Kenyan President William Ruto has revived a proposal to impose higher taxes on Kenya’s super-rich and high-income earners, endorsing the introduction of a wealth tax that failed to sail through Parliament over the past four years.
The idea is the latest in a long list of efforts to raise taxes on the super-rich as the new administration seeks to cut reliance on loans to fund the national budget amid the burgeoning public debt.
The President told Parliament in his inaugural speech on the floor of the House on Thursday that his administration will seek to raise taxes from the wealth accumulated by the richest Kenyans over getting revenues from workers and traders.
This sort of tax would be based on a person’s net worth after deducting their liabilities and would only apply to the richest citizens.
Different from many other kinds of taxes such as income tax, people with sufficient networth would owe wealth taxes even if they failed to take any action, like earning income or selling assets.
It would apply to all property such as real estate, cash, investments, business ownership and other assets, less any debts, and investors would owe the tax each year based on the market value of the assets.
“The economic principles of equitable taxation require that the tax burden reflects ability to pay. This is best achieved by a hierarchy that taxes wealth, consumption, income and trade in that order of preference. Our tax regime currently falls far short of this,” Dr Ruto said.
“We are over-taxing trade and under-taxing wealth. We will be proposing tax measures that begin to move us in the right direction,” he said.
This means the government will impose higher taxes on the rich, followed by excise taxes on consumption of items like beer, cigarettes and betting before targeting workers’ income tax and lastly traders for corporate and sales taxes.
Dr Ruto took oath of office this month after a hard-fought electoral contest, in which he promised he would create economic opportunities for the poor.
But he faces a narrow fiscal space to implement his policies, after the government of predecessor Uhuru Kenyatta ramped up public borrowing to fund infrastructure projects, with debt repayments taking more than 60 percent of taxes.
Dr Ruto’s administration seeks to channel government resources to industries that can create the most jobs, such as farming and small businesses, which will be offered concessional lending through the so-called Hustler Fund.
He plans to introduce the wealth tax first, which was first mooted in 2018, to finance his pro-poor plans, and looks set to face opposition among the class it proposes to target.
Last year, the Treasury said they were looking at fiscal changes that would go into the Finance Bill, including discussions over the wealth tax among many other fiscal reforms to boost revenues.
The Treasury then increased capital gains tax from five percent to 15 percent in the Finance Act 2022 that will take effect from January next year.
Proponents view the wealth tax as a way to boost the government’s public coffers by taking extra money from those who do not really need it.
They argue that such a tax generally only applies to the wealthiest, and it can be argued that the extra taxation will have zero impact on their quality of life.
Critics reckon that a wealth tax is difficult to administer, tends to encourage tax evasion, and has the potential to drive the wealthy away from countries that enforce it.
These caveats, coupled with debates about how to implement it fairly, perhaps explain why only a few countries in the world impose such a tax on their residents, analysts say.
Of 38 Organisation for Economic Co-operation and Development (OECD) countries, only three European countries levy a net wealth tax, including Norway, Spain, and Switzerland.
France and Italy levy wealth taxes on selected assets but not on an individual’s net wealth.
OECD countries that have collected revenue from net wealth taxes grew only slightly from eight in 1965 to a peak of 12 in 1996 to just five in 2020.
“In the past and to some extent even now people try to hide their assets through trusts,” said Nikhil Hira, a tax expert and partner at Kody Africa LLP, a financial consultancy.
Kenya could introduce a wealth tax for the high net worth individuals, who will pay a small share of their net worth.
It could take the form of a higher tax rate for high-income earners.
In 2018, the Treasury sponsored a Draft Income Tax Bill that sought to impose a higher maximum tax rate of 35 percent on income of more than Sh9 million per annum or Sh750,000 a month.
At the time, the top tax rate was 30 percent on all income exceeding Sh564,709 per annum or Sh47,059 a month.
The Treasury said it dropped the bid for the higher tax rate after collecting the views of the public.