LESS IS MORE: UNLOCKING KENYA’S ECONOMIC POTENTIAL THROUGH SMARTER TAXATION

 

Image from Pexels by Nataliya Vaitkevich

Taxation is anchored on the four canons of equity, certainty, convenience, and economy. Equity calls for the burden of taxation to be distributed fairly, while certainty ensures taxes are determined by law, avoiding arbitrariness. Convenience demands that taxes be levied in a manner that is least burdensome to the taxpayer, and the economy emphasizes keeping the cost of tax collection low. Adam Smith argued that these four canons should form the foundation of a country's taxation regime, applied holistically, like instruments in an orchestra. No one instrument takes precedence, but together, they create a harmonious symphony—in the case of taxation, that harmony is economic prosperity.

Unfortunately, in recent years, the Kenyan government has refused to draw from Adam Smith’s fountain of wisdom, embarking on what can only be described as a taxation extravaganza. Taxes have been imposed on everything and anything, leaving a trail of economic destruction in their wake. Businesses are crumbling under the weight of ever-increasing tax burdens, while countless Kenyans find themselves slipping into poverty, marginalized and destitute. The shrinking tax base is a direct result of this over-taxation, with hundreds of business owners unable to keep up, and thousands of enterprises forced to close their doors.

For Kenya to generate revenue, two primary tools exist: taxation or borrowing. With borrowing facing increased scrutiny, taxation has become the government’s default mechanism to meet its annual revenue targets. The approach, however, is problematic. The government tends to go for the low-hanging fruit, targeting areas where every citizen is affected. This includes doubling the VAT on essential goods like petroleum, increasing taxes on small and medium enterprises, and introducing new levies like the housing tax. While these measures may help meet short-term revenue goals, they sow the seeds for long-term economic disaster.

The fallout is predictable: businesses close, jobs are lost, and unemployment soars. Unemployment, in turn, creates fertile ground for crime, whether through violence, tax evasion, or money laundering. All of this discourages investment, stifling economic growth. As if to add insult to injury, those charged with safeguarding public resources often engage in widespread looting, living lavishly at the expense of hard-working taxpayers. Calls for austerity measures and accountability are met with little more than public relations stunts, leaving the public disillusioned and skeptical of any true reform.

This brings us to the crux of the issue: how can Kenya reverse this trend, widen the tax base, and combat over-taxation? Yet, there may be hope. The newly appointed Cabinet Secretary for Treasury, Mr. John Mbadi, has put forward several groundbreaking proposals. During the launch of the medium-term budget preparation for the financial year 2025/2026 on Monday the 9^th of September, he suggested reducing VAT from 16% to 14% and lowering corporate tax from 30% to 25%. He also hinted at a possible reduction in pay-as-you-earn (PAYE) tax. These proposals are bold, but more importantly, they are pragmatic.

A reduction in taxes will lower the cost of capital, creating a more favorable environment for businesses to thrive. This, in turn, will encourage new investments and allow existing businesses to expand, increasing productivity and promoting economic growth. A reduced VAT will lower prices for consumers, boosting consumption, while reduced PAYE will leave more disposable income in the hands of workers, igniting economic activity. Such reforms will benefit not only the economy but also the citizens and businesses that drive it. These are not novel measures, they have been applied in other parts of the world and have proven meaningful. For instance, after years of economic crisis, Greece in 2019 reduced VAT on food products from 24% to 13% as part of their targeted reduction. This reduction helped to ease the financial burden on consumers. This led to stimulated demand and increased spending thus boosting the economy.

Yet, lowering taxes is just the first step. The government must follow through with a commitment to accountability and transparency in its operations. The rampant corruption that has plagued Kenya’s public sector must be addressed head-on, with resources allocated toward curbing mass looting and prosecuting those who betray the public trust. This, in turn, will foster confidence among the populace, reducing the incentive to engage in tax evasion and widening the tax base further.

Kenya is at a critical juncture. Years of over-taxation have pushed businesses to the brink and left millions of citizens struggling. However, the recent tax reform proposals offer a ray of hope. By reducing taxes, Kenya has the chance to revitalize its economy, spur growth, and provide opportunities for all its citizens. But tax cuts alone will not suffice—accountability and transparency must follow. If Kenya can unite these reforms, the country could emerge stronger, with a thriving, inclusive economy where prosperity is not just a dream, but a shared reality.

Written by Alvin Kubasu, Law Graduand, Kenyatta University.