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How low tax base limits revenue

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How low tax base limits revenue

Times Tower, KRA headquarters, in Nairobi. FILE PHOTO | NMG 

Let’s talk about government finance. Not the usual conversation: not how the government doesn’t have any finance, although it doesn’t. Our government is raising less in taxes than its recurrent expenses, meaning it keeps having to borrow more to pay the bills.

No, let’s talk about its revenue. For it has come to my attention that over a fifth of all government revenue is derived from corporate income tax paid by just 310,000 companies.

One of them is mine. Mine’s a smallish one, so I don’t suppose I pay 1/310,000th of one fifth of all government revenue on my company’s income alone. Although, truth be told, since this tax is collected as withholding tax of five per cent of income, to cover a liability set at 30 per cent of profits, it assumes a profit margin of 15 per cent a year, and my company never achieves that.

So, we have run a tax credit on corporate income tax forever –never having managed to persuade a client yet to pay us sufficient to leave us with 15 percent in pure profits all our costs.

I have to believe that some business somewhere in that 310,000 has cracked the art of charging prices that include 15 percent of profit, or what would justify the five per cent of income withheld, and the forever mounting tax credits?

But, either way, the corporate tax burden, and our accumulation of credits, is bearable. It was not, when the government moved the withholding tax up to 10 percent of all income – thus presuming a profit margin, wildly unrealistically, of close to one third of all sales revenue.

At that point, the loss of income and acceleration in never-to-be-refunded tax credits did start to gravely affect our ability to stay in business. But the inflation of likely liabilities got corrected: and thank goodness for that.

So now the real problem lies in just how few of us are paying these taxes.

For the equation is magnified again through individual income tax. PAYE on employees accounts for another 24 per cent – so nearly a quarter – of all of the government’s tax revenues. And yet personal income tax is paid by just 2.6 million registered taxpayers, or just over five per cent of the population.

My company’s employee number took a hit in the travails of staying in business in 2017 and 2018, but has usually averaged around 20 employees.

So, if each one of them is a 1-in-20 contributor of individual income tax, that’s all the personal income tax for 400 Kenyans paid by my one small company, in addition to its corporate income tax and extra withheld credits.

Now, as it happens, taxes are not excessively high in Kenya. I have also run corporate income tax and PAYE in the UK, and in France, and while the corporate income tax is a bit inflated by that withholding tax, the PAYE is generally lower, with fewer upper tax bands. More or less, Kenyan income tax comes in the same, or lower.

The problem is that 19 out of 20 people aren’t paying it – in short, the tax base is tiny. So even as we 310,000 pay, the total sum we generate is less than a huge spending pot for our public sector.

So how do we get out of debt? There are three ways:

The government in a nation where the vast majority of all employment and business is informal and generating no tax concentrates all revenues on priority state functions that can never be undertaken by the private sector – and leaves the rest to a single ministry that does nothing but promote private sector initiatives that further the state’s vision.

We find a way to get the more than 90 percent of adults and business not paying direct taxes into the tax net. We put up our indirect taxes, specifically VAT, which far more people pay, and we spread out the tax burden that way. Or, we can pretend we have more taxpayers, and more tax coming in, than we do, as we have been doing recently, and see how that goes.

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