Emotions around new taxes ignore economic reality

President Uhuru Kenyatta and Deputy President William Ruto address wananchi after attending the National Prayer Day for Peace at the Village of Mary National Shrine in Subukia, Nakuru County. [File]

Throughout history, tax has never been popular. Rulers impose tax on the ruled either by consent through elected leaders or in the past because they got power through blood lines, the monarchies.  

Either way, tax is seen as a means to control others and has always raised raw emotions. It is only after democracy flowered that tax got a better name. Our uproar over taxes has a lot to do do with this residue thinking and our addiction to “help”. While we have flirted with capitalism since Britain made Kenya a protectorate in 1895, we have not really made self reliance our philosophy. 

It is only Americans, whose constitution we largely adopted, who told Britons on the face “no taxation without representation”. Since we are represented, should we really worry about taxes? We voted for Parliament and gave it power to tax us, yet it was the same MPs who were opposing taxation. How sincere were they? 

The debate in parliament was not just about taxes and emotions therein, it was also about the Executive and Parliament sizing up each other. The executive got its way for a reason no one want to say loudly, the ‘handshake’. Without it, Kenyans would be demonstrating on the streets. Finally, after numerous false starts we no longer have Opposition; the Government will continue having its way.

Emotions during the debate were for another reason; 2022. Who wants to be accused by voters of having increased taxes? But deep inside, the MPs knew for sure the Government needs more revenue to pay for proposed projects and recurrent expenditure, including their salaries and perks. 

But why the shift to taxes as the source of Government revenue? 

One, the current regime wants to leave a legacy and the most concrete legacies happen to be in concrete. Two, we must pay for democracy through the many representatives we put in the Constitution. Many will contest this, but the “multiplier effect” makes democracy expensive. Each MP, senator and others has a retinue of support staff.

This is a burden we shall live with. MPs and other reps will not vote themselves out of jobs by reducing their number. The voters might also not support the reduction because they hope one day they shall become MPs and enjoy the perks thereof. Do you expect the governors to surrender the political and financial power they currently have and do not event want to share with their deputies? Do you expect the voters to forego the few jobs devolution brought to the grassroots ?  

Political cost

The other source of revenue for the Government is debt. The Jubilee government preferred that route till IMF came calling and the public complained. Any politician until cornered will prefer debt - it has less political cost and can be paid even by the unborn long after the current leaders have left the scene. Think of 30-year bonds. Taxes are paid by the living who can get annoyed and revolt with their votes. 

Government debt is not uniquely Kenyan, it is a global phenomenon. By global standards, Kenya is doing quite well. Data also shows that most of our debt is not external but local. 

There is even belief that the interest rate cap made it easier for the Government to borrow domestically. When bankers shout that the SMEs  are missing out on credit, they should also confess they are lending to the Government, a safer borrower. 

Claims that Kenya is being sold to China through debt are not supported by facts, it is more about whipping up emotions. 

The emotions about taxes are uncalled for; the same people who said the Government is over-borrowing are the ones up against more taxes.  Attempts to reduce corruption are also met with “mtu wetu anamalizwa”. The emotions are rising because neither debt, taxes or reduction in graft are popular. Perhaps that is why the President was quick to link new taxes to the fight against corruption. 

If we reduced corruption and put taxes into good use, citizens would be happy. Other countries such as in Scandinavia have higher taxes put into social welfare from medical care to education and pension. 

What next after new taxes? What are the short-term and long term consequences of the new taxes in the Financial Act, 2018? As usual taxes affect the poor more than the affluent, despite the progressive nature of taxation. Higher earners pay at higher tax rates.

Here is why the poor suffers. If VAT is eight per cent, petrol price will go up by that amount because it is controlled. What of other products and services whose prices are not controlled? They will go up by more than eight per cent. For example, boda boda riders in one estate increased the fare from Sh50 to Sh70. Looks very little till you do your maths: that is a whopping 40 per cent! 

If matatu fare increases from Sh30 to Sh40, that is an increase of 30 per cent. To say the truth, most businessmen would love occasional tax hikes. Now you understand why Wanjiku is complaining.

It gets more interesting; prices are sticky, easier to go up but hard to come down. Salaries are also sticky, very hard to go up. Remember, except petroleum products, the prices of other products and services including medicine are not controlled. This has a serious implication on the purchasing power of low-income earners. Who has ever got a 30 or 40 per cent salary raise?

The only way to stop businessmen from increasing prices disproportionately more than tax rate is to ensure there is competition and customers have choices. That was the objective of the market system, but is rarely achieved. Look around and you will find that despite the much-touted system, we do not have lots of choices or competition. Where do you get your water, power, food or housing? How many good schools or hospitals are there? How many travellers have choices beyond matatus? The railway only reaches selected towns.

Car owners have a choice of downgrading to matatus, what of matatus users? Don’t say walking. You can shift from a leafy suburb to leafless suburb to reduce rent. What of Kibra or Kangemi citizens? They will not go to the rural areas for cultural reasons. 

Kenyans hoped their MPs would save them from taxes; the MPs chose reality over voter sentiments. It is the country’s moment of truth, torn between debt, taxes and public jobs in a country where the unemployment rate is a national scare. Let down by those they voted for in long queues, the citizens have resorted to dark humour, such as fasting to reduce the cost of food or using TV to light the room. The only consolation is that we could get used to new prices until another shock hits the economy.  

Consequences

What of long-term consequences? That Sh10 increase in bus fare, other services and commodities has enduring implications. One is that it shatters many dreams  of upward mobility. We move up the socio-economic ladder if we can save and invest.

Once taxes and related inflation erode that we stagnate. Those who can increase the price of goods and services make more money. The result is inequality and social instability. 

Interestingly, the fact that most Kenyans work in the informal sectors makes it easy to absorb economic shocks. Those who suffer most are the salaried - they long realised that and are themselves juakalis or side hustles (like writing this article).

The loss in purchasing power as your earnings are slowly eaten by increase in price has left many poor Kenyans asking why they have no money and yet the economy is doing so well. Now they know. In developed countries, salaries are indexed to inflation to maintain the citizens’ purchasing power. In the worst case, you can get welfare checks if poor. 

In Kenya the poor are on their own. That is why giving some money to the elderly was a step in the right direction. We could give money to more vulnerable members of the society if they did not constitute such a higher percentage of the population. In Kenya those less than 14 years of age are about 42 per cent, in Japan it is about 13 per cent. Such dependence ratio leaves lots of citizens helpless even if corruption was mitigated. 

In the long run, erosion of purchasing power leads to socio-economic stagnation and makes it hard to shift from one social class to the other. In extreme cases, the stagnation is transmitted from one generation to the next. 

The truth is that tax and the emotions therein are not just an economic issue, they have social implications, even inter-generational. Shocks from such taxes should return the voters and policy makers to reason. How can we ensure the maximum number of citizens are uplifted from poverty? How can we insulate the vast majority from economic shocks? How did others do it?

Perhaps the reduction of VAT on petroleum products from 16 per cent to eight per cent was that realisation.

The writer teaches at the University of Nairobi.