New taxes may condemn Kenyans to poverty

In 1696, King William III introduced the window tax policy in England, because windows were easy to count and levy. Homes with up to ten windows were required to pay two shillings. The rationale of this tax policy was that richer people were likely to have bigger houses with more windows and therefore would pay more.

Since avoiding paying tax is a human behavioural disposition, the reaction to the new tax policy was that people decided to block windows in their homes in order to pay less taxes.

So, when Parliament last week passed into law the new tax levies recommended by the President and intended to increase revenue collection - mainly Sh35 billion expected from eight per cent VAT on petroleum products, Sh9 billion from the new anti-adulteration levy on kerosene at the rate of Sh18 per litre Sh7.6 billion from excise duty charged money transfer services, telephone and data services - the contrary will most likely happen.

If we are to look at Kenya’s share of revenue collection to GDP in the last four fiscal years, it paints a turbulent picture in our revenue collection efforts, from 2012/2013 the share stood at 17.3 per cent, then went up in 2013/14 recording 18.1 per cent, in 2014/2015 it was 18.7 per cent to 17.2 per cent in 2016/17 and now stands at 19.6 per cent in 2017/2018.

What this turbulence means is that, with the current tax base we are operating within our optimal revenue collection point and there is no room to collect more revenue without harming overall economic growth

This is already evident because in the last four years private consumption (which accounts for some 75 per cent of GDP) has been declining by about five percentage points, this is according to the 2018 World Bank Economic Update report.

Second, what seem to have been forget at Treasury who proposed the new tax levies and Parliament which ratified is that the tax on fuel is consumption tax meaning the entire increase will be passed to the consumers.

A first-year student of economics can confirm that the effect of this kind of tax is that it will reduce consumption of the product.

For example: Kerosene is majorly used by household consumer because it cheaper, increasing it by an exorbitant Sh18 per litre makes unaffordable and so the working poor consumers will likely go back to biomass.

So, it is shocking when Treasury boldly projects a mirage that consumption of Kerosene will still be sustained and Ksh9 billion additional revenue will be collected.

Third, the other ripple-effect simulation missed in the VAT levy on petroleum product and anti-adulteration levy is their upward effect on inflation.To begin with, Kenya is a net oil importer therefore the current rise in international oil prices will be contributing to a pick-up in inflation.

So when you factor in the entire increase of the eight per cent VAT on fuel and Sh18 per litre on Kerosene to the consumer whose income has not increased means that real disposable income – income for one to do his/her general shopping every month - has actually shrunk the moment the President assented the bill into law.

What this means in the medium term is that Kenya may enjoy high economic growth as projected by CBK and treasury of more than five per cent but will not be inclusive growth that translates to overall poverty reduction.

Using recent data released by KNBS, Kenya’s official poverty statistics is that 35.6 per cent of Kenyans live below the international poverty line, meaning one out of every three Kenyans lives below the poverty line.

In the last ten years, around 10 per cent of Kenyans have actually moved up from living below the poverty line to floating middle-class.

Therefore, if government continues taking more from their income in form of taxes and levies when their disposable income has not increased, a number of Kenyans will be condemned back to living below the poverty line.