Tax exclusive club memberships, not textbooks and magazines

The Finance Bill for 2016 contains the proposed tax raises and reductions for the coming financial year.

I am disappointed, having reviewed it, that the Cabinet Secretary for Finance did not propose reversing the imposition of VAT on textbooks, periodicals and magazines.

The tax, which was introduced last year, has been maintained despite obviously undermining longstanding development plans by making inputs to education more expensive. It’s a poorly considered levy for many reasons.

The first is that government is the largest purchaser of school books in Kenya, through support for basic education. In the unquenchable thirst to raise more taxes, the government's tax policy increased the tendency for government to tax entities in which it has invested enormously.

It is not sensible for government, as the largest buyer of textbooks, to impose a tax that circulates public funds back to government with the Kenya Revenue Authority getting an agency commission out of it.

It would be much better to save the agency sufficient time to either conduct audits or administer taxes from other payers.

CASH CRUNCH

In addition to the government, which is a major purchaser of text books for schools, this tax is also borne by other Kenyans who purchase books for private schools, recreational reading or professional development. It is clear that some revenue is collected from these sources.

I have been unable to find a reliable estimate for the total revenue collected from the private purchases of books and periodicals.  However, my observation of data of collections for three quarters of the financial year suggests that this tax measure did not result in very large collections.

Starting from first principles on taxation, Parliaments should only approve new taxes for products or services in order to raise revenue or provide disincentives for the behaviour subjected to taxes. Therefore, to apply Value Added Tax (VAT) on educational materials is to effectively tax knowledge creation.

Commercial publishers in Kenya were understandably concerned, but they argued that this new tax depresses local publishing.  While this claim is self-interested, it is valid, even if not sufficient reason to suspend a tax measure.

So for the reason that the tax has not raised overall collections, in addition to the fact that it results in taxation of knowledge, I propose that Parliament take the initiative and abolish the application of VAT to books and periodicals.

This proposal is not likely to find support with the Treasury, especially given the cash crunch that it has suffered recently amid growing expenses.

The silence from the Cabinet Secretary suggests that Kenya seems to be struggling with new ideas for revenue sources, hence any proposal to abolish this tax will be met with questions on how to cover the gap.

WAITING LISTS

Surveying the economic behaviour of Kenyans reveals a few more sources of revenue that replace the taxation of knowledge.

One of the lowest-hanging fruits is prestigious goods and services with limited sensitivity to price. In this area, a simple tax on club and association memberships is the clearest opportunity.

Evidence in Kenya’s larger towns suggests that the colonial legacy of joining member’s clubs to signal status and affluence is thriving, if not on the increase altogether.

Thus there is sufficient room to place a sensible tax on club memberships based on the subscription price and use that revenue to offset the taxation of books and periodicals.

This policy would work easily without creating new administrative burdens because most professional clubs are formalised, and have registers with a large number of people on their waiting lists.

This patience of prospective members is evidence, on one hand, of the value of clubs in the eyes of prospective members.

On the other hand, it’s a signal to the clubs that the demand for memberships exceeds supply and that therefore, prospective members will comfortably accept an upward adjustment in prices.

It is manifestly fairer to tax those who use exclusive club memberships than it is to tax students who use books in Kenya’s educational institutions

Kwame Owino is the chief executive officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi. Twitter: @IEAKwame