Tax reduction will stimulate economy

One of the most commonly discussed issues in economics is the relationship between tax rates and economic growth. Every country in the world levies taxes to raise revenue for the government. 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.

Some of the tax cuts or reductions that can stimulate economic growth include income tax, capital gains tax, inheritance tax and business tax. Specifically, income tax cuts reduce the amount Kenyan citizens pay on wages.

Reducing the tax rate on the incomes of individual households can promote savings, investment and consumption levels. It encourages Kenyans to work, leading to enhanced productivity. When the consumer purchasing power is enhanced, the aggregate demand is increased, boosting economic growth.

The spending patterns of the consumers change, as they remain with considerable gross income, 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 example, 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 has led to SportPesa leaving Kenya, leaving 400 of its staff jobless. The dispute led to the betting companies cancelling their sponsorship of local tournaments.

In August, Tabitha Karanja, the Keroche chief executive, was questioned over tax evasion. However, tax-evasion claims must be well adjusted to support business. They should not disrupt business. More so, the taxman is targeting digital taxi-hailing firms.

These firms are registered in foreign countries, with their local subsidiaries only dealing with marketing. The reduction of corporate tax will boost small and medium-level companies, leading to more employment opportunities, competition, price stability and enhanced profitability.

But the government 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.

The reduction of tax rates will positively affect wealthy individuals who earn a disproportionate share of their income from sales and dividends. Such individuals will benefit from the corporate tax cut since the tax reductions will positively affect the cost of capital.

Other institutions that will benefit 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.

Kuria Kimani, an economist, is the Molo MP.