperative for the Kenyan government to adopt a more sustainable and thoughtful approach to taxation. While expanding the revenue base is a crucial goal, it must be done in a way that promotes economic growth, ensures fairness and minimises the burden on citizens. To do this, there are a number of options.
The government should consider a comprehensive tax reform that simplifies the tax system, eliminates redundant taxes, and ensures transparency and predictability. A simplified tax code can reduce compliance costs and make it easier for individuals and businesses to understand and adhere to their tax obligations.
Before introducing new taxes or levies, the government should conduct thorough impact assessments to understand the potential consequences on the economy, businesses and citizens. This will help in making informed decisions and avoiding counterproductive measures.
The public and relevant stakeholders in the decision-making process for new taxes can provide valuable insights and ensure that taxation policies are fair and equitable.
Tax policies should prioritise economic growth and job creation. government should provide incentives for investment and innovation, rather than stifling businesses with excessive taxation.
Instead of continually introducing new taxes, the government should focus on addressing tax evasion and improving tax collection mechanisms. This can help broaden the revenue base without resorting to higher taxes.
And to mitigate the impact of taxation on vulnerable populations, the Government should consider expanding social safety nets and welfare programmes to provide support for those most affected by increased taxes.
Balancing the need for revenue with the imperatives of a thriving economy and a contented citizenry is the path to ensuring the government’s objectives are met without unintended consequences. It is time for a reevaluation of the country’s tax strategy to ensure a brighter and more equitable future for all its citizens.
Political commentator