The latest Finance Bill has generated considerable debate and concern among ordinary Kenyans. The bill proposes several measures to correct the budget deficit, but one of the most controversial aspects is the dependence on high taxation. Despite its apparent simplicity, this method frequently results in damaging outcomes for both our financial standing and daily activities.
High taxation affects us all, from small entrepreneurs to white-collar workers and daily wage earners. When the government raises taxes, the immediate effect is a decrease in disposable income. When families are already struggling financially, they may have to make difficult choices between basic necessities like food, education, and healthcare.
With the high cost of living in Kenya, the new tax increases proposals could make many people even poorer. Higher taxes on products and services translate into increased costs, making them less affordable compared to the cost of basic necessities. The poor and those with fixed incomes are disproportionately affected by this situation, leading to greater economic inequality.
Taxes are not only a burden on individuals but also impede investment in the economy. The higher tax rate results in reduced financial resources for businesses to invest in their operations, increase productivity or innovate. Many investors, both local and international in nature, may be discouraged by high taxes on their investments and opt for locations that are less tax-intensive.
Kenya relies heavily on private sector investment to drive its economic growth. Taxation that is too high could choke the engine which generates jobs and incomes. Small and Medium-sized Enterprises (SMEs), which are crucial for job creation and economic diversification, are particularly vulnerable to the negative effects of high taxation.
No government has ever succeeded by overtaxing its own citizens, as evidenced by history. The implementation of excessive taxes can result in stagnant economies, reduced productivity, and a high level of dissatisfaction among certain segments of the public.
For example, the financial system of the Roman Empire was heavily reliant on taxes, with tax collectors serving in this capacity. Despite running an effective but often imprecise system and facing frequent accusations of fraud, their system was inadequate. Despite these attempts at collecting taxes, by the third century CE the empire had entered a period of financial crisis.
Recently, countries like Greece had faced serious economic challenges, partly due to high taxes and austerity measures. If Kenya continues on its current fiscal path, Kenya may mirror Greece’s economic decline, especially due to recent high tax policies.
Just like Greece, which faced serious economic problems due to inadequate tax collection, rampant tax evasion and regressive tax measures such as VAT increases, Kenya may face a similar fate. Greece’s failure to implement effective tax reforms led to capital outflows, businesses shutting down, and a massive public debt crisis worsened by bailout loans.
If the Government of Kenya does not improve its tax collection systems, reduce capital flight and avoid overburdening its citizens with taxes that disproportionately affect the poor, it could experience economic stagnation, mounting debt and social unrest similar to the Greek financial crisis. Instead, it can lead to lower economic activity, lower tax receipts and increased public dissatisfaction.
Rather than relying on high taxation, the government should explore alternative approaches to managing the budget deficit such as fiscal rules and budget discipline, monetary policy coordination, economic growth strategies and also explore alternative revenue sources beyond traditional taxation.
Balancing budgetary needs with sustainable economic growth is crucial for long-term financial stability and prosperity of the country.
Looking at the effects of the Finance Act, it is important that policy makers recognise the harmful nature of high taxation. For the average citizen, high taxes result in lower earnings, higher goods and services costs, and fewer opportunities for economic growth.
Kenya’s path to prosperity is not through excessive taxation of its citizens, but through creating an environment conducive to economic growth and investment. Government can attain fiscal stability by implementing sustainable economic policies, efficient public spending and expanding the tax base, without unnecessarily burdening its citizens.
This is a call on our leaders to rethink the way they tax proposals they make and prioritize on the well-being and economic future of all Kenyans. The goal should be a prosperous economy that benefits everyone, not just a select few.
By Tiberius Onsongo
Tiberius is a Banking and Finance Professional.
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