Progressive tax laws will spur economic growth

A shift to progressive tax laws can usher in a period of remarkable prosperity. [iStockphoto]

There is an ongoing discussion around the cost of living. Basic commodities have been subjected to increased taxation, leaving many households at sixes and sevens.

This discontentment is likely to escalate even further unless new policies are put in place to steer the country onto a different path. Calls to review Kenya's tax laws are frequent and there is need to adopt progressive tax measures that do not place an impossible burden on those at the bottom of the pyramid.

At the heart of Kenya's economic challenge is defining how success is measured. While the standard measure of Gross Domestic Product (GDP) has been useful, it is incomplete. Indeed, it is not unusual to have situations where there is positive growth in GDP without a corresponding growth in job creation. For example, an economic policy anchored on significant investments in capital intensive sectors can deliver huge GDP growth without necessarily creating a correspondingly high number of employment opportunities.

The first step in Kenya's economic emancipation is to make job creation the central objective of government policy. By having this clear economic objective, the conversation around tax policy becomes a much easier exercise. The limitations of a revenue strategy anchored on increasing consumption taxes becomes all too clear. The current policy direction of adding VAT and excise tax on most basic commodities will lead to higher prices and lower consumption.

Producers will sell less and they will be forced to scale down operations by reducing the workforce, ultimately leading to higher unemployment. In the end, the original objective of job creation will be contradicted. It is the reason consumption taxes are considered regressive and a barrier to economic growth. In the long run, they are associated with lower revenue collection as demonstrated by the Laffer curve.

A shift to progressive tax laws can usher in a period of remarkable prosperity. Policymakers will spend more time trying to grow individual income tax and corporate income tax, which means more policy support for companies to expand and hire. There is need for a capital gains tax because as jobs and incomes grow, property owners will be able to conveniently pay their annual rates, which will be ploughed back into the local communities to develop education, health and local infrastructure.

The immediate result of this will be steady and sustainable revenue collection for the government which will lead to lower borrowing as well as an opportunity for government to increase the size of its budget. While many commentators have consistently argued that the government has been running a bloated budget and that it needs to apply austerity measures, the reality is quite the contrary. Kenya's budget expenditure relative to its GDP is less than 25 per cent.

The catalyst for aiding Kenya to make fundamental change in tax policy lies in the political leaders investing time and resources nurturing economic principles around taxation.

-Mr Gichinga is Chief Economist, Mentoria Economics