Kenyan economy is service based, so raising taxes hurts

A man celebrates in Nyamira after the Supreme Court upheld President William Ruto's victory, September 2022.  [Stanley Ongwae,  Standard]

Kenyans must give President William Ruto a thumbs up for being candid on why he is fond of frequently increasing taxes. 

The President has provided the template on why his economic model can only be built by increasing tax rates all so often.

Former President Uhuru Kenyatta increased taxation throughout his reign save for 2017 and only depressed rates once in 2020.

It was Uhuru who increased VAT to 16 per cent on nearly every item save for bread and milk at a go, it had a ripple effect on the economy.

He introduced Railway Development Levy, Capital Gains Tax and exercise duty on basic items like water and juice. These tax increases were not justified.

Today, President Ruto justifies his zeal for increasing taxation to accelerate the tax to GDP ratio. Since assuming office, he has decried the low tax to GDP ratio. I think Kenyans got an ample opportunity to critique this narrative from the perspective of tax to GDP ratio. Where are Kenyan economics scholars?

This needs thorough academic probing through research and publishing besides agile analytical critique by public intellectuals. It is unfortunate African economic scholars haven’t published anything about taxation in Africa. Is it true that tax to GDP ratio can only be attained by increasing tax?  Highly debatable, this can be contested not just through statistical figures but in court.

Tax rates can be reduced and even zero rate some items like bread, milk, maize flour, water and some medicine and still collect more revenue through rapid consumption and heightened demand where jobs will be created and more spending created.

For all intents and purposes, what President Ruto is doing since Finance Bill 2023, is to freeze demand by muzzling consumption. He has stated succinctly he’s a supporter of production not consumption. The President loathes public consumption, but if consumption is punished so severely, how do you produce? For who?

Ruto’s vision is for Kenya to stop borrowing and he avers that World Bank’s money that Kenya borrows is savings from other countries, good point but how do Kenyans get to a culture of saving if they must give as much so frequently to the government and where production is plummeting?

It is interesting the President cites OECD countries as the best examples of tax to GDP ratio where France is at 45 per cent. OECD are industrial economies. Not that we can’t attain a tax to GDP ratio of 22 per cent in 2027, but revenue performance of 2023-2024 financial year need to be factored.

Not once did Treasury Cabinet Secretary lament falling revenue targets beckoning from weakened purchasing power.

Kenya is a service economy, not industrial, we have no minerals, of course no oil, so tax increases must be restrained. But it has become the easiest thing to do. Service economies are by nature vulnerable. They demand constant lubrication through incentives. Finally, two questions need to be pondered by the National Treasury; can tax to GDP ratio drive growth? Can economic growth accelerate tax to GDP ratio?

-The writer is an economic literacy activist