VAT and rising prices: What’s going on here?

By XN IRAKI

Kenyans can humourise anything. A cashier at a supermarket advised that instead of complaining over high milk prices, I should buy a cow. I am considering that advice.

Everyone is blaming Value Added Tax (VAT) for the rise in prices. The argument goes that previously untaxed, or ‘unvattable’ products and services are now being taxed, leading to higher prices. However, if you calculate the percentage rise in prices, it is usually more than the VAT rate of 16 per cent. A good example is Nairobi County parking charges. I chose this because it’s now more expensive to park in Nairobi than to fuel your car!

Entrepreneurs usually take advantage of such changes in law to make hay.  Politicians will quickly blame each other and mask the real issues. Politics and jokes aside, what’s the real cause of the rising prices? The government needs money to fund development, and pay extra salaries and wages demanded by civil servants and teachers. We also argue that our new constitution will be expensive to implement..

The reason behind the high cost of implementing the new constitution is because we gave it to lawyers, and economists were sidelined. No wonder, there are so many commissions headed by lawyers.

Revenue gap

The central theme in the new political dispensation was sharing. Governors are demanding more money but are silent on how they can raise it themselves.  That is why we have a revenue allocation commission but no revenue generation commission. All the layers of our new county governments demand money.  Add the fact that we import more than we export and the deficits are very clear. Governments have two sources of revenue, taxes or borrowing. Raising taxes is unpopular before elections but not after. Raising taxes is easy. Rarely have people refused to pay taxes. But higher taxes can depress the economy, since consumption goes down and fewer jobs are created due to the fall in demand for goods and services. Some could argue this tames inflation. Higher taxes can only be a good short-term measure.

Borrowing by government denies the private sector the much needed credit and depresses the economy. Is it true that ‘VATing’ more goods and services particularly the basics, makes more people share the tax burden?

 What can we do about the rising prices? Government must cut down its costs so that we can borrow less and be taxed less. A good example is counties that are advertising for new jobs, yet no one has been sacked in the former county councils.

 We have fewer ministries, but the old jobs and structures are still intact.The state should make  the economy more efficient and productive by bringing down the costs of doing business. This requires better infrastructure and reducing bureaucracy. It should create an enabling environment to form new enterprises that compete and reduce the prices.  This creates more taxpayers and the burden is shared. We also need to export more by changing our country’s image and producing quality goods and services.

That was the road followed by Korea, Japan and more recently Brazil. We cannot export politics, which is our mainstay. We also must reward hard work or productivity and stop seeing work as evil.

Shall we ever have an equivalent to America’s protestant work ethic? Can we demand counties to generate their own revenues instead of relying on taxes? In the long run, the public will adjust.

Remember the aftermath of Goldenberg? Businessmen can adjust prices. The employed will see their purchasing power eroded. We expect the employed to try their luck at small businesses (jua kali).  Corruption might become a strategy to make ends meet for some.