Wealth tax on super-rich to net Sh125bn a year

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Times Tower in Nairobi, the headquarters of Kenya Revenue Authority (KRA). Picture taken on Thursday, October 15, 2020. PHOTO | DENNIS ONSONGO | NMG

A wealth tax on Kenya’s super-rich and high-income earners has the potential to earn the country up to Sh125 billion in additional revenue, charity organisation Oxfam International says.

Oxfam says in a new report on inequality that a wealth tax of two percent on those with a net worth of $5 million (Sh568 million), three percent on $50 million (Sh5.7 billion) and above, and five percent on $1 billion (Sh113.5 billion) would net the exchequer $900 million (Sh102.2 billion).

This is equivalent to a third of the government’s total healthcare budget.

A more progressive or punitive tax regime that would raise the rate on the $50 million wealth bracket to five percent and levy those holding $1 billion 10 percent would net $1.1 billion (Sh125 billion), the organisation estimates.

The Treasury has mulled introducing a wealth tax or higher top tax rates targeting the wealthy in the past in order to make the tax system more equitable but has failed to get the necessary legislative approval for such a move.

A wealth tax, Oxfam says, would first need proper enforcement of the laws that compel companies to reveal information on beneficial ownership, thus helping the taxman identify the high net worth individuals for easy administration.

“African countries, including Kenya, need more wealth taxes that are specifically geared towards distributing wealth as opposed to income,” said Peter Kamalingin, the pan Africa director of Oxfam International.

“Taxes on property, ownership of land, income derived from ownership of land, personal capital income (dividends, interest and capital gains tax), inheritance and gift taxes should be targeted.”

Imposing a higher top tax rate on high-income earners has also been mooted as a way of ensuring that the rich pay their fair share of taxes.

In 2018, the Treasury proposed changes to the Income Tax Act to impose a higher maximum tax rate of 35 percent on an income of more than Sh9 million per annum or Sh750,000 a month. At the time, the top tax rate was 30 percent on all income exceeding Sh564,709 per annum or Sh47,059 a month.

The proposal was, however, withdrawn, with the Treasury citing a lack of public support for it. In other jurisdictions, particularly in the West, high earners pay a significantly higher top rate of tax.

In the UK, the top individual tax rate is 45 percent on annual income above £150,000 (Sh23.3 million) while French residents pay a similar rate for earnings above €152,260 (Sh19.7 million).

Japan, South Africa, China and Germany similarly levy their top earners a top tax rate of 45 percent.

American citizens and residents, who are taxed on their worldwide income, pay a top tax rate of 37 percent for earnings exceeding $518,401 (Sh58.9 million) per annum.

Neighbouring Uganda adjusted its top tax rate for annual income above 120 million Uganda shillings (Sh3.86 million) to 40 percent in 2020, from 30 percent previously.

Oxfam warns, however, that adjusting top tax rates or imposing a wealth tax is not in itself the solution to the inequality problem and lack of spending on public amenities in the country, with reforms on fiscal transparency also necessary for the impact of these additional taxes to be felt.

“Simply raising taxes on the wealthy will not necessarily result in those taxes being spent on public services and social protection. There is no guarantee that increased tax revenues will be spent tackling poverty and inequality,” said Mr Kamalingin. “Transparency and accountability are critical so that the public can hold their governments to account for how they spend public funds.”

Doing away with tax incentives that have cost the Treasury billions of shillings in foregone revenue is also seen as a good measure to raise additional funds and ease the burden on the few who are actively paying their taxes.

Rich companies have been the main beneficiaries of these tax incentives, which are estimated to be worth more than Sh470 billion, equivalent to 4.6 percent of the country’s GDP.

The International Monetary Fund (IMF) particularly pushed the government to remove exemptions in Value-Added Taxes (VAT), saying that the government needs to improve its revenue performance to cut the fiscal deficit and public borrowing.

These incentives, Oxfam added, lack transparency and mostly don’t guarantee the necessary benefits to justify their existence.