Kenya’s quick tax gains that hurt economy

With so much fanfare as 40 of our African heads of State last month signed up to launch the world’s largest free trade area since the World Trade Organisation, there was a definite air, for some moments there, around the feeling that free trade might be a good thing.

Here, in Kenya, ministers explained that Africa’s Continental Free Trade Area (CFTA) would be a boon to small businesses.

Yet it isn’t only small businesses that benefit from free trade.

Indeed, for anyone setting out to ‘follow the money’, consumers, governments and entire economies head a long list of losers from protectionism and trade barriers, in a victim count that it is hard to find the case for.

A case in point is cars. Cars are extremely expensive in Kenya, because we barely make them and yet they are subject to import duties that are astronomically high. The taxes are complex to calculate, but put roughly, they are over 60 per cent extra on the buying price, which is a large, large addition.

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Yet, take a radical thought – what if the excise duties were waived, and we imported cars at the price paid for them?

The instinctive answer is that the government would lose, in taxes not collected, and consumers would win, on cheaper cars.

But the actual equation is very different, because, in fact, government and consumers, and employees, and businesses would all win.

As cars become sharply cheaper – waiving the 60 per cent in taxes would mean prices at less than two-thirds of their current level – more people would afford them.

Banking business would surge on asset-secured bank loans (where the car belongs to the bank on any loan default). Insurance business would climb. There would be more spare parts businesses, more garages, more petrol sold.

And all that extra work, revenue, and jobs would position more people to buy more cars, in a circle constantly generating more taxes. There would be downsides too: more pollution, more congestion.

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But across the need for more commercial and local government car parking facilities, more mechanics, panel beaters, and windscreen wiping fluid, for anyone who does the numbers: the government wins, we gain jobs, consumers are better served.

And this is where I have an issue with the word ‘protectionism’. Because policies that garner quick tax gains that hold back the whole economy often seem to be ‘protecting’ close to nothing, or certainly, very little.

In Kenya, some such ‘protection’ has even finally been removed, the costs were so high and the protection case so weak. We used to suffer more expensive software than in the West.

Our Windows systems cost more than other people’s – in the complete absence of any specific Kenyan alternative to Microsoft (free Linux being an option everywhere and with no Kenyan benefits).

We do have spaces such as sugar, where at least we produce. But how do we do those protection sums even there, with our sugar taxes in the headlines once again? We don’t even make enough sugar to meet local demand, let alone to make it as an exporter.

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I can’t say I care so much about expensive sugar — it is, after all, the source of our diabetes epidemic. But building in an extra costly ingredient certainly is just one more hamper to the take-off of our food processing industry: count the reduced moves into candy making here.

Wouldn’t the government and the KRA prefer more people paying PAYE, spending on VAT-able goods, delivering corporation tax, and often far more than that in withholding taxes?

Who are we protecting with our car duties? How many people is it? And how many people do we get to employ if we waive the duties and create jobs on jobs on jobs?
Or, was something wrong with my own economics degree?

TheFounder Magazine

Made Of Founders

TheFounder Magazine is an online business magazine that focuses on starting, running and growing a business in Kenya today

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