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Misuse of public funds risks fuelling tax boycott

COMMENTARY
By Ken Opalo | June 22nd 2013

By Ken Opalo

Throughout the week Kenyans have complained about the planned purchase of an office worth Sh700 million for former President Kibaki. As a result the Budget and Appropriations Committee of the National Assembly axed the Kibaki office plan from next year’s estimates. The bizarre expense may be behind us, but it highlights the cavalier attitude with which those who manage our public finances do so. The Kibaki office plan made a complete mockery of the Government’s insistence that there is need for budget cuts, especially of the ever-growing wage bill. The colossal budgeting blunder (not forgetting the misguided free laptops idea) are emblematic not of a Government short on cash, but one with misguided priorities. It is no wonder that teachers, nurses, among other public workers are gearing up for industrial action to demand higher wages and benefits.

And all this comes at a time when the taxman is casting the tax net ever wider. Because of the Government’s need for more revenue, poorer families will likely have to pay a regressive consumption tax in the form of the proposed 16 per cent VAT. The wealthier among us will pay taxes on capital gains, rent income, and financial transactions in Saccos. Given these developments, it is surprising that the increasing zeal of tax collection – through stricter enforcement and a widening of the tax base - is yet to ignite a spirited debate on public finance management in the country. On the contrary, what seems to be happening is that the more the Kenya Revenue Authority (KRA) collects, the more ingenious State officials get at ways of siphoning off money for their private benefit.

Given KRA’s reliance on Kenyan workers for tax collection, it is important that the management of those funds once collected be as transparent as possible. If the current blatant misuse of public funds continues, I can foresee a scenario in which Kenyans decide to avoid taxes rather than pay and see their money squandered. The world over, tax compliance is tightly linked to the public’s perception of how the State uses tax revenue. States with high incidences of graft also tend to have low rates of tax compliance. The low tax compliance rates in Italy and Greece are reminders that even in relatively strong states citizens can successfully hide their income from the taxman.

In order to forestall rising cases of tax avoidance in the future, our state institutions - beginning with Parliament, KRA, and other oversight authorities - must ensure that Kenyans continue to have faith in the contractual bond between citizen and State through taxation.

Of course taxes have always been misappropriated in Kenya’s history, but I believe that this time is different. Firstly, Kenyans are becoming savvier with regard to budget issues. This has happened partly because the budget process is more transparent and has recently been made more accessible through greater parliamentary involvement. Secondly, the more the taxman widens the net the greater the incentive will be for Kenyans who can think of ways, legal or not, of avoiding taxes.  With this in mind, the best way to ensure consensual tax compliance is by ensuring that Kenyans’ hard earned money is not squandered on Government projects that are driven primarily by the rents accruing from the tendering process rather than sound public policy. 

Before the National Assembly passes the proposed new taxes, there needs to be a proper debate about their potential impact on both the economy and the livelihoods of Kenyans. It is only then that the public will have ownership and an understanding of what the Government is planning to do with their tax contributions. And in future, the National Assembly should ensure that the budget process follows the spirit and letter of the Constitution, especially with regard to the provision for robust public engagement. Even though we are already operating under a new dispensation, this year’s budget statement still felt like the mysterious expenditure plans of old that the Minister for Finance would drop from the sky.

Accountability in the management of public finances covers the entire cycle from tax collection to government expenditure. As the tax base widens and rates go up, the high rates of compliance will only be maintained if the public feels that the expenditure process is transparent and responsive to it needs. An opaque and manifestly fraudulent budget process will only sow the seeds of tax avoidance.


 

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