The Interplay Between Economic Freedoms and Taxation

The concept of economic freedoms pertains to individuals' capacity to make independent economic decisions, encompassing the fundamental right of every human to control their labor and property. These freedoms are intricately intertwined with the overall tax system, which includes the imposition of taxes and their administration. This relationship is rooted in the potentially distortive effects of taxation, which can lead to significant alterations in the range of available choices, disruptions in the efficiency of free trade and private property enjoyment, and imbalances within free markets.

Taxation in Kenya is the process by which the government imposes levies on individuals and businesses to generate revenue for funding essential public services. These services include but are not limited to infrastructure development, education, healthcare, and national defense. In addition, several economic freedom indices have been developed to quantitatively measure the extent of a free market and financial freedom within the country. Studies across various economic sectors consistently demonstrate a positive correlation between economic freedom and higher levels of economic growth, highlighting the importance of economic freedom in fostering a prosperous society.

Policymakers are confronted with the complex task of balancing the promotion of economic freedom and the implementation of taxation policies. This challenge is compounded by the various political and private sector incentives that often lead to increased government expenditures. While financial liberty is crucial for economic growth and societal well-being, taxation is a fundamental tool for financing public goods and addressing income inequality. Striking the right balance requires a nuanced understanding of various factors and the potential implications of policy decisions on both economic freedom and taxation.

Designing tax policies requires a thorough understanding of how they affect economic freedom. Taxation plays a crucial role in shaping the financial decisions of both individuals and businesses. As a result, policymakers must carefully weigh the need for generating revenue to preserve economic freedom. Implementing strategies such as lowering tax rates, simplifying the tax system, broadening the tax base, and tailoring taxes to achieve specific objectives can foster economic freedom while ensuring that revenue levels are sustained.

Arbitrary violations of taxation principles can hinder economic growth and government revenue. Such violations can lead to social unrest, reduced investment and entrepreneurship, decreased compliance, increased administrative costs, and lower overall tax revenue. Adherence to these principles is crucial for governments to promote economic growth and secure stable revenues.

Adam Smith outlined four taxation canons in his 1776 book "The Wealth of Nations": equity, certainty, convenience, and economy. These canons provide guidelines for a fair and efficient tax system. Equity dictates that the tax burden should be distributed fairly among taxpayers. Certainty ensures that taxpayers have a clear understanding of their tax obligations. Convenience emphasizes the need for a tax system that is easy for taxpayers to comply with. The economy promotes the minimization of tax collection costs.

Excessive taxation can stifle economic growth, discourage investment and entrepreneurship, and reduce overall tax revenue due to the diminishing returns principle. However, taxation is also essential for funding public goods and services, redistributing wealth, and addressing income inequality. Striking a balance between these competing objectives is not just important, it is critical for promoting economic growth and ensuring citizens' well-being. By reiterating the gravity of this issue, the audience can feel the weight of the decisions that need to be made.

Tax policy changes often come in the form of omnibus legislation called the Finance Bill. Analyzing specific taxation proposals from the Finance Bill 2023 illustrates the potential impact on economic freedoms.

Proposals to broaden the scope of the turnover tax and increase the tax rate for businesses could drive informal businesses to adopt compliance-evading strategies. Raising taxes on high earners may have a negligible effect on revenue while discouraging high earners, increasing the risk of tax avoidance and evasion, and potentially stifling economic growth.

Imposing a withholding tax on digital content creators and changing the due date for withholding tax could increase the compliance burden and cost of compliance for businesses, potentially making Kenya a less attractive investment destination.

Levies on financial institutions and digital lenders could increase the cost of borrowing and financial transactions, potentially violating the Pigouvian rule that taxes should be levied on activities that generate negative externalities.

An amendment requiring a deposit before filing an appeal and expanding the Commissioner's powers in an amendment could create unpredictability and fail the test of fair administration.

Conclusion

The potential unintended consequences of these tax policy changes raise concerns about their impact on economic freedoms. Governments and policymakers must thoroughly understand and consider the effects of these changes. This understanding can help them strike a balance between taxation and economic freedoms, promoting sustainable economic growth and ensuring the overall well-being of their citizens. By emphasizing the importance of this understanding, the audience can feel more informed and aware of the complexities of tax policy decisions.

Lowering tax rates can incentivize investment and entrepreneurship, increasing economic activity and job creation. Simplifying the tax system can reduce compliance costs for businesses and individuals, making it easier for them to participate in economic activities. Broadening the tax base can help distribute the tax burden more equitably across the population, ensuring that everyone contributes their fair share. Additionally, designing taxes for specific objectives, such as environmental conservation or social welfare, can address societal concerns while minimizing distortions to economic activities. These potential benefits of tax policy changes can inspire optimism for a more prosperous and inclusive economy.

By thoughtfully implementing these taxation policies, governments can help promote economic freedom, encourage prosperity, and foster a more inclusive and sustainable economy for their citizens.