By Antony Mutunga
“Taxes are how we pool our money for public health and safety, infrastructure, research, and services–from the development of vaccines and the Internet to public schools and universities, transportation, courts, police, parks, and safe drinking water” – Holly Skylar
Ideally, taxes are meant to be used to offer services to citizens. And in some countries, especially developed ones, this is the case. In many developing countries, governments often fail to utilize the taxes they collect to better the lives and economies of the citizens. Corruption and mismanagement have seen huge margins of public revenue squandered.
In general, taxes are a major means by which the government finances its activities. They are the means through which good infrastructure is developed; they also ensure that citizens have easy access to quality public services. But it is not always that governments collect enough revenue through taxes to cover their development expenditures. For instance, Kenya’s fiscal deficit for the last five years has been increasing. The country recorded a fiscal deficit of Sh607 billion for the financial year 2019/20, up from Sh534 billion in 2014/15.
In an attempt to increase its revenue, the Kenya government has resorted to increasing domestic taxes and introduced new ones. For example, as from January 2015, the government reintroduced the Capital Gain Tax on the transfer of property in Kenya, whether or not the property was acquired before January 1, 2015. Also, the government reintroduced the turnover tax in January 2020 at a rate of 3 percent on the gross turnover for businesses whose turnover does not exceed Sh5 million.
In introducing additional taxes, the government did increase its revenue, but by a small margin. On the other hand, it has ended up compressing the disposable income available to households – what remains after one deducts taxes from his income. Consequently, this has also meant a reduced savings and less expenditure, which in turn affects purchasing power, as businesses experience low traffic to their establishment, leading, inevitably, to lower profits, or even outright losses.
Kenya primarily relies on the SMEs, and when these are financially affected, the effect on attendant economic limbs is significant. Savings also play a major role as it is what people lend to SMEs for credit investments. Compressed individual savings reduces the funds available for credit or increases the cost of obtaining them, a scenario that leads firms to lose investors, conduct job layoffs or even shut down.
Tax evasion
When the inevitability of business closures as a result of bad policy, becomes a reality, firms resort to underhand tactics, such as failing to or under-declaring their taxes. In addition, many of those who do file their taxes begin to question whether the government uses the taxes they collect for their benefits. While, nationally, some development is reported and seen each year, it is the result of loans taken, ostensibly to plug budget deficits, but which end up lining individual’s pockets.
COVID-19 has wreaked health and economic havoc all over the world, and even though things are slowly getting back to normal, the economy is ailing. Thousands of businesses have closed down and many citizens have lost their jobs. In an attempt to cushion its people, the Kenya government proposed some measures, such as reducing PAYE and VAT, but the National Treasury has proposed to revert to the initial figures in an attempt to plug budget deficits. Inevitably, people and businesses will suffer.
Taxes are crucial for any country; how they are allocated and utilized determines a country’s financial health and prospects in any given year. The government needs to find new ways to reduce its expenditure while at the same time encouraging more citizens to declare their taxes. By being innovative about collecting taxes and prudent in how it spends them, we can both address our deficits and drastically reduce our reliance on foreign debt. (
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