Increased taxes fail to shore up revenue collections for government

A look at the recently released Leading Economic Indicators (September 2024) report by the Kenya National Bureau of Statistics (KNBS) is an interesting piece of information.

The report provides a peek into the Monthly Leading Economic Indicators by highlighting changes in Consumer Price Indices, inflation rates, interest rates and exchange rates. In addition, it details changes in selected indicators of international trade, agriculture, energy, manufacturing, construction, tourism and transport.

In essence, it lays bare the economic performance of the different sectors of Kenya’s economy by breaking down how the different sectors have performed month on month basis as contrasted and compared to the previous year.

Away from the statutory deductions for employees and corporate taxes for firms, new regulatory fees, taxes and levies to support the Kenya Kwanza government agenda such as the Affordable Housing Levy and the Social Health Authority to provide universal health coverage have pushed individual and corporate taxes to a new high.

This has seen a good number of employees experience diminished power of purchase and fewer options to choose from when spending. Disposal income for many small business people and employees is at a historical low hence hurting demand which in turn hurts struggling firms. It therefore came as no surprise when the KRA announced this week that it had had a revenue collection hole of Ksh.42.9 billion within the first four months of the Financial Year 2024/25.

The tax burden on Kenyans

The Kenyan government seems sold on the idea that more taxes must yield better revenues but the truth must slowly be downing on those unrelentingly pushing this school of thought.

There is an economic theory that proposes that higher taxes can decrease revenue because they can lead to tax fatigue, tax avoidance and evasion, stifle the incentive to work, discourage investment activity and ultimately deter anticipated economic growth.

The Leading Economic Indicators (September 2024) report says there are a few sectors which experienced a slight increase in demand and subsequently their earninreasons for the depressed earnings or performance across given sectors despite the fact of service or product availability. The Laffer Curvegs, however, the sluggish pace and outright diminishing performance experienced in a good number of sectors, though over a short period, have a story to tell.

In the study of economics, there is a theory, commonly called the Laffer Curve which depicts the relationship between tax rates and revenue. It would be the best fit in analyzing the reasons for the depressed earnings or performance across given sectors despite the fact of service or product availability.

The Laffer Curve

The Laffer Curve theory suggests that there is a certain optimal tax rate the government should impose for enhanced revenue. This point in the curve is anywhere between zero and one hundred but it is incumbent upon each government to find out.

From this theory, it goes that if the government imposed a tax rate of 0 percent, the government would not collect any revenue. If the government imposed a tax rate of 100 percent, individuals would no longer work and businesses would no longer produce goods as there would be no incentive to do so.

The Kenya government would therefore have a lot to look into following the random and sustained increment of taxes upon many sectors and most primarily on income and corporate taxes. With many estimates putting the rate of taxation among formal workers at around 45 percent or more, many Kenyans have never had a time of economic constraints such as this one.

The Laffer Curve is often used to demonstrate the argument that at times, cutting tax rates can result in increased total tax revenue. The curve makes the assumption that there is a single tax rate and that the behaviour of businesses and individuals in response to it is predictable.

Leading Economic Indicators 2024

According to the report, covering until September 2024, fossil fuel consumption registered a reduction of four percent in petrol, diesel consumption dropped by 2.5 per cent and kerosene by 41.29 per cent. The reduction in fuel consumption took place despite the drop in fuel prices in the past recent months.

In October, and held constant onto November, data from the Energy and Petroleum Regulatory Authority (EPRA) showed that the pump prices dropped to the lowest level in 19 months, attributed to lower import costs. The drop in fuel consumption is symptomatic of a number of factors including the Laffer Curve.

Within the last two years, the price of fuel was constantly on the rise until mid this year when it took a turn for the better. However, it would seem by that time some consumers had either sought alternatives or had markedly reduced consumption. The other factor is the availability of cheaper alternatives, for consumers such as Kerosene, which seems to be more affected by dwindling demand.

Within the KNBS report, the number of active mobile money agents increased from 348,065 in August 2024 to 367,551 in September 2024, while mobile money subscriptions rose from 78.6 million to 79.4 million.

However, the total number of transactions fell from 214.3 million to 196.5 million, and the total value of transactions declined from Ksh.705.9 billion to Ksh.670.5 billion during the same period. It is clear from the aforegoing that the increment in the number of agents coupled together with more clients signing up for mobile money subscriptions would have translated to more business and more value from the transactions but this did not add up as desired.

It does not help that the Kenya Revenue Authority and government officials have constantly threatened to catch tax cheats by snooping on their mobile money transactions. The authorities even went further and said they are planning to turn business till numbers and mobile Pay-bill numbers to be official payment portals for purposes of determining taxes due. All these are contributors to the lethargy being witnessed through lesser-value transactions and untraceable cash transactions.

The report further says that the number of passengers travelling by the Standard Gauge Railway (SGR) declined from 281,683 in August 2024 to 175,901 in September 2024, resulting in a corresponding drop in revenue from Ksh.440.6 million to Ksh.296.4 million.

It must be remembered that a notice issued by Kenya Railways in September 2023 indicated the cost of travelling by SGR on First Class from Nairobi to Mombasa will rise by Ksh.1,500 from Ksh. 3,000 to Ksh.4,500. On the other hand, passengers using Economy Class on the Nairobi-Mombasa route would pay Ksh.500 more as the cost rises to Ksh.1,500 from the previous Ksh.1,000.

By August 17, 2024, Kenya Railways announced that the official commercial launch of the Standard Gauge Railway (SGR) Premium Class Coach introduced ostensibly to “significantly boost foreign exchange.”

Speaking during the occasion to conduct a test ride with diplomatic dignitaries down to the coast, Kenya Railways Managing Director Philip Maingi defended the steep Ksh.12,000 one-way ticket cost for the Premium Class Coach, claiming it was value for money for the high-end services and experience.

The cost of travelling using train services has lately been on a rapid upward projection leaving many Kenyans with fewer options such as road transport which unlike the SGR termini that terminate out of the two cities of Nairobi and Mombasa, take travellers to the heart of the two cities at a cost-effective price. From the data presented, it is also obvious that the SGR traveller numbers only go up over the April, August and December holidays when schools in Kenya are closed.

Tax options

Must each government impose taxes to function? The unpretentious answer is, until there is a better idea, it remains the only straightforward approach to raise funds for use in running a government.

Setting up an efficient and fair tax system is, however, far from simple, with many sectors fighting for attention and priority, it is a tough procedure. The model tax system in many countries should raise essential revenue without excessive government borrowing while encouraging economic activity.

Tax cuts and their effect on the economy depend on the timeline for growth, the probability of an underground economy, the availability of tax loopholes, and the economy's productivity level. Tax policy is often the art of the possible rather than the pursuit of the optimal to the detriment of prudent tax administration and progression. It is a long long way to go…