Effects of Tax Increase To The Economy

 

There has always been a misconception that, increase in taxes would increase revenue collection.

On July 2015, CS Rotich proposed a tax reform where an  imported Car was to be taxed 20% more, Beer was to be taxed Sh 100 per litter from Sh 70, Juice was to be taxed Sh 10 more per liter, Plastic bag was to be taxed 50% more while Cigarettes Sh 2,500 per 1,000 sticks which is  an increase of Sh 1300.Motorcycles which have created a lot of jobs are to be taxed Sh 10,000 per unit.

Rotich stressed that the measure was key to funding Sh 2.1 trillion budgets among other reasons.

According to economic report 2016 Kenya Personal Income Tax rate is as high as 30% since 2010. Personal Income Tax rate is tax collected from individual and is imposed on different sources of income like labor, pensions, interest and dividend. When the current government ascended to power they had a vision to improve our economy. They have worked hard to do so but sometime they have always missed the point.

Learn From Russia

As a nation we are faced by the same economic problem as Russia was in 2000. However since their president came into power in the same period, he reformed the economy, it’s only shameful that we haven’t learnt from them. Russia had defaulted on its dollar-denominated debt in 1998 because its economy was in crisis. The ruble’s (currency they use) value had fallen by an additional factor of about 5:1 before being stabilized in 2000. But they introduced ‘The Margic Formula’ tax reforms.

Among the tax reform measures were a 13% flat tax on personal income, which replaced the three-bracket system with a top rate of 30%, lotteries tax reduced from 35% to the standard flat rate of 13%, exempting small businesses from value-added tax, sales tax, property tax, and social insurance taxes and building on it.

They went ahead and  reduced corporate income tax rates from 35% to 24%. This was magic and smart for them; ruble which was going for 29/dollar at the beginning of 2001 has rose to 30/dollar today. The revenue from the 13% flat income tax in 2007 was 1,267 billion rubles, 624% higher than revenue of 175 billion rubles in 2000 and the gain was not “inflationary” .

The Russia’s debt/GDP ratio has today improved to about 6%.  Beginning January 1, 2008, Albania implemented a 10% flat tax on corporate and personal income. The 10% personal rate replaced five rates that peaked at 30% while the 10% corporate rate was halved from the previous 20% rate.

Despite the reduction in rates, total revenues increased from LEK 125 billion in 2007 to LEK 148 billion in 2008  In conclusion, the flat rate tax plan did a lot to help stabilize the ruble as big tax cuts tend to be currency-supportive. The flat tax tends to achieve greater compliance due to its simplicity and low rate. It reduce corruption, eradicated subsidies from favored constituents, raised money to pay for badly-needed services, and established the credibility to push for further reforms.

Effects of Tax Increase

Just as Russia had been faulted by international organizations and experts on its failure to collect enough tax, the same have been directed to Kenya. But Russia responded by implementing an economic viable method while Kenya responded with faulty method.

The increase in tax has been a blow to agriculture and other sectors. It has led to multiplier effect of low consumption. It has depress the economy resulting to net negative effects and most a time the government fails to achieve its objectives of revenue collection.

As observed when Keg beer was taxed more, people turned to illicit brew. Chair of Association of Imported Cars confirmed that order were being cancelled and had reduced from 12000 units to 4000 in the year on November 2015.

Bottom line 

Kenya tax is comparably high. We have so many taxes being imposed and new ones being introduced for capital gain. All this is depressing the economy and we might not achieve collection target.

Countries such as Latvia Estonia, Russia and Albania have lowered their taxes and increased their revenue collections.  I am longing to see Kenya adopt this ‘magic formula’ instead of toying with methods that does not work.

CREDIT:GATHATHAI MWANGI

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About the Author

Muhatia
Muhatia is the Managing Editor of Biz News Media Reach him via editor@biznews.co.ke