Desperate times call for desperate measures. This common phrase is borrowed from the medical world wherein its original form it meant for extreme diseases, extreme methods of cure are most suitable. In light of the COVID-19 pandemic, which is not only a threat to human health but also a great detriment to the economy, the world now understands this phrase better than ever before.
As many commentators have rightly put it, we are at war with an invisible enemy. Being at war means mobilizing war front foot soldiers and equipping them with the most sophisticated artillery till the war is won. History tells us that every major war has triggered increased tax rates. Citizens through their commander-in-chief have to endorse the war. In so doing, they are voluntarily asking for higher taxes.
If COVID-19 was a war to be fought, then the first reflex would be to raise taxes. However, this is not a war where soldiers are on the war front while civilians are minding their business. The civilians, now the taxpayers, have been tossed to the economic war front in the form of lockdowns, salary cuts and in some cases, job losses. Policymakers found themselves between this rock and a hard place, between raising taxes to foot the rising costs of managing the pandemic and reducing taxes to cushion the masses. Reducing tax rates was wise, at least to keep the economy afloat.
The most immediate tax relief is being enjoyed by salaried individuals after revision of the tax rates. Shoppers alike have been cushioned through reduction of Value Added Tax (VAT) rate from 16% to 14%. Small Businesses with a turnover of less than Sh50 million are also beneficiaries of this State generosity and are now being taxed at 1%. To the taxpayer, the tax reductions may seem marginal, while employees with littered payslips may not have noted any change.
The marginal changes to every individual amount to a huge revenue shortfall to the government. The parliamentary budget office notes that the Kenya Revenue Authority (KRA) is losing Sh1.3 billion daily to this revision. To ask the question on whether these measures are sustainable is not far-fetched. The International Monetary Fund (IMF) while approving a loan facility of Sh78.9 billion has urged Kenya to reverse the corona tax cuts.
The COVID-19 pandemic opens the opportunity to keep debating on whether to increase taxes again or to reduce them further. Dwelling so much on this topic will constraint our thoughts in the same box while not focusing on the real issue of revenue leakages. More than ever before, the focus should be on tax compliance especially in the informal sector now that the tax rate has been reduced to 1%. I dare say that we can achieve and even surpass our revenue targets if all the taxes payable are deposited to the exchequer notwithstanding the reduced rates.
The fundamental question of why taxpayers fail to pay taxes has to be addressed. One of the reasons has been lack of adequate knowledge among the taxpayers. Nonetheless, there is evidence that the taxman has made significant strides to bridge the knowledge gap among the taxpayers.
It might be true that some people fail to pay taxes due to lack of knowledge, but the question is, do their compliance status change once they get the knowledge? I hypothesize that people fail to honor their tax obligation because they are not patriotic enough. Patriotism is not just saying I am proud to be a citizen but being conscious enough towards civic duties and taking taxes as personal obligations. Governments must invest in boosting the tax morale of individual payers. This can be achieved by making them appreciate that their little contribution matters.
Therefore, as it were in the days’ great wars, modern day governments ought to rally their citizens behind their national flag. If compatriots put their lives on the line for a course they believed in, why not some little money? That said, the question of why pay taxes needs a practical and tangible answer. The fact that tax money is spent on provision of public goods and services needs to be visible and comprehensible to the least of all taxpayers.
Taxpayers in a certain region or sector should find answers to the question of how much taxes they have paid and what services are they getting in return. This is especially so with sector specific taxes and levies. Government revenue collection agencies might be divorced from spending units but to Mwananchi there is only one Government. Needless to say, the greatest offence to tax morale is developing doubt on government spending.
The writer is a lecturer at KCA University