Can the Kenya Kwanza govt tax the rich to Utopia?
Deputy President Rigathi Gachagua was at it again with his tongue in cheek statements, this time directed to the owners of capital signalling intentions to tax the rich by urging them to pay “One billion Kenya Shillings per month”. While addressing the legislators earlier in the week, President William Ruto had also said that those who are sponsoring mass demonstrations must pay their taxes. A veiled reference to the former president Uhuru Kenyatta, who the Kenya Kwanza legislators have lined up accusations of evading taxes in business deals and estate tax exemptions instituted by Mzee Jomo Kenyatta, the country’s first president.
But have Kenya Kwanza picked the wrong fight? During the fiasco of America’s Afghanistan war, commentators told the powers that be that you cannot shoot or bomb your way out of combat and how they were right. After America moved out, the Taliban took over power flawlessly, they returned the country back to the Taliban after two decades of endless war of attrition. The same can be said about taxation, you cannot tax your way out of a financial crisis.
In a bid to rescue the sorry fiscal situation, the government has turned to a Kibaki-era rallying call, “Kulipa ushuru ni kujitegemea” but rather than be realistic and practical about raising revenues, the government has been on an onslaught mostly chasing imaginary people who do not pay taxes. The issue of taxation is something that is very fluid. Ideally the government would have forced people to pay their dues but in democracies, while the taxes are mandatory they have to be levied with the consent of the taxpayer. To manufacture consent for taxation, the government appeals to the need to build a welfare state to appease the masses according to Torgersen (1978), to fund education, health care, social security and housing.
It is no surprise that the current regime has been on a road show to say how infrastructure is evil blaming the previous regime for abandoning the welfare state, something they promise to reverse. The Kenya Kwanza government professes going back to the basics, promising to ensure they deliver on the four public goods. But in creating a welfare state in which the government is at the top especially in Africa, what happens is that doors to toll stations are opened and bureaucrats become rent seekers. It is also a wish divorced from reality since Kenya does not have the resources to create a command economy given the little available revenues are already weighed down by disproportionate debt, huge wage bill and constitutionally fixed expenditure.
Kenya has to rely on investments and foreign direct inflows whose owners always require that the government must sign up guarantees on tax exemptions failure to which investors will vote with their feet. An example is given of Africa’s richest man Aliko Dangote, when he wanted to invest in Cement plant in Kenya. Some powerful forces required him to pay ‘taxes’ when he refused to play ball, he went and opened shop in neighboring Ethiopia. With Comesa being part of the regional bodies that ensure preferential trade, it is just a matter of time before his products land on our shelves; somehow we have not stopped him. So as this example purports, there will only have one result, the rich will prefer to have a wait and see attitude and will not bother to invest.
If this happens it will work against the very foundations of the welfare state by depriving the government the very taxes they need to fund the welfare state. The government needs exponential growth in the economy to extract taxes and this can only happen when the private sector is energised enough to invest. This cannot happen if the government is doing nothing to incubate growth.
Take subsidies for instance, so far the government has been getting rid of them oblivious of the fact that this will in turn make Kenya very uncompetitive as an investment destination because the cost of doing business is going to be at an all-time high translating to higher prices and reduced consumption. What President Ruto’s handlers have been telling him about government subsidies is that they are wrong because they skew the market conditions. However, Africa does not have an environment of near perfect competition and the removing of the subsidies is not panacea for addressing market distortions. Instead, it only serves to increase pain on the poor and deprive businesses of customers as Kenyans stretched out of price elasticity reduce purchases, seek alternatives or abandon some consumption.
The reality is that most of our people are extremely poor and those who can bail out African economies are the rich, but only if we can encourage them to mobilize their capital for increased production not seizing it in new for s of taxation. If the government is going to cause resentment in their ranks an economic recession will be in the offing.
The rich have a way of working around extreme taxation, the United States during the prohibition days failed fantastically as well as when they tried to impose taxes on the likes of Al Capones, Vandykes, Morgans, Kennedys, and the Trumps. What these rich people did was to create tax neutral jurisdictions in the Bahamas, Bermuda, Cayman Islands and Jersey. This situation created what is now known as tax havens where the rich have to hide their money; it is a situation that does not help the African countries because the money that is saved there goes to help financial centres in London, Hong Kong, Dubai and Mauritius.
The Kenya Kwanza government should be wary that wealth redistribution has always fell flat on its face. It has not succeeded before, it will surely not succeed today; the government would be better advised to find ways of creating more economic activity rather than more taxes.
The author, Mr Mwangi Ngamate is a technopreneur and a former lecturer at International Collage Cayman Island. [email protected]
