Debt collection concept. [Getty Images]
The fourth and longest serving US Chief Justice John Marshall had a controversial opinion ahead of its time.
He said the power to tax is also the power to destroy. The Kenyan tax regime has all indications of proving him right.
In April, Treasury Cabinet Secretary UKur Yatani tabled the Finance Bill, 2022 to propose methods the State will use to raise revenue.
The Bill makes some progressive proposals. The proposal to eliminate duty on inputs for motor vehicle assembly will promote local manufacturing and increase employment.
Further, the proposal to remove duties on inputs of raw materials for pharmaceutical products and manufacturing is good.
Like any tax system, what it gives with one hand, it takes with the other. The Bill proposes to increase the capital gains tax from five per cent to 15 per cent, and raise excise duty on beauty products, bottled water, fruit juices, beer and other beverages.
The Bill proposes that in cases where there is a conflict between the tax collector and a taxpayer, the taxpayer must pay 50 per cent of the disputed amount first.
The ambitious plans any government has must be financed by equally ambitious revenue levels.
Given the requirement for an annual Finance Bill, Treasury tends to make two mistakes.
One, it assumes that the only and best way to raise revenue is by taxation. Even then, in most cases they focus on the tax rates and do not seem keen to reduce waste, eliminate tax evasion and increase the tax base.
Kenya loses over Sh100 billion on tax write-offs alone, which has been costly on the overall tax regime.
The second mistake is that tax changes are often erratic and short term. This makes their implementation rushed, inefficient and hard to measure.
But this year these missteps are compounded. In 1974, US economist Arthur Laffer introduced a concept that came to be known as the Laffer Curve. It states that revenue is zero when the tax rate is zero. As you raise the rate, revenue rises to a certain level.
However, if you continue to raise the rate further, revenue starts to fall as people look for ways to avoid or evade tax.
In principle, no one wants to give 100 per cent of their income as tax, so a tax rate of 100 per cent would also result in zero revenue.
Economists agree our tax regime has crossed the Laffer curve equilibrium. We we are now going into the regressive side of the curve; high tax rates with very low revenues.
The last few years have seen the government raise VAT on fuel and basic household commodities, excise tax and duty on several products.
As early as 2017, the government started observing that non-tax revenues had begun increasing faster than the traditional tax revenues. In that year, the government reported a rise of 78 per cent in non-tax revenue
Directly, revenues from beer consumption dropped from 40 billion to 18.7 billion, perhaps indicative of the high excise duty on the product. This is a fact the finance bill 2022 has ignored.
A paper done by the Institute of Economic Affairs reports that overall economic growth has declined over the last 10 years and with it, revenue as a percentage of growth.
In principle, the more taxes we’ve raised in the last 10 years, the less effective the strategy has been and the resultant revenue therein.
Treasury’s public expenditure review of 2017 showed that VAT and excise duties increase poverty and have a small, negative effect on inequality. The review noted that the poverty rate increases by more than five percentage points after VAT is accounted for.
Excise taxes, on their own generate only half of the revenue that VAT generates but increase poverty by about one percentage point.
This perhaps explains why the public is bitter and scorns at the seven per cent GDP growth reported for last year. They are poorer.
The writer is the CEO of Elim Capital. @Odhiamboramogi