Is it time for us to shift from taxing wealth and profits?

The philosophy behind the levying of taxes took root when the world accepted to be bound by social contract — each one would contribute to a common purse to be employed for the benefit of all. This sacrifice was to be borne by all, each according to their means.

But this begs the question-- why tax? And if so, what proportion of earnings should be subjected to it? It stands to reason that tax should be considered in line with two parameters: wealth and profits.

Wealth in its basic form connotes a surplus beyond what is required for rudimentary living, and profits are the gains after deduction of applicable costs. A useful analogy would be to consider wealth as a fruit tree and the profits as the fruit.

Today, the most common taxes the world over are employment and consumption taxes, principally on salaries and commodities, reflecting a shift from the initial intent of taxing only profits and wealth.

As a result of the shift, the low and middle income members of society pay a disproportionate share of their income in taxes due to the reliance on consumption and wages for tax revenues, effectively making tax a burden rather than the social contribution it is meant to be.

The same employee who is taxed 30 per cent on their income, pays 16 per cent value-added tax (VAT) on their consumption plus an array of other customs and excise duties, all on the same earnings.

The effect is that an ordinary Kenyan worker pays nearly 50 per cent of their earnings to the government in form of taxes, while the wealthy who rely on interest, dividends and capital gains have a significantly lower tax rate averaging less than 10 per cent, if their income is split equally among the three income groups.

In the last few years, more jurisdictions are gradually reducing employment taxes and focusing more on taxing profits and wealth.

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Many countries tax such income at between 15-20 per cent, with the global average at 25 per cent. At 30 per cent, Kenya is at the upper end of the spectrum, even though there have been marginal reductions in the recent past following the expansion of the tax bands.

Even then, countries with high employment income tax rates exceeding 30 per cent, such as Germany, make heavy social investments, such as housing and guaranteed jobs.

By keeping off wealth taxes, a country loses out on the 80/20 rule; an accepted principle in economic circles that 20 per cent of the populace own or control 80 per cent of a nation’s wealth. This ratio is more pronounced in developing nations where 1 per cent of the populace controls 90 per cent of the nation’s wealth.

Implementation of wealth taxes is not easy, with global estimated tax earnings from capital gains tax (CGT) and dividends averaging one per cent of the total tax revenue.

As such, it will be a considerable challenge for policy makers, but it remains the only way out for countries grappling with a shrinking tax base.

For starters, it’s time for unconventional taxes such as tax on idle land, congestion taxes, inheritance taxes and even premium taxes for living in high end places.

Kipkemboi Rotuk is Tax advisor at KPMG Advisory Services Limited.