The Laffer Curve is the common-sense notion that there is not a simplistic mechanical relationship between tax rates and tax revenue.
You also have to consider potential changes to what’s being taxed.
I’ve cited interesting case studies from Canada, Denmark, Hungary, Ireland, Italy, Portugal, Russia, France, and the United Kingdom.
Today we’re going to add Kenya to our list.
But before looking at Kenyan tax policy, let’s first look at some IMF data on the rapidly growing burden of government spending in that East African nation.
That’s a very depressing chart, showing about 10 times as much spending today compared to 20 years ago. But keep in mind that there’s been inflation.
If you look instead at spending as a share of economic output, the government budget is now consuming about 22.5 percent of GDP compared to 15.5 percent of GDP two decades ago.
A very troubling development, though not as bad as implied by the chart.
As is usually the case, bad spending policy has led to bad tax policy. Kenyan politicians have been trying to squeeze more money out of the private sector.
However, as reported by Victor Amadala for the Star, higher taxes are backfiring.
Kenyans…talked to the Star on measures they take to survive in a tough economic environment characterized by the high cost of goods and services due to high taxes… Last year, the government introduced several tax measures in the Finance Act, 2023 that added pressure on taxpayers, pushing up the cost of living. It, for instance, doubled Value Added Tax to 16 percent on fuel… Others are the introduction of a housing levy and raised deductions on national health coverage and social protection. …An analysis of official data by both the Kenya National Bureau of Statistics and the Energy and Petroleum Regulatory Authority (EPRA) shows kerosene consumption dropped by almost half, three months after VAT on fuel doubled in July last year. Only 15.3 million litres of kerosene were sold in the review period compared to 28.8 million litres same period in 2022, the lowest in past five years. …The state is on the receiving end as consumers become creative to escape high taxes. The latest report by the Parliamentary Budget Office (BPO) shows Kenya Revenue Authority (KRA) missed the tax revenue collection target for quarter one of the current financial year by Sh72.5 billion. …”You cannot defy the Laffer Curve theory and survive. Tax measures must be of mutual benefit between the public and the state. This is just the tip of the iceberg, winter is coming,” an economist Shem Mutonji opines. …This sentiment is echoed by his colleague, Joe Ngatia who says you cannot overmilk a cow to prosperity for “It will throw a hoaf in desperation.”
Sounds like we need Shem Mutonji and Joe Ngatia working for the U.S. Treasury. Maybe they could convince Joe Biden that overtaxing the American economy is not a good idea.
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