TAX JUSTICE REPORT

The issues of poverty and taxes affect everybody in Kenya, though in varying degrees. This makes them matters of concern for the government and the citizens of the country. This research on “Tax Justice and Poverty: narrowing the wealth gap and reducing public dependence on external financing”, therefore deals with these issues in the specific context of Kenya. This is because Kenya is a country of an estimated 48.5 million, of which 73 per cent are below 30 years of age. Yet 19 million Kenyans (40 per cent of population by 2014 figures) were considered poor by multidimensional standards, an estimated 14.7 million were living below the $1.90 (KSh. 197) per day extreme poverty threshold, while 6 million (about 13 per cent) were regarded as destitute.

In spite of “promises” of free market theories, the gap between rich and poor in Kenya increases over time rather than granting wealth for all. A very small segment of the population (about 8,960) people – less than 0.1 per cent), owns a disproportionately large share of income and wealth than the remaining 99.9 per cent. The number of the super-rich in Kenya is expected to grow by over 80 per cent in the next ten years. In the 2015/2016 budget, there are only about 700,000 public servants (about 2 per cent) of the country’s total population who were assured of an income from salary and remunerations. They took an estimated KSh. 627 bn (50 per cent) of Kenya’s KSh 1.3 trillion tax revenue that year. Youth unemployment rate is estimated at 67 per cent, with only 155,000 of the over one million youth joining the labour market annually, able to get jobs. Limited skills and the government’s inability to create new jobs denies employment opportunities for the rest.

The illicit financial flows, bribery and corruption exacerbate the problem. It is estimated that since 1970, Kenya has lost over $10.6 bn in accumulated illicit financial flows out of the country. These take various forms like trade mis-invoicing, money laundering, unlicensed cash transfers, and aggressive tax planning through outright tax fraud, tax evasion, aggressive tax avoidance, tax exemption, and thin capitalization. Safe havens, shell companies and unregulated financial networks aid this process. Besides, the rich also grow in power and influence in government circles to determine how policies are formulated in their favour. On the other hand, a section of the Kenyan population operates in the informal economy, locally known as the “Jua Kali”. Its tax revenue potential has been estimated to be at KSh 55 bn, but a formidable knowledge gap about this sector, makes it difficult to tax or to be improved.

Education and social protection programs are two possible avenues for the government to address these issues of increasing poverty and inequality. The potentials provided by education and social protection programs cannot, however, be attained because of lack of funds. The Government of Kenya lacks the funds for establishing more equitable education and social services sector, and has instead resorted to reducing the budgets for these sectors. The contributory schemes like the National Hospital Insurance Fund (NHIF) and the National Social Security Fund (NSSF), can only benefit the income-earning contributing members. This means, the vast majority of Kenyans are left out and still have to grapple with the grueling effects of poverty and inequality.

The alternative of borrowing from external sources, as the Government of Kenya has been doing is no better. Continued borrowing has driven the country’s debt portfolio to a record KSh 4.7 trillion, making it the fifth highest in Africa. The country’s debt to GDP ratio now stands at 60 per cent, as of the 2016/2017 financial year, up from 52.1 per cent in 2015/2016 financial year. The country’s credit worthiness and debt sustainability hang on tender hooks, while investments through these borrowed funds seem not to benefit the poor ordinary Kenyans.

To prevent the poverty, inequality and debt gaps from growing further, tax policies and reforms should be designed to reduce, or at the very least slow down the growth of these gaps. Other public policies should alleviate the disadvantages and mitigate the effects of these gaps. Even more important, because they affect both the rich and the poor alike: Revenue raised through taxes can be used by the government to finance the aforementioned development and social services programs in terms of infrastructure, health, education, security, legislation, jurisdiction and executive representation, thus benefiting all citizens.

However, the policies of taxation in Kenya, have increasingly failed to deliver: the economic system and ‘knowledgeable’ citizen (or those with enough money to pay a good tax-lawyer) make easy use of the global market and legal infrastructure. They siphon finances away through seemingly licit means, or outright illicit ways like money laundering, bribery and corruption. This has led to poor revenue collection from taxation and losses of about $1.1 bn of potential tax revenue, consequently leading to low tax quota contribution to Kenya’s Gross Domestic Product (GDP). The Kenya Revenue Authority, bound by legislation and jurisdiction, tries to pursue a fair and appropriate taxation for development and poverty reduction. The question that requires to be addressed is how just and fair such a system of taxation is to the country and its people.

In evaluating the system, an ethical approach has been used to address the issues by focusing on the human person. Instead of using a market system that places profits above all, leading to an unfair competition and the resultant inequality and other problems such as resource over-use. A value system based on the Catholic Social Teaching (CST) has been adopted for analysis. It highlights the rights and dignity of each individual person (personalism), the need for active support for those in need (solidarity) and the need for establishing structures for individuals and groups to develop their capabilities (social justice). This can help to reduce and remove the negative influences of the free market economy and replace these with a “social market economy” that works for the Common Good of all, based on equity. Drawing from the CST is also a special call to the Catholic Church to participate in these socio-economic and political issues that affect the people.

This, therefore, calls for review and reforms in Kenya’s tax laws, policies and administration to minimize the deficits that exist. These improvements and changes have to be implemented with a view to increasing revenue collection from taxes.

The Jesuit Hakimani Centre, in collaboration with the Jesuitenmission in Germany and the Jesuit Centre for Theological Reflection in Zambia became engaged in the project so as to:

  1. identify the common problems shared by rich and poor countries, regarding poverty and inequality.
  2. explore opportunities for influencing the fight for Tax Justice for poverty reduction and development through Christian principles