It appears that in the Finance Bill (2018), Parliament is on course to scrapping plans to introduce a 16 per cent VAT on petroleum products for two years. This is welcome news. It is unconscionable for the government to keep levying ever more taxes on Kenyans in the face of runaway corruption and wastage in the national and county governments. The government should only tax what it needs to provide public goods and services. In other words, taxation should be matched with service delivery.
That said, taxation can also be used to help integrate the national economy. One quack of economic history is that it is only in the 1980s (and in Kenya, to be exact) that the idea of “formal” and “informal” sectors of the economy gained traction in economic thought.
At the time it made sense to make this distinction for the purposes of planning. In hindsight, this seems to have been a bad idea. Creating the idea of formal and informal sectors essentially created avenues for two-track policy making.
The same governments in developing countries made policies for their formal sectors (often linked to the global economy and supply chains) and their informal sectors (which were consigned to the low-productivity and low-quality world of things). This mentality is pervasive. You only need to look at what we do for “international investors” or foreign tourists relative to what we do for Kenyans. As a policy tool, the tax code can help us fix this structural problem in our economy. What if we committed to making all Kenyans part of the formal economy through the tax code? This may sound far-fetched, but this is how it would happen. Consider the case of Kenya Revenue Authority PINs. Through this simple innovation, we can keep track of taxpaying individuals and firms. Firms have to prove they are tax-compliant to get business, especially in the public sector.
It is possible to extend this same system to include other licencing requirements covering labor standards, management practice, quality assurances, and the like. In other words, we could use the market (with some incentives from KRA) to create incentives for jua kali firms to improve their management standards and quality.
Now, you may think that this would increase the cost of tables from carpenters, thereby killing jobs as demand plummets. That may be true. But what is also true is that the price level is an equilibrium problem. Because carpenters earn very little for every hour worked, they can only pay so much for rent, food, clothing, among other things.
Individuals in these related sectors experience the same problem. They also cannot charge more because the carpenters can only earn so much. This leaves us all stuck in low wage.
Increasing our standards of living will necessarily involve creatively incentivising all sectors of the economy to towards higher productivity. This is the challenge that should be keeping our policymakers awake. merely a means of raising revenue, we should also view it as a powerful tool of orienting the use of Kenyan labor and capital.
-The writer is an Assistant Professor at Georgetown University
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