Taxation: Why Kenyan goose should be plucked gently

National Treasury CS Njuguna Ndungu. [Boniface Okendo, Standard]

It was Jean Baptiste Colbert, the respected economic reformer who ended up as King Louis XIV's First Minister of State (like a Prime or Chief Minister) in 17th Century France, who offered that "the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."

Many will recall his timeless quote, but this is to understate the role history records that he played in ordering, first, the workings of government, then, the workings of the economy in an era in which Europe was all war; no peace.

Almost 400 years later, on Planet Kenya, Treasury informed us during this week's public sector hearings that the Kenya Revenue Authority (KRA) missed its five-month revenue target for the 2022/23 fiscal year by a little over Sh30 billion, with income taxes largely to blame (low economy, low tax take, anyone?).

Actually, for the sake of idle argument, a loosely pro-rated estimate of the tax shortfall based on exchequer reporting in the December 2022 Kenya Gazette for the period to November might put it at Sh107 billion based on a Sh2.07 trillion tax target translated at Sh173 billion per month. Interestingly, the same reporting suggests that non-tax revenue is running slightly ahead of target. Pro-rating might be simplistic, because taxes are not constant flows, but maybe they should be.

Let's take Colbert's perspective and KRA's current year performance as the two extremes in the debate that seems to be emerging, especially across mainstream media, on taxes in Kenya. For those with short memories, the last time we paid so much interest in taxes was the 1980s and early 1990s, when nobody outside a couple of think-tanks was willing to comment on public spending.

But I am getting ahead of myself. Between the extremes above, I see five conversations to be had.

The first conversation that is happening is the official one on tax collection targets led by President William Ruto. Except that his targets are as clear as mud. Is his "one trillion extra in one year" additional to the Budget Review and Outlook Paper (BROP) 2023/24 target of Sh2.42 trillion that is almost Sh400 billion above the current 2022/23 target that is flagging after five months? What is being doubled by 2027/28 - the 2021/22 tax, not total KRA collection of Sh1.77 trillion, or this year's tax target in the BROP of Sh2.04 (not 2.07) trillion (yes, this year's target is almost Sh300 billion more than the previous year's achievement)? Let's call this the political conversation.

To be clear, there is the tax take (income, excise, customs/import and VAT) to which is added investment and other income to derive ordinary revenue. When we add ministerial appropriations-in-aid (internally-generated revenues), we get total revenue (that's the Sh2.2 trillion total number we celebrated for 2021/22 that's officially supposed to hit Sh2.5 trillion this year, Sh2.9 trillion in forthcoming 2023/24 and a whopping Sh4.2 trillion by 2026/27, with the tax take at Sh3.6 trillion). Which leads us to the second, technocratic conversation taking place.

It starts with the BROP targets mentioned above. In the BROP itself, there's mention of a Medium-Term Revenue Strategy (MTRS) that ambitiously aims to grow ordinary revenue to a quarter of the economy (currently we are at 15 per cent) by 2030 with taxpayer compliance at 90 per cent from 70 per cent today. This two-phase MTRS (2023/24 to 2026/27 and 2027/28 to 2029/30) is a work in progress.

Where is the International Monetary Fund (IMF) in this business of tax targets? Well, they are still working broadly with the numbers from the technocrats - an actual tax take of Sh1.77 trillion in 2021/22 and a target of Sh2.04 trillion in current 2022/23. Some Sh2.43 trillion in forthcoming 2023/24 and Sh2.73 trillion for 2024/25 are respectively about Sh10 and Sh20 billion higher than BROP, give or take a billion.

For the technocrats, economic growth is an important driver of this conversation, but there is merit to the rationale behind a political conversation that seeks to answer the difficult question as to why the economy has grown much faster than the tax take in the past decade. That agriculture and the informal sector are not fully in the tax net is one discourse. That big business, especially the banking sector, proportionately account for more in taxes than growth is another. Digital helps too - consider that today we have 10 million more people on Hustler Fund than taxpayer PINs.

The challenge we have here is that this discourse on big numbers is all "macro-babble", as I call it. So there is probably a third, less noisy, conversation going on at the microeconomic level. It begins with the multiple impacts of the 2022 Finance Act on private sector activity at present and investment choices in the future. From taxes on digital and financial derivatives, to expanded (and unindexed) capital gains rates to taxed exportable services, and everything in between.

That there have been questions is not surprising, that's par for the course. But the conversation is leading to two emerging concerns; one immediate and the other for the long term. For the former, the silent question being asked is, what do the monster tax targets we are hearing about mean for the content of the 2023 Finance Bill? For the latter - where is Kenya's national tax policy right now? Isn't this the basis for predictability and certainty that sits above tax targets, medium-term strategies, digitisation/automation processes, finance bills and the like? Is the president's initially proposed tax policy hierarchy of wealth-consumption-income-trade now up and running?

That's the hissing that Colbert referred to; but mostly there will be no golden egg without a goose.

Let's turn to two final conversations. We start with what we are hearing today. Debt-fuelled growth is our mortal enemy. Growth will be driven by revenue and savings (remember, "yesterday bad; tomorrow good"). Yet each of these is a function of increasing economic activity, and return. This raises two questions. The first is about the scope to generate private savings for investment in Kenya's "hand to mouth" context, which is a discussion of its own. The second, more complex one, is about how to deal with government "behaviour" that spends everything it collects and more.

In other words, what is the "game-changer" that creates an official culture of thrift in a way that, say, Singapore famously did? Cutting a long story short in the interest of space, does Kenya have a revenue problem, or an expenditure one? "Oh, but we can't cut down government, it is the largest source of business in Kenya. Think of all the procurement and supply opportunities that we record in the books as "operations and maintenance" or "development". Hey, we can't cut the payroll without inviting revolution and crime". This is the political language of our prisoner's dilemma that prefers to hike taxes to hit everyone over cost cuts that hit the established status quo.

And it's the conversation we do not want to have. Have a quick look at this Kenya Kwanza administration. On the one hand, an austerity drive. On the other, fast expanding government. With many promises to deliver, wouldn't it make sense that one speaks to the size of government? Is there a conversation around taxes and government, and not taxes as a book-balancing item?

Which brings us to a final conversation that takes us back to basics. The conversation about taxes is not a conversation about government, but one about citizens and businesses as taxpayers. As an agent of the people, government has no money of its own, so it must make its case for our wallets. Its tax collection mandate is a delegated power deriving from our collective consensus that it is as much an instrument of societal order, as it is a platform that underpins the nation's development.

But that's the esoteric, demand-side stuff. What would the supply-side of government look like in a citizen-centric conversation about taxes? One, a value for money entity that puts our taxes to the right use, especially regarding the basics (think Article 43 rights).

Two, a proactive provider of seamless front-office products and services that are accessible and affordable to all - think non-tax revenue. Citizens are much more interested in what the system does than how it actually works.