Following the 2022 Kenyan elections that brought President Williams Ruto into power, citizens believed the country’s economic outlook would improve significantly. Kenyans expect the new government to make progressive policies for the nation’s prosperity. However, 2023 brought a surge in living costs and new policies that left Kenyans grappling with several economic uncertainties.
The revision of individual income tax brackets and rates, effective from July 1, 2023, introduced higher tax rates across different income segments. For instance, individuals earning over KES 288,000 faced increased tax rates, including 25 percent on the next KES 100,000 and 30 percent on the next KES 5,612,000. Those earning above KES 9,600,000 experienced the highest rate of 35 percent. These changes exert financial pressures on individuals and businesses grappling with economic challenges.
A thorough review and reconsideration of recent tax amendments are imperative to alleviate the burden on businesses and individuals. The government should reassess the impact of increased turnover tax rates and doubling taxes on petroleum products, which hinders growth. Striking a balance between revenue generation and economic empowerment of individuals and businesses should be at the forefront of policy revisions. The unintended consequences of the recent amendments highlight the need for policies that stimulate rather than impede economic activities. Considering the diverse economic landscape, a more nuanced and targeted approach to taxation can help mitigate the negative impact on businesses and promote a conducive environment for growth. As such, lowering tax rates, simplifying the tax system, and broadening the tax base are essential.
Lowering tax rates involves reducing the percentage of taxes individuals or businesses pay on their income or profits. The adjustments could affect income tax rates, corporate tax rates, or other applicable taxes. For example, the Kenyan government could reduce the highest individual income tax rate from 35 percent to a lower level, such as 30 percent or even 25 percent. That way, the government would incentivize economic activities such as investment, innovation, and job creation.
Simplifying the tax system entails streamlining the tax compliance process for individuals and businesses. The Kenyan government can achieve this by reducing the number of income ranges that determine the tax rate, known as tax brackets. Additionally, the government can eliminate certain deductions or exemptions and make tax forms and regulations more precise and accessible. For instance, the government could simplify the tax system by consolidating tax brackets and eliminating complicated deductions, making it easier for taxpayers to understand and fulfill their obligations. Simplification aims to reduce the administrative burden and compliance costs associated with taxation, ultimately leading to increased compliance, fewer errors, and a more efficient allocation of resources within the economy.
Broadening the tax base involves expanding the range of economic activities or entities subject to taxation. This process could include bringing previously untaxed sectors or individuals into the tax net or reducing the scope of tax exemptions and loopholes. For instance, the government could implement measures to ensure that high-income earners and profitable businesses contribute their fair share of taxes. By broadening the tax base, the government seeks to distribute the tax burden more evenly across the population and reduce reliance on a small group of taxpayers, ultimately enhancing revenue stability and fairness in the tax system.
The government should exercise fiscal discipline to curb unnecessary spending and ensure the effective use of tax revenues. Adam Smith’s canons of taxation, emphasizing equity, certainty, convenience, and economy, should guide the Kenyan government’s policy decisions. The government should prioritize projects and services that contribute directly to national development. The government’s excessive spending in non-essential areas, such as luxury overseas travel for officials and extravagant infrastructure projects with minimal societal benefits, underscores the urgent need for fiscal discipline. By redirecting resources from such endeavors towards critical sectors like healthcare, education, and infrastructure maintenance, the government can effectively use tax revenues and alleviate the burden of excessive taxation on the populace.
Kenya stands at an economic crossroads, navigating the delicate balance between taxation and economic freedom. The challenges presented by recent policy changes demand a recalibration of strategies to foster a thriving economy. The government’s commitment to a thoughtful reassessment of taxation policies, coupled with the promotion of economic freedom and fiscal discipline, is crucial for steering Kenya toward sustainable growth and the well-being of its citizens. Achieving this delicate balance will alleviate the current economic challenges and set the stage for the nation’s resilient and prosperous future.
By Collins Omosa
Collins Omosa is a writing fellow at African Liberty.
