Why Do You Pay Tax?

Brenda Wambui
4 July ,2017

The Kenya Revenue Authority (KRA) deadline for filing individual tax returns came and went on the 30th of June 2017, and with it came much whingeing and wringing of hands by Kenyans, both online and on mainstream media. It was understandable, because this time, the penalty for non-compliance was KES 20,000, twenty times what it was in 2016.

There were ads everywhere reminding us that kulipa ushuru ni kujitegemea (paying tax makes us self-sustaining), and this time, the KRA went a step further and decided to shame us into filing returns on time. One particular image stood out for me. It featured a former radio presenter, Caroline Mutoko, saying that “Kenya is NOT your sponsor, so pay your taxes and file your returns.” I could taste the disdain and disregard.

Taxes are taken for granted both in public finance, and in public discourse. Yet, as Joseph Schumpeter said in 1918, “the fiscal history of a people is above all an essential part of its general history. An enormous influence on the fate of nations emanates from the economic bleeding which the needs of the state necessitates, and from the use to which the results are put.” It is important to understand why we pay tax, the relationship between tax and “development”, and what actually drives development.

We have a social contract with the state. We give up some freedoms to it, and in return we receive security, healthcare, education, infrastructure and other services that enable us to become a functional and prosperous society. To invest in these social programs and in public property, which enables our goal, the government needs steady/sustainable financing from taxes. Taxes are also used to re-distribute money that is concentrated in the upper classes to the middle and lower classes. Our taxes not only pay for goods and services, they are also a key part of the social contract between Kenyans and the state. They help us run an effective government, which is why it matters how much money is collected, how it is collected, and how it is used.

How taxes are collected and spent directly affects the credibility and legitimacy of a government, and of a state. It is important that they think of what to tax, as well as how much to tax. In Kenya, we have at least 20 taxes, including Value Added Tax (VAT), Income tax (both pay as you earn, which is individual, and corporate tax), excise duty, customs duty, among others. When taxes are high, many people, and businesses, opt out of the formal sector.

This affects investment and growth in a state. Taxing the informal sector is notoriously difficult because many of the enterprises therein are not registered anywhere. Maintaining reasonable tax rates encourages the formalization of businesses and widens the tax base. If Kenya were to ensure its citizens thought taxes were reasonable and well spent, more businesses would apply for licenses at county level, more businesses and companies would get registered at the State Law Office, and more of them would register with KRA. This formalization would contribute to job creation and subsequently, economic growth. Yet, in a country like Kenya, this is not the case. We have a growing informal sector, and we rely on foreign aid and loans to plug our budget deficits.

A growing informal sector comes with its challenges. The incomes of people in the informal sector are difficult to measure, and taxing them is largely impossible because many do not keep good records. Ultimately, formality is important to economic growth and true development. The informal sector should shrink as a country grows. This can be encouraged encouraged by having a functioning legal environment – if businesses want the benefits of the legal system, they need to formalize. Informal sector businesses are not able to take advantage of economies of scale, many of which come entangled with the legal system, to grow. It is up to the state to make the trade-off worth it for them. In Kenya, it is not worth it.

Another reason why Kenya has difficulty expanding its tax base is foreign aid, which reduces the incentive for the state to take tax collection and spending seriously. Key areas that should be funded by taxes, such as healthcare and education, tend to be donor funded in Kenya. Infrastructure, on the other hand, is mostly built through loans. This leaves public officials predisposed to the theft of Kenyans’ hard earned money due to a low accountability threshold,. It also reinforces donor dependency and increases the debt burden on our country, which leads to lower government spending on essential elements of our social contract because more is spent on recurrent expenditure (such as repaying the principal and interest on loans) as opposed to development expenditure.

This makes us apathetic, because unless you are in the formal sector where your taxes are already withheld and filing returns is just an exercise in assisting the government to reconcile your accounts, you may not see the need to pay taxes. Why pay when you receive poor quality public goods? When public schools and public hospitals are in shambles, and the teachers, doctors and nurses who man them are regularly on strike demanding their dues and asking for better treatment? When there is a high rate of unemployment? When you barely have water and electricity supply even when you are ready and willing to pay for them? When the roads near your home and workplace are in poor condition, with potholes that are a safety hazard? When you have to pay for private garbage collection and security outside your gate? When there is not much you get in return?

Perhaps what KRA and Caroline Mutoko should have is some humility, and acknowledge that while KRA is not Kenya’s sponsor, we are definitely its. Tax reform and justice is necessary in Kenya before we start blaming maltreated citizens for “not doing their part” in building a prosperous nation.

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