This archive report was first published on 26 October 2019.
As an economist and the Molo MP, I firmly believe that tax reduction is a crucial step towards stimulating economic growth. The relationship between tax rates and economic growth is a widely discussed topic in economics, and it is essential to understand the impact of tax cuts on the economy.
Every country in the world levies taxes to raise revenue for the government, and any increase in tax rates increases the government's income for expenditure. However, a reduction in tax rates leads to increased economic growth and prosperity. This is because tax cuts reduce the amount citizens pay on wages, promoting savings, investment, and consumption levels.
Reducing the tax rate on individual household incomes can encourage Kenyans to work, leading to enhanced productivity. When consumer purchasing power is enhanced, the aggregate demand is increased, boosting economic growth. This, in turn, changes the spending patterns of consumers, enabling them to spend more.
In the business environment, reducing taxes on profit provides more money to companies for investment, expansion, and increasing the rate of employment. For instance, the recently closed betting firms, such as SportPesa and Betin, contributed to expanding the economy through job creation, corporate partnerships, and corporate social responsibility.
However, the friction between SportPesa and the government over the 20 per cent withholding tax led to SportPesa leaving Kenya, leaving 400 of its staff jobless. The dispute also led to the betting companies cancelling their sponsorship of local tournaments.
Furthermore, the government's move to tax boda-boda operators forces them to dig deeper into their pockets as they incorporate the proposed additional insurance costs. This is expected to lower their revenues and increase the cost of doing business.
On the other hand, the reduction of corporate tax will boost small and medium-level companies, leading to more employment opportunities, competition, price stability, and enhanced profitability. The reduction of tax rates will also positively affect wealthy individuals who earn a disproportionate share of their income from sales and dividends.
Other institutions that will benefit from the tax reduction are pass-through entities such as sole proprietorships that will enjoy the low rates. Several stipulations featured in the framework prevent the wealthy from employing the tax breaks as a means to protect income.
