This occurs because excessively high rates discourage economic activity, stifle investment, and incentivise tax evasion, driving transactions into the underground economy.
Ndung'u articulated this, stating, "High tax rates create incentives for evasion," and observed, "We're seeing this with our shrinking tax base."
He further emphasised that a vibrant economy is essential for higher tax generation, stating, "We need economic recovery for us to generate even higher taxes because the current vibrancy, the current economic structure and the vibrancy of the economy is so low to support added tax."
The comments by Professor Ndung'u at the time appeared to contradict the government's public stance on aggressive taxation and echoed similar warnings from KRA Commissioner General Humphrey Wattanga about the difficulties in bringing Kenya's vast informal economy into the tax net.
Appearing before the National Assembly Finance Committee, Mr Wattanga, a few months ago, also conceded difficulties in bringing the informal economy into the tax net, even as he warned of a decline in some specific taxes in other sectors.
Yesterday, the KRA announced a significant organisational restructuring and leadership changes within the tax agency to beef up tax collections.
In a press release, the KRA announced a "major recruitment drive" and a review of its organisational structure, framing it as a move to "enhance service delivery and organisational agility."
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The KRA statement noted that the recruitment drive "covers a wide range of roles from leadership to operational positions" and explicitly mentioned the re-advertisement of "Deputy Commissioner positions as well as one Commissioner position" to "enhance inclusivity and broaden participation."
The restructuring, according to KRA, aims to "address both current and future institutional needs by enhancing workforce flexibility, operational efficiency, and fostering a culture of continuous learning and innovation."
The pressure now mounts on the KRA's new and re-assigned leadership to demonstrate a tangible improvement in tax collection to support the government's fiscal stability, analysts say.
Tax consultant Ian Njoroge yesterday warned that "Every new tax measure pushes more transactions underground," trapping the government in a "vicious cycle" where it raises rates to cover gaps, only to drive more evasion and create new shortfalls.
Analysts say the Ruto administration is faced with a rock and hard place with limited options: either to intensify tax enforcement, risking further economic contraction; expand borrowing, potentially triggering credit downgrades; or revise spending, which would likely delay key development projects.