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Rich Kenyans feel the pinch of income tax

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The richest 10 per cent of the Kenyans account for 80 per cent of the income tax burden, a new World Bank report showed, partly reflecting the downside of limited access to formal sector jobs among the poor.

Estimates show that the poorest 40 per cent of Kenyans account for 14.3 per cent of market income but less than one per cent of direct taxes. In contrast, the richest 10 per cent bear 80 per cent of direct taxation incidence.

On average, direct individual taxes account for only 1.2 per cent of total household expenditure among the poorest quintile, but their share increases to 4.5 per cent in the fourth quintile and to more than eight per cent in the top quintile.

“This is a result of both the progressivity of the tax system and limited access to formal-sector jobs among the poor” the World Bank explained in its report.

Individuals in the bottom 20 per cent hold less than five per cent of all formal sector jobs while individuals in the top 20 per cent hold 48 per cent.

This kind of skewed distribution of formal jobs has direct consequences on the pockets of the few holders of quality employment in Kenya.

“The distribution of taxpayers across tax brackets suggests that a large share — one third— of those that pay income tax end up paying the highest marginal tax rate of 30 per cent. Only 2.8 per cent of individuals report employer contributions to the NSSF (National Social Security Fund) whose taxable income falls below the personal relief threshold,” the World Bank added.

Around 20 per cent falls into the two subsequent tax brackets, with marginal tax rates of 10 and 15 per cent, respectively. On average, they pay 7.4 and 9.4 per cent of their gross income in taxes, respectively.

Almost one in three individuals that are assumed to pay income tax in the analysis are in the top bracket with a marginal tax rate of 30 per cent. The estimated average tax rate in this bracket is 18 per cent.

Payroll taxes have performed poorly lately, denting the Kenya Revenue Authority’s overall collections. For instance, income tax paid by salaried workers in form of pay-as-you-earn fell Sh29.2 billion short of target last year — a trend linked to layoffs of employees as companies struggled financially.

During the first half of the financial year — July to December 2017 — more than a dozen companies listed on the Nairobi Securities Exchange issued profit warnings and many reported staff cuts in the second half of the fiscal year ending June.

According to the Economic Survey 2018, 897,800 new jobs were created in 2017. Informal sector created 787,800 employment opportunities or 83.4 per cent of new jobs during the period under review.

The number of persons engaged, excluding those in rural small-scale agriculture and pastoralist activities, rose by 5.6 per cent from 16 million persons in 2016 to 16.9 million persons in 2017.

“The new jobs included the extra personnel engaged in the public sector to serve in the Independent Electoral and Boundaries Commission and recruitment in the essential services which include health, education and security services,” the Economic Survey 2018 explained.

Wage employment in the modern sector increased from 2.5 million people in 2016 to 2.6 million in 2017.

The total number of self-employed and unpaid family workers within the modern sector rose from 132,500 people in 2016 to 139,400 people in 2017.

Annual nominal average earnings per person in the modern sector increased from Sh 645,035.2 in 2016 to Sh684,097 in 2017. However, annual real average earnings per person decreased from Sh 379,968.9 to Sh 369,004.3 over the same period.

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