There is a common platitude that you can’t tax a nation to prosperity, but also on the other hand there is another epigram that says debt is the slavery of the free. Taxes as a fiscal tool can be applied to achieve different things by governments. A prudent balance of different tools can yield desired results, however, that can only be achieved if the tax base is sound enough to yield substantial income. In the event that taxes fall short of budgetary demands, the next easier route is borrowing — debt.
This has been the trend in most developing economies to plug the gap of development finance, leading to the debate of what ought to be done to solve the challenge. Taxes have never been a darling of tax payers, the authorities have to use punitive measures to get it, but in a situation where both the tax base and tax net are narrow, chances of developing using local finances are small, thus debt. Apart from being an economic tool, taxes can be too political. Those in government are apprehensive to cast the tax net wide enough to bring in the fold, both formal and informal sectors. This makes both the impact and incidence of the tax to fall on slim shoulders. You find that a small percentage of the population pays taxes to benefit the untaxed majority.
The politics of taxes is so profound that in countries with term limits, presidents choose to acquire debts in the first term in order to ensure re-election in the second term. By the end of second term, the debts acquired have accumulated to a level that the incoming government starts from the deep end. Let us take Kenya as an example of the taxes vs debt conundrum. Dr William Ruto came to power on the hustler mantra, promising the “maama mboga” sugar candy administration, to his consternation, he found empty coffers with debts three times his national budget. Now his challenge is how to implement his massive plan on affordable housing, NHIF and free education which were his campaign rallying call, with huge debts like Eurobond that is falling due soon. In this scenario, he has found himself between a wall and a hard place, can he tax his “maama mbogas” or go for more debts to raise funds to push through his manifesto? It is a cliff edge balance between appeasing his fanatic following and delivering on his promises.
He has chosen taxes in such a radical way that has alienated his power base. For the first time in Kenya tax history, through well-crafted tax policies, the informal sector, slowly but systematically is being brought into the tax net with all the screams of betrayal. The political opponents have latched on this stance to tout him on his campaign promise to the hustlers. But Dr Ruto is a resolute man, ready to deliver his “PLAN’ via taxes. He has instituted a tax policy that has earned him the name Zakayo, in reference to the biblical tax collector. His stance is that development must be funded locally, a myriad of taxes targeting the smallest tax payer have been instituted and a single collection bag called e-Citizen where all government revenues are pooled, then disbursed to respective ministries. This single move has been phenomenal, leading to revenue collection increase exponentially ten fold.
Two things have happened, first, all government services should be paid directly to the central portal minimizing human interaction thus curbing bribery and corruption. Secondly, payments have been simplified making it easier for the tax payer.
The tax policy may be yielding the desired incomes, but the debate now is, can an expansionary tax regime foster national development or it shrinks the personal income of the tax payer? The argument that you can’t tax a nation to prosperity takes into account that the tax payer has to be left with disposable income to prosper, then slowly national income will improve later. The problem with this argument is that the incomes are too meagre to realise any meaningful economic development without debt support. However, this leads to a debt trap.
In Kenya, there is a Eurobond debt that was acquired in 2014, retiring in June this year, but the country is facing a financial crisis and has found itself in a precarious position, where it has been forced to secure a new debt to pay off the old Eurobond. Dr Ruto is so intransigent asserting that the situation is a temporary hitch that will be sorted with increased tax collection. With his aggressive tax policies, it would be hard to doubt his resolve, given that in recent weeks, there are glaring signs that the economy is rebounding, the collections have increased massively after plugging holes in the tax collection and the Kenyan shilling gaining strength against the dollar.
The Kenya scenario can be replicated in many developing countries where tax-debt debate is more evident.
In Uganda, agriculture employs over 70% of the population, but only 4% of farmers are taxed with only 38,528 registered for taxes (2022/23). What this means is that the majority of the population depends on a small percentage of tax payers, which exerts a lot of burden on the few.
The attempt to bring them in the tax net has turned into a political fight, with politicians arguing that the farmers are too poor to pay taxes, yet they demand the social services from government. To be politically right, the government ends up going for loans. The cyclic spiral of debts, debt servicing and eventual debt redemption may end up in a debt trap. Some African countries have found themselves in a situation where they can’t pay leading to default or repudiation.
Scholars that support debt over taxes argue that debts help build capacity to develop and pay back later. The fault with this argument is failure to acknowledge structural bottlenecks in developing economies that conspire to impede accelerated development. It is absolutely impossible to get funds to invest in all sectors at once to cause balanced growth. To industrialize for instance, you need infrastructure, power, railways, telecommunication, security, raw materials which all require funds more or less at the same time.
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