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What a sound national tax policy should entail

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Summary

  • Taxes perform specific functions which include but are not limited to raising money to finance public services, providing economic stimulus, promoting equality in the society through redistribution of resources and encouraging changes of behaviour.
  • A tax system should generate sufficient revenues to enable the government to meet its objectives and improve the welfare of the citizenry.
  • It is generally agreed worldwide that taxation should be hinged on a set of principles which were promoted by renowned Scottish economist Adam Smith.

In the 2021/22 budget statement, Treasury cabinet secretary noted that the country’s tax policies are spread across various statutes which are amended every year during the budget process creating uncertainty in tax legislation.

The cabinet secretary indicated that the government is in the process of developing a National Tax Policy Framework that would not only enhance administrative efficiency of the tax system but provide consistency and certainty in tax legislation and management of expenditure.

Taxes perform specific functions which include but are not limited to raising money to finance public services, providing economic stimulus, promoting equality in the society through redistribution of resources and encouraging changes of behaviour.

A tax system should generate sufficient revenues to enable the government to meet its objectives and improve the welfare of the citizenry. This is mainly achieved through introduction of new taxes, changes to tax rates and bands or reliefs. These are also geared towards provision of economic stimulus and making inflation adjustments.

We also have significant policy changes which include structural changes to a form or system of tax. The changes are in some instances aimed at addressing global challenges such as the OECD base erosion and profit shifting (BEPS) project.

It is generally agreed worldwide that taxation should be hinged on a set of principles which were promoted by renowned Scottish economist Adam Smith. These are certainty, ability to pay, convenience and efficiency.

Certainty implies that taxpayers should know if they are liable to pay tax, the amount to be paid and when it is to be paid. Ability to pay implies that a taxpayer should pay in proportion to their ability, with those with higher levels of income paying more.

Convenience implies that taxpayers should pay tax at the most convenient time while efficiency means the tax should outweigh the cost of collecting it.

What factors should guide the government’s decisions on tax policies?

Tax policies should go through an appraisal mechanism that ensures that existing tax policies and new proposals are balanced and deliver against objectives. The decisions should be based on available evidence.

There are certain major factors that should guide governments in making tax policy decisions which support methodical and consistent approach to appraisal. They also identify tensions and conflicts of potential tax policy changes.

First, a summary of its fiscal impact which essentially enumerates the policy cost and an estimate of its impact on the budget. It should also indicate the long-term economic impact and the potential impact on the tax base.

The alignment of the proposed tax policy against principles of a good tax should also be documented and a justification prepared for deviations. This should be supported by the strategic objectives of the proposed change as well as any trade-offs that will accompany the policy change.

Additionally, the policy change should be considered alongside other tax policies, the overall economic strategy and government spending plans. Conflicts and trade-offs should be identified, and mitigating factors put in place.

The affordability and value for money are critical factors particularly for tax incentives, reliefs, and exemptions.

This should ensure that these policies deliver the intended value to the targeted citizenry and the government is also in a position to forego the associated tax revenue.

What are the stages of developing a tax policy?

The initial stage should be engagement and analysis. An initial analysis of the proposed tax policy changes which include their proposed objectives, rationale and the nature of evidence that has been collected to support the change.

Continuous and active public participation to seek feedback from stakeholders’ pre-budget should ensure the government considers all relevant views and alternatives, if any.

The second stage entails policy design where data is analysed, proposals are developed and appraisal in line with overall government’s strategic objectives. Significant policy changes should undergo deeper analysis and critique to ensure that they achieve the intended objective.

Thirdly, the decision should be made including the identification of any lead options.

Next, the decision should be implemented through the necessary legislative mechanism. This entails the government working with the revenue authority to ensure the changes are implemented, they are clearly understood, and the administration and collection is efficient.

Lastly, the policy should be evaluated through monitoring and evaluation. This basically entails assessing existing policy and recent changes against intended aims and performance expectations.

By and large, Kenyans look forward to a National Tax Policy Framework that will be responsive and flexible enough to accommodate unpredictable changes to economic circumstances.

Mr Maina is a senior taxmanager at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.