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Do higher taxes boost economic performance

by biasharadigest
Society

Do higher taxes boost economic performance

Economists argue that when taxes go up people
Economists argue that when taxes go up people desire to work less, invest less, and reduce entrepreneurship. FILE PHOTO | NMG 

Imagine that you sit at the mantle of an international financial conglomerate deciding where in the world to invest for the manufacturing component of your portfolio.

Over the past 20 years, the traditional choice for much manufacturing investment centred around China. But due to limitations on ownership of an investment, overbearing controls, slowing growth, and geopolitical changes, your firm decides to look elsewhere and compare Southeast Asian, Latin American, African, and Middle Eastern nations for alternatives.

What criteria would you utilise to make your decision? In your analysis, you would include corporate tax rates on the earnings of your subsidiary, money transfer tax rates, electricity tax rates, ability to control the investment, personal income tax rates for your workers and executives, reliability of raw materials supply, consistency of electricity, levels of bureaucracy, value-added tax(VAT) rates, speed and efficiency at a nearby port, etc. Notice that many criteria revolve around various forms of taxes. How does Kenya compare to the rest of the world with our tax rates?

In the past 19 years, the vast majority of countries in the world lowered their corporate tax rates while Kenya survived as one of the few keeping charges constant.

Our corporate tax rate of 30 percent for domestic or 37.5 percent for foreign operating companies are some of the highest taxes in the world. The Tax Foundation found that among 218 countries, the average corporate tax rate is 22.8 percent and has globally declined since 1980. Europe retains the lowest corporate tax at an average of 20.3 percent, but here Africa holds the highest corporate taxes at 28.5 percent on average.

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Other countries with similar corporate charges to Kenya include the Democratic Republic of Congo, Equatorial Guinea, Chad, Sudan, Zambia, Venezuela, Colombia, and Cameroon.

Then in Kenya, we also hold relatively high personal income tax at 30 percent for the largest income category. We allow very few deductions on a personal level to lower our effective tax rates.

But depending on family size, personal effective (after allowable deductions) income tax rates are lower in the Czech Republic with 5.6 percent, Chile seven percent, South Korea 10.2 percent, United States 10.4 percent, Germany 21.3 percent, and the UK at 24.9 percent.

Commensurate with the taxes in the before mentioned six nations, citizens receive free primary and secondary education and pothole-free roads. The Czech Republic, South Korea, Germany, and the UK each also provide free healthcare to their residents and Germany includes free university.

But does Kenya benefit from its high tax regime? Economists argue that when taxes go up people desire to work less, invest less, and reduce entrepreneurship.

The economic theory claims that taxes distort pure market-driven supply and demand. But policy institutes claim that such effects would be small.

Research by William Gale and Andrew Samwick found that increases in taxes on the wealthiest citizens correlates with better economic growth while opposite tax reductions on the wealthiest in society held no material benefits to national macroeconomics.

The benefits of a tax increase on the rich only boost the economy if the government uses the increased revenue to pay down the national debt. But in Kenya, much of our taxes go into debt servicing paying the interest rather than much principal reduction.

Further, since abundant wealth in Kenya gets stored in real estate that incurs the much lower capital gains tax on property sales, our richest citizens get charged less in taxes.

Further, much social media discussion currently circulates around the new three percent sales tax on small traders. But research shows that broadening the tax base and ensuring fewer loopholes for corporates and the wealthy, so they pay their tax rates more uniformly, improves an economy.

In conclusion, would you as an international financial conglomerate invest in Kenya’s manufacturing sector purely based on our tax regime?

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