Higher tax rates bad for growth

The role and idea of government have transformed substantially over the past 150 years. From largely low tax environments with extensive autonomy for citizens with governments who provided largely safety and protection to currently the dramatic uptake of their roles in every citizens’ lives, the tectonic shift differs markedly across the world.

In order to pay for services, governments must develop tax systems to generate revenue to support its citizens. Citizens, in theory, then should perceive those services received as good value for the money they pay out in taxes. Roughly 100 years ago, late United States Supreme Court Justice Oliver Wendell Holmes famously proclaimed that “taxes are what we pay for a civilised society”.

A nation decides what its version of civilisation should entail.

Over in Germany, citizens enjoy free basic medically necessary healthcare mixed with a multi-payer system, free primary, secondary, and university education, extremely low crime rates, and generous unemployment protections from job losses.

In return for such government-provided services, German’s are considered by the OECD to pay the second-highest tax rates on average income earners in the world. Germany’s top tax rate of 42 per cent does not kick in until the wage earner exceeds the equivalent of a massive Sh70 million in a single year. In fact, incomes less than Sh7 million per year are only taxed at 14 per cent, while those who earn less than Sh1.2 million annually pay no income tax at all.

Now compare here in Kenya with our average tax rates at some of the highest in the world for lower middle income and middle-income earners and corporations.

However, in return for our lower middle income and middle-income tax bracket of 30 per cent, temporarily set at 25 per cent during coronavirus, do Kenyans receive medically necessary healthcare at no cost? Do Kenyans receive free primary, secondary, and university education? Do Kenyans feel we live with extremely low crime rates?

In Kenya, if we lose our jobs, will our government pay our monthly bills for years to protect us from going into poverty? If the answers are no, then a critical observer would beg to ask: then why do lower middle income and middle-income earners in Kenya pay 2.14 times the tax rate than German citizens if dramatically fewer services are received by the state?

This week, news broke that the Kenya Revenue Authority (KRA) is considering raising taxes on Kenyans earning more than Sh9 million per year up to 35 per cent to recover from the reduced tax revenues of the pandemic. For such a high-income tax rate, the threshold is shockingly low.

Kenya continues our march towards squeezing revenue out of the working and employed middle classes while leaving the wealthy classes largely untouched. We house one of the lowest capital gains taxes in the world at five per cent, where the wealthy mostly earn their revenue, with on the flip side some of the highest tax rates on employed persons in the world.

Germany’s capital gains tax equals 25 per cent, South Africa ranges from 7.2 per cent to 18 per cent, the United States between 20 per cent and 37 per cent, and Uganda at 30 per cent.

The imbalance proves perplexing. In advocating higher employed person income taxes, the KRA appeals to Kenyans to see that our nation utilises lower tax rates than other nations by showing the highest tax rates of other countries. But this does not bear true witness to reality.

One must look at average tax rates for average Kenyan workers, lower middle income, and middle-income earners compared to the tax rates on the uber-wealthy in other nations and what income levels the higher rates kick in.

Excessive taxes stifle economic growth and do not recover tax revenues in the medium and long terms. Economic growth builds citizen wealth. Greater citizen wealth increases the tax base.

If efforts to grow our economy were matched with the same vigour to raise taxes and increase electricity prices beyond international averages, then Kenya’s incomes may increase high enough to naturally and organically provide a stronger tax base that raises the tax revenue in a win-win scenario.

East Asian economic success stories of Hong Kong, Taiwan, South Korea, and Singapore utilised low tax policies to stimulate extraordinarily high rates of economic growth between certain periods in the 1950s and 1980s. Even today, economic powerhouse Singapore with its only 5.8 million inhabitants decided that its version of civilisation can be funded with only a maximum tax rate of 22 per cent.

In summary, let us be on the lookout for objective research and watch for averages, not outliers. Let us build on our impressive economic growth of prior years. Excessive salary tax burdens do not lift a country towards greater economic prosperity.

Dr Scott may be reached on [email protected] or on Twitter: @ScottProfessor