President William Ruto has revived a proposal to impose higher taxes on Kenya’s super-wealthy and high-income people, endorsing the introduction of a wealth tax which failed to pass through parliament over the past of the past four years.
The idea is the latest in a long line of efforts to raise taxes on the super-rich as the new administration seeks to reduce reliance on loans to fund the national budget amid debt. growing public.
The President told Parliament in his inaugural address on the floor of the House that his government would seek to raise taxes on the wealth accumulated by the wealthiest Kenyans rather than obtaining income from workers and traders.
This type of tax would be based on a person’s net worth after deducting their debts and would only apply to the wealthiest citizens.
Unlike many other types of taxes such as income tax, people with sufficient net worth would be liable for wealth taxes even if they took no action, such as earning income or selling assets.
It would apply to all property such as real estate, cash, investments, business ownership and other assets, less debts, and investors would be liable for tax each year based on the market value of the assets.
“Economic principles of fair taxation require that the tax burden reflect ability to pay. This is best achieved through a hierarchy that taxes wealth, consumption, income, and trade in that order of preference. Our tax regime is currently well below that,” says Dr Ruto.
“We are overtaxing trade and undertaxing wealth. We will come up with tax measures that will start moving us in the right direction,” he said.
This means that the government will impose higher taxes on the wealthy, followed by excise taxes on the consumption of items like beer, cigarettes and bets before targeting income tax on working people and finally shopkeepers for corporate and sales taxes.
Dr Ruto was sworn in this month after a hard-fought election campaign, in which he promised to create economic opportunity for the poor.
But he faces tight fiscal space to implement his policies, after his predecessor Uhuru Kenyatta’s government increased public borrowing to finance infrastructure projects, with debt repayments accounting for more than 60% of taxes .
Dr. Ruto’s administration is seeking to channel government resources to industries that can create the most jobs, such as agriculture and small businesses, which will be offered concessional loans through the so-called Hustler Fund.
He plans to first introduce the wealth tax, which was first mooted in 2018, to fund his pro-poor plans, and appears set to face class opposition that he proposes to target.
Last year, the Treasury said it was considering tax changes that would go into the finance bill, including discussions of the wealth tax among many other tax reforms to boost revenue.
The Treasury then increased capital gains tax from 5% to 15% in the 2022 finance law which will come into force from January next year.
Proponents see the wealth tax as a way to bail out the government’s public coffers by taking extra money from those who don’t really need it.
They argue that such a tax generally only applies to the wealthiest, and it can be argued that the additional taxation will have no impact on their quality of life.
Critics say a wealth tax is difficult to administer, tends to encourage tax evasion and has the potential to drive the wealthy away from countries that have it.
These caveats, coupled with debates over how to apply it fairly, may explain why only a few countries in the world impose such a tax on their residents, analysts say.
Out of 38 countries in the Organization for Economic Co-operation and Development (OECD), only three European countries levy a net wealth tax, including Norway, Spain and Switzerland.
France and Italy levy wealth taxes on certain assets, but not on an individual’s net worth.
OECD countries that have collected net wealth tax revenues have increased only slightly, from eight in 1965 to a peak of 12 in 1996 and just five in 2020.
“In the past and to some extent still today, people tried to hide their assets through trusts,” said Nikhil Hira, tax expert and partner at Kody Africa LLP, a financial advisory firm.
Kenya could introduce a wealth tax for wealthy individuals, who will pay a small portion of their net worth.
This could take the form of a higher tax rate for high earners.
In 2018, the Treasury sponsored an Income Tax Bill which sought to impose a higher maximum tax rate of 35% on income over 9 million shillings per year or 750,000 shillings per year. month.
At the time, the top tax rate was 30% on all income exceeding 564,709 shillings per year or 47,059 shillings per month.
The Treasury said it dropped the bid for the higher tax rate after gathering public opinion.