- Taxes perform specific functions which include, but are not limited to, raising funds to fund public services, providing economic stimulation, promoting equality in society through the redistribution of resources, and encouraging change. of behavior.
- A tax system should generate sufficient revenue to enable the government to achieve its objectives and improve the well-being of citizens.
- It is generally accepted around the world that taxation should be based on a set of principles promoted by the famous Scottish economist Adam Smith.
In the 2021/22 budget statement, the Treasury Cabinet Secretary noted that the country’s tax policies are spread across various laws that are changed every year during the budget process, which creates uncertainty in the tax law.
The Cabinet Secretary indicated that the government is in the process of developing a national tax policy framework which would not only improve the administrative efficiency of the tax system, but provide consistency and certainty in tax legislation and expenditure management. .
Taxes perform specific functions which include, but are not limited to, raising funds to fund public services, providing economic stimulation, promoting equality in society through the redistribution of resources, and encouraging change. of behavior.
A tax system should generate sufficient revenue to enable the government to achieve its objectives and improve the well-being of citizens. This objective is mainly achieved through the introduction of new taxes, changes in tax rates and brackets or reliefs. These are also focused on providing economic stimulus and inflation adjustments.
We also have significant policy changes that include structural changes to a form or system of taxation. The changes are in some cases aimed at addressing global challenges such as the OECD Base Erosion and Profit Shifting (BEPS) project.
It is generally accepted around the world that taxation should be based on a set of principles promoted by the famous Scottish economist Adam Smith. These are certainty, ability to pay, convenience and efficiency.
Certainty means that taxpayers need to know if they are liable for tax, how much to pay and when it is due. Ability to pay implies that a taxpayer should pay in proportion to their ability, with taxpayers with higher income levels paying more.
Convenience implies that taxpayers should pay tax when it is most convenient, while efficiency means that the tax should outweigh the cost of collecting it.
What factors should guide government decisions on tax policy?
Tax policies should go through an evaluation mechanism that ensures that existing tax policies and new proposals are balanced and meet objectives. Decisions should be based on available evidence.
Some major factors should guide governments in making tax policy decisions that support a methodical and consistent approach to assessment. They also identify tensions and conflicts of potential tax policy changes.
First, a summary of its budget impact which basically lists the cost of the policy and an estimate of its impact on the budget. It should also indicate the long-term economic impact and the potential impact on the tax base.
The alignment of the proposed tax policy with the principles of good tax should also be documented and justification prepared for deviations. This should be supported by the strategic objectives of the proposed change as well as any trade-offs that will accompany the policy change.
Furthermore, the policy change should be considered alongside other fiscal policies, overall economic strategy and government spending plans. Conflicts and trade-offs need to be identified and mitigating factors put in place.
Affordability and value for money are critical factors, especially for tax incentives, reliefs and exemptions.
This should ensure that these policies deliver the desired value to the targeted citizens and that the government is also able to forego the associated tax revenue.
What are the steps in developing a tax policy?
The initial step should be engagement and analysis. An initial analysis of the proposed tax policy changes, including their proposed objectives, rationale, and the nature of the evidence that has been gathered to support the change.
Continued and active public participation to solicit stakeholder input ahead of the budget should ensure that the government considers all relevant views and alternatives, as appropriate.
The second stage involves policy design where data is analysed, proposals are developed and evaluated in line with the government’s overall policy objectives. Significant policy changes require further analysis and critique to ensure that they achieve the intended purpose.
Third, the decision must be made including the identification of all major options.
Then the decision should be implemented through the necessary legislative mechanism. This involves the government working with the revenue authority to ensure changes are implemented, clearly understood, and administration and collection are effective.
Finally, the policy should be evaluated through monitoring and evaluation. Essentially, this involves evaluating existing policy and recent changes against intended goals and performance expectations.
Overall, Kenyans look forward to a national tax policy framework that will be responsive and flexible enough to adapt to unpredictable changes in economic conditions.
Mr. Maina is Senior Tax Manager at Ernst & Young LLP (EY). The opinions expressed here are not necessarily those of EY.