Introduction
In Kenya, 2017 national elections are over at least the balloting. It is noteworthy that none of the eight (8) presidential contenders spoke in details about tax.
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(Photo by Waka)
Kenyan politicians do not consider tax as an important campaign item that can get them extra votes. However, this does not mean that tax is not affected by national elections in Kenya. World over, national elections have negative and positive effects on tax. Let us reflect on what has happened in the last many days in Kenya on matters tax.
Relationship between national elections and tax
In every general election, leaders are elected to represent Kenyans including taxpayers for five years. Among the many responsibilities of the elected leaders is to determine and oversee the use of tax revenues paid to the national government by the taxpayers. Hence, taxpayers elect leaders to ensure that tax contributions are utilized well.
Therefore, national elections and taxes are two sides of the same coin. When capable leaders are elected, there is better utilization of the taxes collected and vice versa. Hence, the electoral process and the leaders elected have an important role to play in taxation within a country. However, depending on the outcome of the electoral process, this relationship can result in positive or negative consequences (effects).
Positive effects of national elections on tax
National election in a country results in many positive effects on tax. The following are some of the positive effects on tax that may result from national elections.
Opportunity to address tax issues
During any national election, there is an opportunity to address the pertinent issue regarding tax. However, in Kenya, tax is not considered as one of the issues that should be addressed with the politicians handling the issue halfheartedly. Hence, whatever tax campaign pledges that are made during the campaign period they are rarely fulfilled.
Extra money into the economy
A lot of money is required to run a smooth campaign during the election period. This money is from savings, donations etc. Donations are from either local or international donors. In absence of national elections, donated money would not flow into the economy. Most of international donations are in foreign currency.
This means that more foreign currency flows into the country thus reducing the exchange rates for those currencies. This has the positive effect of reducing the cost of imports. More goods are imported, followed by increased manufacturing at lower costs. Higher taxes are collected from increased sales due to low production costs.
Increased spending by citizens
In any election period, many aspirants spend a lot of money on supplies, logistics, bribes etc. Suddenly, the economy is consumer-driven because consumption of certain products such as alcohol, clothing and food during this electioneering period is very high. Ordinarily, this money would not be spent.
However, there is a lot of free money ditched out by politicians to be spent on consumerism. Since this money is not hard-earned cash, it is spent as fast as it is received. The retail economy is spurred and this has spiral-over effects into the manufacturing sector as demand for the products increases.
The cash given out by the politicians is not saved but it is consumed. For example, wherever campaigns are held, the attendees procure food and drinks from the local retailers. Besides, many politicians spend money to procure campaign materials such as branded t-shirts, caps etc. This increased spending should ideally result in increased tax collections especially consumer taxes such as Value Added Tax (VAT).
Negative effects of national elections on tax
Though there are many positive effects of national elections on tax in a country, there are also negative effects of national elections on tax. The following are some of the negative effects.
Inflationary pressures
Most of the huge cash inflows into the economy is not backed by productive activities. Besides, some governments have been known to print money to fund national elections. This extra money into the economy is likely to create inflationary pressures.
The high inflation results in high prices that translate into increased taxes especially consumption taxes. However, with the high inflation and increased product prices, the cost of living increases and hence less tax collections at the end of the day.
Over spending by the incumbent government
Many times incumbent governments have been accused of overspending and use of public funds to finance their campaigns. This means that in most cases development money is used to finance the campaigns thus denying development projects funding.
No country can develop without adequate funding for development projects. In the end, the use of public funds for political campaigns will result in under development in the country and the government will collect adequate taxes.
Economic disruptions
During the electioneering period, there is over-concentration on the political arena leaving the economy struggling. In most countries Kenya included, the economy grounds almost to the halt. There is minimal economic activity. This often results in reduced economic production and hence lower tax revenue.
Holding of goods
In attempts to raise campaign money, some politicians may decide to hold some goods especially fast-moving consumer goods. This will result in scarcity which will translate into higher prices and taxes.
However, scarcity and high prices may be temporary. In the meantime, the consumers may switch to other products that are freely available especially products that are not taxed. This will result in negative effects on tax.
Non-compliance
During the electioneering period, many business people find it increasingly difficult to comply with tax requirements, especially regarding tax payments. This is influenced by the struggling economy which results in difficult credit management hence increased levels of non-compliance.
Less tax collections
All the negative effects of national elections on the economy and elsewhere results in reduced tax collections in the country. This is evidenced in the failure to achieve tax collection targets and eventually budget deficits during the electioneering year.
Higher future taxes
The budget deficits during the electioneering year are covered with borrowed funds from the local and international money markets. The borrowed funds plus interests will be in the future with money generated from taxes. To cater for these extra expenses, taxes may be increased.
What can be done?
To reduce the negative effects and enhance the positive effects of national elections on tax, several steps can be done. The following are some of the steps that can be undertaken.
- Create strong national institutions that will create a buffer between politics and the economy. This will result in separating the economic function in the country from the political dramas thus ensuring economic continuity.
- Strengthen tax compliance requirements so that whatever money is used during campaigns in a country, it is from income where tax has already been paid.
- Limit the amount of international donations for political campaign money because of its disruptive effect of the economy in terms of exchange rates and potential inflationary effects and hence tax.
- Stringent post-election tax audits to ensure that tax is paid for all election-related businesses that were transacted in the country during the electioneering period.
Conclusion
This post explained the relationship and effects of national elections on tax. There are many other negative and positive effects of national elections on tax in the country that were not addressed in this post. Besides, though there is a strong link between election and tax, there are other steps that can be taken to minimize the negative effects of national elections on tax.
Feel free to send us questions or topics on tax and investments in Kenya that you would wish to be covered in this Website.
Disclaimer
This post is for general overview and guidance and does not in any way amount to professional advice. Hence, www.taxkenya.com, its owner or associates do not take any responsibility for results of any action taken on the basis of the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from KRA. Tax industry in Kenya is very dynamic.
©Wakaguyu Wa Kiburi
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