2) Indirect taxes.
Direct taxes under Kenya law are
levied on income wealth or spending power or any combination of the three.
Indirect taxes are levied on goods and services and may be
applied by either unit or percentage of value or at a flat rate or in any other
combination of lump sum.
The relationship between an individual tax and income of a
taxpayer may also help us classify the effect of those taxes; classified as
proportional, progressive, or regressive.
- Proportional taxes: Percentage of tax payable remains constant even as income rises.
- Progressive taxes: Percentage of income paid will increase as income rises because rates of the taxes will be increasing progressively as income rises.
- Regressive taxes: Percentage of income paid in taxes decreases when income rises. These taxes are usually a single figure.
Most of the people who determine which taxes to charge may
actually decide that they themselves do not get charged or that those applicable
to them are proportional or progressive.
Governor Ronald Reagan (as he then was) in commenting about
the U. S tax structure observed,
“Once you are told the income tax will never be
greater than 2% of the income and
That only from the rich. In our
lifetime this law has grown from 31 to more than
440,000 words. We have received this
progressive tax direct from Karl Max who
Designed it as an essential of a socialist state”
In the proportional tax bracket, the steepest rate of
increase occurs through the middle income range where are to be found the bulk
of our small businessmen, professional people and supervising personnel, the
very people whom Max said should be taxed out of the system.
At 16,000-18,000 shillings of income, a man reaches the 50%
rate; the government can only justify this bracket on a punitive basis.
There can be no moral justification for the progressive tax,
that’s why bureaucrats Pretend that it is proportionate taxation.
1) Direct taxes
They are under Kenya law levied on income, wealth and spending power with
consequences that usually they are referred to as direct taxes because
attainment brings the taxpayer directly in contact with the taxman. In some
situations, this may not be the case.
They are usually preferred because they help maintain
horizontal equity so that those who earn the same income are subjected to the
same tax rate.
They also reflect equity in ensuring high income earners who
rely more on the state for either the opportunities to earn that income or
opportunity to protect that income are made to pay.
Progressive tax rates are utilized then vertical equity is
achieved and the state uses the direct taxes to redistribute income. It is
amenable to lower tax avoidance since people must earn a living.
Direct taxes have however been criticized on grounds that
they may discourage people from working harder because if through a progressive
tax rate, that is both high and steep, the taxes take a greater percentage of
income than the person who earned it, the person will be discouraged from
earning that income.
Under what circumstances may the progressive system be both steep and high?
Direct taxes may encourage tax evasion by encouraging people
not to report circumstances relating to income thus resulting into a black
market.
2) Indirect taxes.
Under kenya law, this are imposed on outlay of goods and services. They are indirect
in the sense that the prices of goods may be inclusive of tax so that in paying
for the goods, the taxpayer also pays for the tax. The burden is shifted to the
consumer who may not realize the burden.
It increases the choices to taxpayers so that the taxpayer
may choose to either spend on less tax or choose whichever of the goods that
may be attracting the taxes.
It helps in inequitable allocation of resources so that some
activities that may have an effect on health, the environment or other public
affairs may be taxed out of existence.
Disadvantages of indirect taxes
Most indirect taxes tend to be regressive i.e. same rates
apply to all the taxpayers and the more able to pay tend to pay less and tend
to be subsidized by those who are less able to pay hence affecting the vertical
equity.
In relation to foodstuffs, basic commodities etc, low income
earners spend less income on these commodities and in paying the same taxes,
shoulder the same budget.
The indirect taxes tend not to take into account the
personal circumstances of the taxpayer.