Workers earning high salaries will be made to pay increased taxes if Parliament adopts proposals to raise the country’s revenues in the next financial year.
The proposals are part of recommendations given to parliament ahead of the start of the budgeting cycle by a group of policy and budgeting experts.
The report by the Parliament Budget Office says that while salaries have gone up over the years, the growth has been unequal and had only favoured the high earners.
The pay-as-you-earn (PAYE) amounts deducted from salaries have not changed and those pocketing high incomes have ended up paying a lesser tax proportion to the salaries, the report says.
COST OF LIVING
To reverse the trend, the experts are proposing the adoption of progressive taxes, a model which takes a larger percentage of salary from high-income groups than from the low-income ones and is based on the ability to pay.
“Urban centres are more unequal than rural areas. While Nairobi accounts for a big proportion of the value of consumption of goods and services relative to other areas in Kenya, it is the most unequal with average consumption of the higher income earners at least 600 times more than that of lowest earners,” the report says.
“Kenya is considered relatively unequal with a Gini Coefficient (measure of income inequality) of 0.45 to 0.47 according to various studies.”
The proposals, which are set for debate by Parliament, follow plans by Treasury Cabinet Secretary Henry Rotich last month to lower taxes for low earners to cushion homes from the high cost of living.
Adjustments by the Treasury on the PAYE bands and monthly personal relief (MPR), which were to come into effect this month, mean that income tax bands will be expanded by a further 10 per cent and that workers will take home more money depending on salary levels.
Also introduced by Mr Rotich was the increase of taxpayers’ monthly personal relief from Sh1,280 to Sh1,408.
“Apart from inequality, overall economic wellbeing as measured by poverty rates is equally depressing,” the report says.
With at least 40 per cent of persons in Kenya living below the poverty line, the effect of income distribution in taxation has grown significantly.
Broad taxes such as value added levies on goods and services may place a higher tax burden on the average income earner given that most purchases are subject to VAT.
“The rich, mainly owners of capital and the wealthy, alternatively tend to bear a relatively smaller burden of income tax relative to workers when the structure of income distribution is not considered in tax design,” the experts say.