Inequality and political stability in Kenya

Kenyans queue to file tax returns at Kenya Railway Golf Club in Nairobi on June 30, 2016. PHOTO | JEFF ANGOTE | NATION MEDIA GROUP

What you need to know:

  • The persistence of inequality is certainly worrying in the Kenyan context.
  • A number of commentators have suggested that inequality was one of a number of factors that contributed to the outbreak of political violence in 2008.

  • Kenya exhibits a number of different kinds of inequality at the same time: between individuals, between regions, and between communities.

  • One of the dangers of this overlapping set of inequalities is that when they overlap people who find themselves on the wrong side of multiple disparities are likely to feel like they have no stake in the political or economic system and so no reason to protect it.

My Kenyan friends with well-paying jobs often complain that they are overtaxed. Of course, there is nothing “Kenyan” about this – there are very few people in the world who enjoy paying tax, and most of us question whether what we get from the government is worth what we pay into it. But at a recent conference I attended someone mentioned that the rate of tax paid by the highest earners in Africa is one of the lowest in the world. This made me wonder which story was right: do wealthy Kenyans pay too much tax, or too little?

It turns out that tax rates for the wealthiest in Kenya are comparatively low by international standards. Combined with a fairly high sales tax, this means the overall tax system does little to redistribute wealth from the richest to the poorest. In addition to a number of other factors, this is one reason that economic growth has gone hand-in-hand with rising inequality. This is an important issue for all Kenyans, because rising inequality may drive higher levels of crime and political instability if it is not effectively managed.

Taxing people is not easy. Even the richest people who can most easily afford to pay their taxes have been caught trying to dodge them. Take the case of Lionel Messi, the world famous footballer who earns something like £500,000 a week before tax. Apparently, this was not enough. Along with his father, Messi was recently sent to jail for defrauding the Spanish government of £3.5 million (Messi is serving a 21-month suspended sentence). If he doesn’t want to pay his taxes, it is hardly surprising that people who earn far less than him have second thoughts too.

Encouraging people to pay tax has often proved to be particularly difficult in Africa, where it has a number of negative connotations. On the one hand, tax is associated with exploitative processes of colonial rule, when it was introduced in an effort to both cover the costs of Empire and to force Africans into providing cheap wage labour for European farmers. On the other hand, taxes also have a bad name because in the 1980s they were enforced by unpopular governments that squandered much of their revenue as a result of corruption and mismanagement. Against this background, it would be surprising if people were not suspicious of handing over their hard earned money to the state.

OTHER REASONS

In contemporary Africa, there are other reasons to be wary of paying taxes. As the members of the rising middle-class are only too aware, paying tax does not mean that you necessarily receive services. If you send your children to private school because government schools are not good enough, run your own generator because you are fed up with power cuts, and employ your own security guards because the police force is not capable of maintaining law and order, then you might feel that paying taxes is a fruitless exercise.

Of course, this negative picture is not quite right for a number of reasons. The first is that taxation supports a wide range of government activities, some of which benefit everyone. In addition to funding education and healthcare, taxes cover everything from road building programmes to national security. We might not all agree on how our governments try and fight terrorism, but we wouldn’t want them to stop trying.

The second reason that paying taxes is not just a waste of money is that in actual fact the rate of taxation in much of Africa is comparatively low for the highest wage earners. It might not feel that way to those paying the taxes – and of course people often have to pay a range of other bribes and fees on top of income tax – but in places like Kenya the rich are paying less tax than in other parts of the world.

This is how the figures break down. The top rate of personal income tax in Kenya is 30 per cent. This is a little above average for Africa, where the top rate of tax ranges from around 15 per cent in Mauritius to 25 per cent in Nigeria, 30 per cent in Burkina Faso and 50 per cent in the Central African Republic (CAR). However, what is striking about these figures is that, with the exception of the CAR, they are all significantly lower than the corresponding figure in other parts of the world. For example, in Europe the top rate of tax is typically over 40 per cent, reaching almost 60 per cent in Sweden.

A colleague of mine at Oxford University, Prof Edmund Fitzgerald, has spent the last decade working on how to estimate how “progressive”, that is, redistributive – different tax systems are. He has invested so much time in this research because he believes that progressive taxation is necessary to reduce poverty and inequality. In an attempt to develop a measurer that can rank countries against each other he has created what he calls the Plato Index. The name is inspired by a line in Plato’s Republic, in which the great political philosopher argued that “When there is an income tax, the just man will pay more and the unjust less on the same amount of income”.

WEALTHIEST CITIZENS

The Plato Index effectively measures the share of tax revenues paid by the wealthiest citizens. When the index is higher, a greater share of tax is paid by the top 20 per cent of wage earners, and the tax system is more progressive. Although getting good quality data on these issues is difficult, Prof Fitzgerald’s early results are striking. He finds that on average the less wealthy a country is the less progressive its tax system is likely to be. In other words, when a country is less well off the burden of taxation is more likely to fall on the worst off, creating a double whammy for the poor.

More specifically, Prof Fitzgerald estimates that in developing countries, the wealthiest 20 per cent of the population only pay about 10 per cent of their income in tax. In sub-Saharan Africa the figure is even lower – about seven per cent. This is dramatically lower than in Latin America, the Middle East, North America and Europe. Moreover, when you factor in the Value Added Tax that most African governments impose on sales, the poorest citizens actually pay a higher proportion of their income in tax than the wealthiest.

There are a number of possible ways to defend this state of affairs, but none quite stands up to scrutiny. One is to argue that Africa does not have enough wealthy people to be able to stand higher rates of income tax. After all, if there are very few people who earn a lot of money, they can hardly be expected to sustain government revenue on their own. But while this may have been true in the past, such a position seems increasingly implausible today.

While the middle class can rightly point out that their disposable income is lower than people often assume, this is not true of the continent’s economic elite, a group that is growing larger year by year. According to research by AfrAsia Bank and New World Wealth in 2015, there are almost 165,000 millionaires in Africa – with 7,000 in Kenya alone. All of these people could afford to pay a significantly higher rate of tax on their salaries.

CAPITAL FLIGHT

Another way to respond would be to argue that higher rates of taxation would lead to capital flight and brain drain. If income taxes increased significantly, wealthy Kenyans might move to Mauritius where tax rates are particularly low. This is a real concern and deserves to be taken seriously. There is no point in adopting fairer taxes if doing so leads to a fall in government revenue because less people end up paying them. But given that income tax rates are relatively low, and much lower than in other choice destinations, it should be possible to gradually increase the top rate of tax without generating an exodus.

Finally, wealthy Africans might simply say that they don’t care it is not their responsibility to look after the poor, or to support a state that has done little for them. Why should people who pay for private education and healthcare contribute towards government expenditure in these areas? Instead, they might argue, their contribution to the national interest is to do their jobs well and to create jobs and wealth for the people they employ in their firms.

The problem with this argument is that in the long-term the rich also have something to lose from high inequality. Thomas Picketty, the influential French economist, argues that there are no natural forces preventing the increasing concentration of wealth in the hands of the few and so governments need to step in to prevent future economic and political instability. According to Picketty, such an intervention would be fully justified because economic and political shocks have the potential to hurt us all, and the rich need to be protected from them as much as the poor.

The persistence of inequality is certainly worrying in the Kenyan context, where 62 per cent of the country’s wealth is owned by just 0.00002 per cent of the population. A number of commentators have suggested that inequality was one of a number of factors that contributed to the outbreak of political violence in 2008. Kenya exhibits a number of different kinds of inequality at the same time: between individuals, between regions, and between communities. One of the dangers of this overlapping set of inequalities is that when they overlap people who find themselves on the wrong side of multiple disparities are likely to feel like they have no stake in the political or economic system and so no reason to protect it.

 

Dr Nic Cheeseman teaches African politics at Oxford University in the UK; Twitter: @fromagehomme.