Higher taxes won't cure flagging revenues, Treasury boss admits

Treasury Cabinet Secretary Prof Njuguna Ndung'u conceded that higher taxes are hurting Kenya's economy. [Robert Menza, Standard]

President William Ruto’s top money man now says higher taxes do not necessarily lead to higher collections.

National Treasury Cabinet Secretary Professor Njuguna Ndung’u, an avid researcher and academician, made the revealing comments on Tuesday evening during an International Monetary Fund (IMF) virtual forum where he was a panelist.

The comments by Prof Ndung’u, a former Central Bank of Kenya (CBK) governor, who published several papers on taxes and the economy before he assumed his current role are likely to shine a fresh spotlight on the fiscal strategy of the Kenya Kwanza government, which has introduced a raft of new taxes amid protests from consumers.

Speaking during the IMF African Fiscal Forum, Prof Ndung’u alluded to the principle by American economist Arthur Laffer, who argues lower tax rates change people’s behaviour and stimulate economic growth, creating more tax revenue for the government, not less.

He, however, maintained that the William Ruto government is firmly focused on instituting tax reforms to bring tax equity and broaden the tax base.  

“The first brutal point is to say that with the current tax system, and even the way we are conducting our fiscal policy, we cannot raise adequate revenues beyond 14.1 per cent of GDP even if we get a vibrant economy because in a sense, somehow, somewhere is a combination of both technical issues as well as political issues.”

“The domestic resource mobilisation must be couched in a way that also reflects the economic structure, and it should change with the economic structure. The moment you fail and you are left behind, then it means that  it is going to be extremely difficult for you to catch up.”

Prof Ndung’u also said higher taxes would be generated in a growing economy and not a battered economy.

“The second point is that 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,” he said.

He, however, maintained that ongoing reforms would ensure equity in the payment of taxes.

American economist Laffer is sometimes referred to as the “father of supply-side economics,” and his philosophy on taxes became known as “The Laffer Curve.”

Backers of his philosophy credit Laffer with helping to spur income tax reductions around the world and boosting national economies as a result.

Critics, including the IMF, however, say the tax cuts he has espoused over the years have not produced the promised results and have instead contributed to growing income inequality and soaring budget deficits.

Laffer said earlier he did not invent the Laffer Curve and quoted economist John Maynard Keynes in summarising it.

“Given sufficient time to gather the fruit, a reduction of taxation will run a better chance than an increase of balancing the budget,” he said.

This is the second admission by one of President Ruto’s top moneymen that higher taxes could hurt the economy.

Appearing before the National Assembly Finance Committee, Kenya Revenue Authority (KRA) Commissioner General Humphrey 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.

The rare but candid admission by Dr Ruto’s top moneymen underlines the revenue-raising challenges facing the cash-strapped Kenya Kwanza government, which is relying on a series of fresh levies and revenue modifications aimed at the sector in a bid to increase its tax earnings twofold.

The controversial revenue plan proposed by the Kenya Kwanza government has not yet gained traction as tax collection in both the previous and current fiscal years has  fallen short of the target by billions of shillings.

This deals a major blow to the President’s efforts to fund his costly campaign promises and repay mounting public debt at a time when his administration’s additional taxes are stoking tensions amid the high cost of living.

The platform on which his government was elected aimed at uplifting low-income earners, commonly referred to as hustlers.

KRA has faced significant pressure from the Ruto administration to address revenue leakage and enhance the State’s financial resources to allow Treasury to reduce its dependence on public debt.

This comes at a time when the Kenya Kwanza government has shown a strong interest in implementing new tax increases, rattling its support base.

The government has implemented a set of contentious taxes, including a 100 per cent increase in value-added tax on fuel to 16 per cent, and a 1.5 per cent surcharge to finance the construction of affordable housing.

The government anticipates that these measures will generate an additional Sh200 billion annually.

The KRA’s shocking admission aligns with the documented decline in tax compliance, indicating a potential transition towards an underground economy.

A spot check by The Standard earlier revealed that some traders have resorted to abandoning electronic payment methods to avoid increased tax compliance.

After years of relying on large manufacturers, importers and salaried Kenyans, the Kenya Revenue Authority (KRA) recently launched an aggressive campaign to fulfil President William Ruto’s demand for more revenue to meet his ambitious pre-election pledges.