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Increasing taxes will up poverty and crime rate

NAIROBI, KENYA: No war can be won without strategy. This explains why some Kenyans are questioning the goal of the budget recently presented to Parliament by Treasury Cabinet Secretary Henry Rotich.

The goal of a national budget should not be repaying debt, but to induce investments that create jobs and make  goods and services available for the comfort of citizens.

Taxation should not induce poverty because poverty breeds crime. In any case, an appropriate tax policy is a must if economic growth is to be achieved.

Appropriate tax policy must raise both rates of saving and capital formation. It is unlikely that the recently presented budget will achieve that.

Treasury and Parliament should find out the citizens’ feelings about the budget.

It is now like employees and employers have rejected the budget. Employers own the business and businesses supply jobs to citizens, entitling them to an income.

A budget that increases the cost of doing business and takes away employees’ income undermines economic growth.

In this column, Treasury was cautioned against over borrowing and now we are right inside the mess. There should be a national conference on the economy.

In the old days, conferences would take place at the University of Nairobi, and the Minister for Finance and Economic Planning would discuss the economic agenda of the nation.

This is not the case, which might explain the disconnect between what is going on at the National Treasury as depicted by the budget and the business world.

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It is not equitable asking business, specifically new ones to pay tax in advance as tax is based on profits, which can only be established later.

If that has to happen, then it must be a symmetrical affair, i.e if later the business that paid tax in advance reports losses, then the Kenya Revenue Authority must refund that tax together with interest.

It cannot be that the government can always tax but is not accountable for the levies they collect. Look at what is happening at these institutions such as Kenya Bureau of Standards, the intelligence, etc., that are funded with taxpayers’ money, in relation to sugar imports.

The feeling is that our taxes are wasted. Taxation is not bad, but National Treasury should be aware that excise taxation is a burden that discourages investment savings and hard work.

The reason why Kenyans fight over who becomes the president is about access to the resources funded by tax payers. When you reduce income in the hands of citizens through higher taxation, their purchasing power is reduced and so is their demand for products and services. This means less revenue for businesses that translate into high level of unemployment.

Increase in levies and taxes will derail further a weak economy. Unknown to Treasury is that, currently, a number of businesses cannot meet their statutory obligations such as NSSF, NHIF and catering levy.

Treasury seems to be inferring that taxes will solve our debt problem and maybe  other economic problems; specifically that a higher tax is the best method to raise high government revenue.

However, they forget that low taxes can stimulate the economy thus increasing taxable revenue and propel economic growth. In 1980, Ronald Reagan attributed the bad state of the American economy to bloated government service and oppressive taxes.

The economists advised Regan that America will have to reduce taxes to promote economic growth and he listened!

Paul Harvey who was Regan’s advisor was the architect of this supply side or trickledown economics. Nevertheless, Harvey stood on the shoulders of Arthur Laffer to be able to see that far.

The basis in Regan’s 1980 proposition was that less taxation allows citizens to spend and invest more in businesses thus creating more income to residents.

Higher taxation and levies will send business into financial bliss and even bankruptcy, undermining competition and breeding inefficiency within the few remaining businesses.

Regan’s idea created 11.6 million jobs. It is on record that when Clinton in his term increased tax, revenues rose by 7.4 per cent per year, GDP rose by 5.6 per cent per year and the national debt increased by (Sh73 billion)  $730 million.

However, in the second year when the Republicans forced Clinton to reduce tax, revenues increased by 5.7 per cent per annum and the debt were reduced by $409 billion.

It is true that tax policy that is appropriate for developed countries, but we equally want to increase our levels of individual income.

However, CS Rotich should study carefully the relationship between tax revenue and GDP. In the US, the conclusion is that give more tax concession to propel economic growth. A budget should never betray citizen’s social and economic agenda.

This current budget is not placing food on the table but taking it away. The core of our tax policy should be to reduce inequalities in income and wealth distribution.

In 1794, there was a tax rebellion in the US,  the Famous Whiskey rebellion. Angry barley, maize and wheat farmers burned down tax collectors’ houses but the US used military force to break them.

-The writer teaches at the University of Nairobi

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