Ensuring equity, fairness best starting point for our tax regime

Times Towers building that houses KRA headquarters. [File, Standard]

From comments this week, the Kenya Kwanza administration still has plenty to convince us in setting out its growth-friendly fiscal consolidation path for Kenya.  To begin, contractionary fiscal consolidation and expansionary growth cannot be used in the same sentence of proper English. 

Then we had an aggressive brouhaha on taxes from what is essentially our constitutional idea that everybody should pay, with almost zero exceptions.  As is always the case with these things, the week’s debate offered more heat than light, and it is not beyond any imagination is to consider this as partly a reaction to the unexpected lift that Azimio has gained from its most recent public rallies. 

I don’t think many Kenyans have a problem with paying taxes, or with President Ruto’s call to pursue a journey of self-reliance.  In the technical long-term that is government, debt represents future taxes, so a past decade of borrowing had sadly left us busy “kicking the can down the road”. 

There are many views on tax, and here are a couple of the more telling ones.  We are familiar with former UK Prime Minister Churchill noting with much aplomb that “for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.  This is the sort of view that got some politico in our 1970s detained for “substantiating the obvious”.

Then there are these four from former US President Reagan.  First, “simple fairness dictates that government must not raise taxes when families are struggling to pay bills”.  This would strike a popular chord in a Kenya where it’s not clear if we are getting new taxes or taxpayers or both.

Killer statement

Then tough ones on government.  Like “government does not tax to get the money it needs; government always finds a need for the money it gets”.  Or “the people are not under-taxed; the government is over-fed”.  Then the killer statement, “we don’t have debt because we haven’t taxed enough, but because we spend too much”.  Enough said? I am not responsible for these quotes.

National self-reliance objectives notwithstanding, there are a couple of inter-related points that this Kenya Kwanza administration might do well to reflect upon as it pursues what is coming across as an aggressive stance from a team that promised less “madharau” and more friendly government.

We could begin with the theory from the likes of Adam Smith that point us to the need for a tax system that is principled around equity, fairness, simplicity, certainty, convenience and efficiency.  If I am not wrong, these principles are captured in our draft national tax policy.  But it is their practice that makes the difference.  Let’s go to the two perspectives, on success, then on trust.

First, drawing on best practice from the OECD, three critical success factors (CSFs) for any modern tax administration.  The first one sounds obvious - the state of the economy.  This is probably repetitive, requiring work to grow an economic “dog” that wags fiscal “tail”.  Anybody who has read KRA’s corporate plans will see that they model forward tax targets, and analyse past and current performance using economic growth as a key, but not the only, variable.

A second CSF revolves around the extent to which the public supports government priorities.  Support here is not voting; but supporting what is presented and delivered as a sensible agenda during those civic moments between elections when we are not actually lining up to vote.  It goes without saying here that this is where civic education; indeed civic competence; matters so much.  To question priorities, contribute to budgets, monitor implementation and hold leaders to account.  With a political (and tax) administration willing and ready to have “their feet held to the fire”.

The third CSF is pretty straightforward.  It is about the willingness of taxpayers to comply with tax rules.   You don’t need to go far to see that compliance is largely a function of adherence to the principles set our earlier.  But it is more basic than that, and goes to my second overall, and related, point drawing on observation on how any government extracts anything from its citizenry.

Trust is the byword, and there are three “trusts” that any taxpayer looks for.  The first is trust that the method of collection is helpful, not harassment (I have said seamless and painless before).  This week’s hullaballoo suggests that this message has not quite registered with this administration.

Serial maladministration

The second trust is that funds collected will be applied prudently and judiciously (I have said economically, efficiently and effectively before).  This is particularly relevant to a public spending context in Kenya that is replete with corruption, fraud, waste and serial maladministration.

And, as many Kenyans will ask every day (despite all of the fine words from our leaders), why do I contribute to the public purse then privately self-provide the same costly and unregulated service?

There is an unusual angle I like to persist with here. In one sense, taxes (whether national or local) are largely directed at the public good.  Where, however, government is able to provide services directly (e.g. through MDAs, county government or parastatals), there is a greater willingness for taxpayers to seek and pay for these services for direct benefit (as citizens, residents or customers).  So here’s a quick question. In creating trust in the use of funds, might well-delivered services indirectly foster a growing public confidence in the role that broader taxes play?  Food for thought.

The third trust is that others will bear their fair share; a simpler way to think about the equity principle we were ostensibly dealing with this week.  Ostensibly because there’s politics as well.  Yet this might represent the actual challenge our political (and tax) administration faces from a trust perspective. Yes, it might be the aggressive collection method, or the fear that our taxes go into a “black hole”, but if equal circumstances do not guarantee equal treatment, who will pay?

Mostly, though, is weaponizing the tax effort the way to get everybody to pay their rightful share?

Which doesn’t mean we should ignore Reagan. There is a correctness in the growing view that we spend way too much time thinking about taxes as book-balancing, not economic signalling.

Green economy

Yes, we have interesting new ideas emerging around fiscal policy for a future green economy, but there are an equal number of measures being introduced that are getting private sector actors to wonder and consider alternative investment destinations (of course, one could also argue that the idea is to transform Kenya into an economy driven by dignified labour, not owners of capital).

Yet, even as we consider angles to the tax debate - which still lacks a national tax policy framework - it is equally important that we get the shape and style of government we are willing to finance.

Spending is equally important in our fiscal consolidation, which raises the question of cost of government across MDA, county and parastatal services and functions, and the role of privatisation in the wider scheme of comprehensive public enterprise and parastatal reform.  We also cannot see policy direction in the future of our tens of public funds cutting across government.

Indeed, although we had a cabinet dispatch “announcing” spending cuts of Sh300 billion in the supplementary budget for 2022/23, the draft policy statement in the public domain offers no clue as to how this will be achieved; particularly in a way that does not depress private sector activity.

We haven’t really asked the hard questions about why, as the Council of Governors noted, overall spending and revenue is expected to rise significantly in 2023/24, but national government’s minimalism has denied them a share of this while increasing its own national budgets for what should be fully devolved functions.  These are questions for the economy’s productivity choices.

We will return next time, though we must remember that the international financial institutions considered Kenya a “tax frontier” (read, under-collector) in providing us with much-needed support.  Let’s end with a Reagan thought on government’s role in the economy; “if it moves, tax it; if it continues moving, regulate it; if it stops moving; subsidise it”. The debate must go on.

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