President Uhuru Kenyatta’s government has resolved to implement what has been christened the “Big Four.” The President made it clear during the last Jamhuri Day celebration that during the next five years he will dedicate his energy, time and the resources of his administration to the Big Four. The Big Four are legacy projects ranging from manufacturing, universal healthcare, affordable housing and food security. Of course these project require serious funding.
Kenyan tax payer is already burdened by the increase of the “routine” taxes such as sin taxes and income taxes. There ought to be fiscal innovation to meet the budgetary needs and re-introduction of the estate duty abolished in 1980s may be the solution to raise the much needed cash for the projects
Estate tax may be defined as a tax paid by a person who inherits money or property or a levy on the deceased person. Section 7 of the Estate Duty Act, Chapter 483 (now abolished by the Estate Duty (Abolition) Act no. 10 of 1982) provided that whenever any person dies a tax known as a estate duty shall be levied and paid on all property of which the deceased was at the time of his death competent to dispose; all the property which the deceased or any other person had an interest ceasing upon the death of the deceased, the proceeds of any policy of assurance on life of the deceased among others.
Curiously, the Act excluded application of the tax to His Excellency MzeeJomo Kenyatta and to His Excellency Daniel ToroitichArapMoi. However with the legislation of the Estate Duty (Abolition) Act in 1982 no estate duty may be levied on property which passes on death of any person who died on or after 1st January 1982.
With concerns about the runaway debt burden, the country needs to broaden its tax base for purposes of raising funds for its projects. This includes a re-introduction of the estate duty or estate tax as is sometimes called.
Estate tax represents one of the oldest forms of taxation. Such taxes can be traced to ancient Egypt, during the reign of Psametichusi in the Seventh Century BC. A tax on inheritance was also introduced by the Romans some two thousand years ago when the Roman Senate approved Emperor Augustus’ proposed inheritance tax as an alternative source of funding. In United States the tax accounted for 10% of federal receipts in 1930s.
The tax envisaged under Section 7 of the Estate Duty Act encompasses the value of the real estate, cash, bank deposits, stocks, bonds, mutual funds, businesses, pensions and proceeds from life insurance policies owned by the deceased. The rationale for taxing inheritance is that inheritance falls into the concept of income.
The Carter Commission in its report on tax reforms in 1966 observed that taxes should be allocated according to change of economic power of individuals or families. In the Commission’s view, if a person obtains increased command over goods and services for his personal satisfaction, it matters not, from the point of taxation, how he acquired the property. The same ought to be taxed.
The Estate tax debate historically has been controversial. However all taxes are controversial as they have implications for efficiency and equity. In the case of efficiency, the concern is over whether the tax distorts economic behavior and induces individuals to take actions they would otherwise not take in absence of the tax. Equity concerns relate to whether all individuals pay their fair share of taxes in defraying the costs of services provided by government and that tax liabilities reflect the ability to pay principle.
Supporters of imposition of estate tax view large concentration of wealth as dangerous to a democracy and large inheritances are considered inconsistent with democratic ideals of equal opportunities. On the other hand those against this move argue that death tax is punitive and may in essence result in an increase in lay-offs and tax avoidance measures such as offshore investments resulting in the general retardation of economy and effectively government revenue altogether.
The re-introduction of the estate duty is the avenue for widening the tax base and raising the much needed revenue for the government especially in Multi-Billion estates. This will be line with the core principle of taxation which is redistribution of wealth.