Category: Economic literacyTaxation
By: Leo Kipkogei Kemboi,
Introduction
The Finance Bill 2024 in Kenya sparked a wave of collective action primarily driven by Gen Z, marking a significant moment for youth engagement in Kenyan politics. This younger generation, known for their digital fluency and facing bleak economic prospects, utilised social media platforms to voice their discontent and mobilise protests against the proposed tax hikes, which led to the President of Kenya refusing to assent the Bill into Law and referring it to Parliament for withdrawal and this raises a critical issue of how they were able to achieve collective action. In this article, I focus on why building collective action around policy issues is difficult, why Gen Zs achieved it, and conclude why societies and constitutional democracies need to achieve it at an earlier stage of development.
Collective action is the concerted effort of individuals or groups to achieve a common political or economic goal. This goal frequently entails influencing government policy or modifying economic structures to benefit the group. In political economy, collective action differs from a broad notion of collective action: (i) Political economy focuses on how collective action can affect power dynamics and resource distribution within a society. Consider labour unions negotiating for higher salaries or social movements campaigning for policy changes. (ii) The study of collective action in political economy focuses on how formal and informal institutions (such as laws, social norms, and political systems) promote or impede collective activity. It also examines how different groups’ interests align or conflict, influencing the possibility of successful collective action.
It’s always difficult for societies to achieve collective action for various reasons.
- The Free-Rider Problem: This is the classic dilemma. Suppose individuals can benefit from a collective good (like a clean environment or higher wages) regardless of whether they contribute. In that case, there’s a rational incentive to “free-ride” – let others do the work and reap the rewards. This can lead to a collective action failure, where the good is under-provided or not provided. In the past, few entities (Like the Law Society of Kenya) would take up legal action against the Finance Bill, which benefitted everybody else when it always succeeded, regardless of whether others benefitted or not.
- Coordination Costs: Organising and coordinating a large number of people can be difficult and costly,especially across different geographical regions in Kenya and places in urban areas where transport costs are significant. This entails identifying and mobilising individuals. It involves finding people with common interests and persuading them to work together. The Finance Bill is a technical document that is tough to read and understand what it is modifying since it requires you to have the other acts and compare the altered portions to those on the bill. To have collective action in such a situation, the information asymmetry must be resolved, which could entail ensuring everyone has the same knowledge and understands the aims and techniques. The information asymmetry was resolved when the Twitter (X) spaces were turned into an education forum with various experts Gen Z deemed credible offering public education. They quickly identified incoherent and incorrect policy suggestions in the Finance Bill. There was no need to manage internal differences because everything done by GenZ was crowdsourced, which meant that even those on the same frontline may have never met or known each other.
- Power Asymmetries: In many cases, those who benefit most from collective action may lack the power and resources to organise effectively. Conversely, powerful groups often have an easier time mobilising to protect their interests, even if it’s at the expense of the broader collective. In this case, the powerful are those who execute and hold budgets depending on the revenue-raising measures presented to Parliament. The powerful are always highly organised and deploy coherent messages, including in the Finance Bill’s case of how budget cuts would affect public services.
- Collective Action Problems are Context-Specific: There are no one-size-fits-all solutions. The problems of attaining collective action differ depending on the situation and include Group size and heterogeneity. This is an important issue given the fact that tribal groups in Kenya are highly ethnicised and fractionalised, and this is demonstrably shown by competitions by key leaders to lead their tribes, which have been called “Kingpin competitions”. Larger, more diverse groups are often more difficult to organise, especially if Kingpin has not ostracised the policy problem. The type of the good under consideration can be another problem. Public Goods (non-excludable and non-rivalrous) are more vulnerable to free-riding than private goods. An efficient and equitable tax system shares key traits with a public good. Its benefits, including well-funded public services, robust infrastructure, social safety nets, and a stable economy, are difficult to exclude anyone from enjoying, regardless of their direct tax contributions. This non-excludability extends to children and those in the informal economy. Moreover, the tax system’s advantages are non-rivalrous, meaning one person’s enjoyment of a well-functioning society doesn’t diminish its availability to others. The Institutional Environment, which includes Rules, customs, and political institutions, can help or inhibit collective action. While tasked with representing the people’s interests, the National Treasury and Parliament have inadvertently or intentionally hindered collective action on issues like taxation. If perceived as biased towards certain sectors or interest groups, the Treasury’s budgetary control can spark grievances and fuel collective action. Lack of transparency in its processes breeds distrust, making it difficult to hold the institution accountable. Furthermore, the influence of powerful economic actors on the Treasury has created an uneven playing field, discouraging collective action by citizens who feel powerless. Similarly, if seen as unresponsive to citizen needs or plagued by partisan gridlock, Parliament can lead to disillusionment with formal political channels and a shift towards more aggressive forms of collective action. Weak parliamentary oversight of the Treasury further erodes public trust, potentially igniting collective action against perceived mismanagement or corruption.
Context Issues
In Kenya, where a significant percentage of the population includes young people suffering from unemployment, the concept of an “escaping matrix” is strongly ingrained. This term encapsulates the struggle to break free from the clutches of poverty, and for Kenya’s youth, low taxes are seen as a crucial key to unlocking this matrix. With limited job opportunities and a high cost of living, young Kenyans view a heavy tax burden as a significant barrier to economic empowerment and a threat to their aspirations for a brighter future.
Taxes are seen as hindering young Kenyan’s economic freedoms. Increased taxes present a significant hurdle for young Kenyans aspiring to achieve economic freedom. With less disposable income because of a capricious tax system or higher tax rates, young people, especially those entering the workforce or struggling with unemployment, face limitations on their ability to save, invest, or afford necessities, hindering their economic progress. Increased taxes, particularly those targeting small businesses and start-ups, can stifle entrepreneurship, a path many young Kenyans see as a way to escape poverty. This stifling of innovation and job creation is compounded by the discouraging effect high taxes have on both domestic and foreign investment, leading to fewer opportunities and a sense of limited upward mobility. A higher cost of living further exacerbates the burden of increased taxes, as indirect taxes like VAT lead to price hikes on essential goods and services, disproportionately impacting those with lower incomes. This confluence of factors creates a perception of unfairness among young Kenyans, who see their limited incomes heavily taxed while facing a challenging economic landscape, potentially fuelling social unrest and eroding trust in the government’s ability to foster an environment for economic prosperity.
Kenya’s tax system relies on a mix of direct and indirect taxes. Income tax is the heavyweight, making up roughly 45% of total tax revenue. This means it leans heavily on taxing income directly. However, here’s the catch: only 3 million out of 22 million Kenyans are in the formal sector and paying income tax. This small group shoulders a disproportionate burden. A smaller number of firms are also formalised. The Value Added Tax, which averages about 26% of revenue. It’s applied to goods and services, so everyone pays, regardless of income. Excise Duty, another indirect tax, outlays around 12% and targets specific goods like fuel and alcohol. While these indirect taxes provide a revenue stream, they can hit lower-income groups harder. As shown in the tax structure, the numbers show a potential imbalance, with a heavy reliance on a small segment of formally employed Kenyans and firms.
Chart: Composition of Ordinary Revenue
Source: own calculation from Statistical Annex to The Budget Statement for The Fiscal Year 2024/2025
So, how did Gen Z-led protests achieve collective action problems? I identify the following reasons, giving a past challenge and the difference brought forward by Gen Z-led protests.
Table: How was Collective Action around Taxation (Finance Bill 2024) formed?
Conclusion
Societies and constitutional democracies, especially emerging and developing economies like Kenya, can greatly benefit from early collective action focused on sustainable public finances, predictable economic policy, and consultative policy processes as required by the Constitution. This proactive approach is essential for fostering economic stability and growth. When prioritising sustainable public finances, a government can invest in crucial areas like education, healthcare, and infrastructure without incurring unmanageable debt. This, in turn, creates a stable economic environment conducive to investment, job creation, and long-term growth. Simultaneously, predictable and transparent economic policies give businesses and investors the confidence to plan for the future, further stimulating economic development.
Beyond economic benefits, early collective action on these fronts promotes social equity and inclusion. By engaging in dialogue and advocating for fair taxation policies, citizens can help ensure that tax systems are equitable and benefit all members of society. This reduces inequality and fosters social mobility. Moreover, inclusive policy processes, where marginalised groups and young people have a voice, lead to more equitable outcomes that address the needs of all citizens, fostering a sense of inclusion and shared ownership. Such collective action strengthens the very fabric of democratic governance. When citizens actively engage in budget processes and hold their leaders accountable for utilising public funds, it promotes transparency. It helps prevent corruption, ultimately fostering trust in democratic institutions. Consultative policy processes, in particular, encourage active citizenship and strengthen democratic norms. People who feel heard and believe they can influence government decisions are more inclined to participate in civic life and contribute to a more responsive and accountable government.
Taking collective action on these crucial challenges is not a choice but an essential investment in Kenya’s long-term stability, economy, and democratic future. Citizens and government may work together to create a more egalitarian, inclusive, and successful society for all, reducing the likelihood of social upheaval and fostering a common sense of purpose and development.
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Gen Z Collective Action on Taxation and Economic Policy.
| Post date: Tue, Nov 5, 2024 | | Category: Economic literacyTaxation | | By: Leo Kipkogei Kemboi, |
Introduction
The Finance Bill 2024 in Kenya sparked a wave of collective action primarily driven by Gen Z, marking a significant moment for youth engagement in Kenyan politics. This younger generation, known for their digital fluency and facing bleak economic prospects, utilised social media platforms to voice their discontent and mobilise protests against the proposed tax hikes, which led to the President of Kenya refusing to assent the Bill into Law and referring it to Parliament for withdrawal and this raises a critical issue of how they were able to achieve collective action. In this article, I focus on why building collective action around policy issues is difficult, why Gen Zs achieved it, and conclude why societies and constitutional democracies need to achieve it at an earlier stage of development.
Collective action is the concerted effort of individuals or groups to achieve a common political or economic goal. This goal frequently entails influencing government policy or modifying economic structures to benefit the group. In political economy, collective action differs from a broad notion of collective action: (i) Political economy focuses on how collective action can affect power dynamics and resource distribution within a society. Consider labour unions negotiating for higher salaries or social movements campaigning for policy changes. (ii) The study of collective action in political economy focuses on how formal and informal institutions (such as laws, social norms, and political systems) promote or impede collective activity. It also examines how different groups’ interests align or conflict, influencing the possibility of successful collective action.
It’s always difficult for societies to achieve collective action for various reasons.
- The Free-Rider Problem: This is the classic dilemma. Suppose individuals can benefit from a collective good (like a clean environment or higher wages) regardless of whether they contribute. In that case, there’s a rational incentive to “free-ride” – let others do the work and reap the rewards. This can lead to a collective action failure, where the good is under-provided or not provided. In the past, few entities (Like the Law Society of Kenya) would take up legal action against the Finance Bill, which benefitted everybody else when it always succeeded, regardless of whether others benefitted or not.
- Coordination Costs: Organising and coordinating a large number of people can be difficult and costly,especially across different geographical regions in Kenya and places in urban areas where transport costs are significant. This entails identifying and mobilising individuals. It involves finding people with common interests and persuading them to work together. The Finance Bill is a technical document that is tough to read and understand what it is modifying since it requires you to have the other acts and compare the altered portions to those on the bill. To have collective action in such a situation, the information asymmetry must be resolved, which could entail ensuring everyone has the same knowledge and understands the aims and techniques. The information asymmetry was resolved when the Twitter (X) spaces were turned into an education forum with various experts Gen Z deemed credible offering public education. They quickly identified incoherent and incorrect policy suggestions in the Finance Bill. There was no need to manage internal differences because everything done by GenZ was crowdsourced, which meant that even those on the same frontline may have never met or known each other.
- Power Asymmetries: In many cases, those who benefit most from collective action may lack the power and resources to organise effectively. Conversely, powerful groups often have an easier time mobilising to protect their interests, even if it’s at the expense of the broader collective. In this case, the powerful are those who execute and hold budgets depending on the revenue-raising measures presented to Parliament. The powerful are always highly organised and deploy coherent messages, including in the Finance Bill’s case of how budget cuts would affect public services.
- Collective Action Problems are Context-Specific: There are no one-size-fits-all solutions. The problems of attaining collective action differ depending on the situation and include Group size and heterogeneity. This is an important issue given the fact that tribal groups in Kenya are highly ethnicised and fractionalised, and this is demonstrably shown by competitions by key leaders to lead their tribes, which have been called “Kingpin competitions”. Larger, more diverse groups are often more difficult to organise, especially if Kingpin has not ostracised the policy problem. The type of the good under consideration can be another problem. Public Goods (non-excludable and non-rivalrous) are more vulnerable to free-riding than private goods. An efficient and equitable tax system shares key traits with a public good. Its benefits, including well-funded public services, robust infrastructure, social safety nets, and a stable economy, are difficult to exclude anyone from enjoying, regardless of their direct tax contributions. This non-excludability extends to children and those in the informal economy. Moreover, the tax system’s advantages are non-rivalrous, meaning one person’s enjoyment of a well-functioning society doesn’t diminish its availability to others. The Institutional Environment, which includes Rules, customs, and political institutions, can help or inhibit collective action. While tasked with representing the people’s interests, the National Treasury and Parliament have inadvertently or intentionally hindered collective action on issues like taxation. If perceived as biased towards certain sectors or interest groups, the Treasury’s budgetary control can spark grievances and fuel collective action. Lack of transparency in its processes breeds distrust, making it difficult to hold the institution accountable. Furthermore, the influence of powerful economic actors on the Treasury has created an uneven playing field, discouraging collective action by citizens who feel powerless. Similarly, if seen as unresponsive to citizen needs or plagued by partisan gridlock, Parliament can lead to disillusionment with formal political channels and a shift towards more aggressive forms of collective action. Weak parliamentary oversight of the Treasury further erodes public trust, potentially igniting collective action against perceived mismanagement or corruption.
Context Issues
In Kenya, where a significant percentage of the population includes young people suffering from unemployment, the concept of an “escaping matrix” is strongly ingrained. This term encapsulates the struggle to break free from the clutches of poverty, and for Kenya’s youth, low taxes are seen as a crucial key to unlocking this matrix. With limited job opportunities and a high cost of living, young Kenyans view a heavy tax burden as a significant barrier to economic empowerment and a threat to their aspirations for a brighter future.
Taxes are seen as hindering young Kenyan’s economic freedoms. Increased taxes present a significant hurdle for young Kenyans aspiring to achieve economic freedom. With less disposable income because of a capricious tax system or higher tax rates, young people, especially those entering the workforce or struggling with unemployment, face limitations on their ability to save, invest, or afford necessities, hindering their economic progress. Increased taxes, particularly those targeting small businesses and start-ups, can stifle entrepreneurship, a path many young Kenyans see as a way to escape poverty. This stifling of innovation and job creation is compounded by the discouraging effect high taxes have on both domestic and foreign investment, leading to fewer opportunities and a sense of limited upward mobility. A higher cost of living further exacerbates the burden of increased taxes, as indirect taxes like VAT lead to price hikes on essential goods and services, disproportionately impacting those with lower incomes. This confluence of factors creates a perception of unfairness among young Kenyans, who see their limited incomes heavily taxed while facing a challenging economic landscape, potentially fuelling social unrest and eroding trust in the government’s ability to foster an environment for economic prosperity.
Kenya’s tax system relies on a mix of direct and indirect taxes. Income tax is the heavyweight, making up roughly 45% of total tax revenue. This means it leans heavily on taxing income directly. However, here’s the catch: only 3 million out of 22 million Kenyans are in the formal sector and paying income tax. This small group shoulders a disproportionate burden. A smaller number of firms are also formalised. The Value Added Tax, which averages about 26% of revenue. It’s applied to goods and services, so everyone pays, regardless of income. Excise Duty, another indirect tax, outlays around 12% and targets specific goods like fuel and alcohol. While these indirect taxes provide a revenue stream, they can hit lower-income groups harder. As shown in the tax structure, the numbers show a potential imbalance, with a heavy reliance on a small segment of formally employed Kenyans and firms.
Chart: Composition of Ordinary Revenue
Source: own calculation from Statistical Annex to The Budget Statement for The Fiscal Year 2024/2025
So, how did Gen Z-led protests achieve collective action problems? I identify the following reasons, giving a past challenge and the difference brought forward by Gen Z-led protests.
Table: How was Collective Action around Taxation (Finance Bill 2024) formed?
Conclusion
Societies and constitutional democracies, especially emerging and developing economies like Kenya, can greatly benefit from early collective action focused on sustainable public finances, predictable economic policy, and consultative policy processes as required by the Constitution. This proactive approach is essential for fostering economic stability and growth. When prioritising sustainable public finances, a government can invest in crucial areas like education, healthcare, and infrastructure without incurring unmanageable debt. This, in turn, creates a stable economic environment conducive to investment, job creation, and long-term growth. Simultaneously, predictable and transparent economic policies give businesses and investors the confidence to plan for the future, further stimulating economic development.
Beyond economic benefits, early collective action on these fronts promotes social equity and inclusion. By engaging in dialogue and advocating for fair taxation policies, citizens can help ensure that tax systems are equitable and benefit all members of society. This reduces inequality and fosters social mobility. Moreover, inclusive policy processes, where marginalised groups and young people have a voice, lead to more equitable outcomes that address the needs of all citizens, fostering a sense of inclusion and shared ownership. Such collective action strengthens the very fabric of democratic governance. When citizens actively engage in budget processes and hold their leaders accountable for utilising public funds, it promotes transparency. It helps prevent corruption, ultimately fostering trust in democratic institutions. Consultative policy processes, in particular, encourage active citizenship and strengthen democratic norms. People who feel heard and believe they can influence government decisions are more inclined to participate in civic life and contribute to a more responsive and accountable government.
Taking collective action on these crucial challenges is not a choice but an essential investment in Kenya’s long-term stability, economy, and democratic future. Citizens and government may work together to create a more egalitarian, inclusive, and successful society for all, reducing the likelihood of social upheaval and fostering a common sense of purpose and development.
More Blogs
Mr. Trump and Kenya’s Macro
It has always been difficult to tie Mr. Trump’s statements to his subsequent policy actions. That fact qualifies any certainty in discerning his implications for Kenya’s macro now. But in three areas, the Kenyan macroeconomic authorities should be on high alert. The Kenya Shilling For much of 2024, the Central Bank of Kenya (CBK)has been […]
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In my new paper, “On Efficiency, Equity, and Optimal Taxation: Reforming Kenya’s Tax System,” I examine Kenya’s tax system through the lenses of efficiency, equity, and optimality and recommend policy recommendations. I try to look at how efficiently the system generates revenue without distorting economic activity (efficiency), how fairly the tax burden is distributed across […]
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The credibility of Monetary Policy in Kenya is compromised at present by two factors: As we anticipated mid-year, inflation is headed below the target range for the first time; The 7-member Monetary Policy Committee (MPC) has four vacancies. In light of the former prospect, the MPC reduced the Central Bank of Kenya (CBK) Policy Rate, […]
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The Budget formulation and preparation process in Kenya is guided by a budget calendar which indicates the timelines for key activities issued in accordance with Section 36 of the Public Finance Management Act, 2012.These provide guidelines on the procedures for preparing the subsequent financial year and the Medium-Term budget forecasts. The Launch of the budget […]
Adjusted IMF Program Demands on Kenya
In the IMF WEO published yesterday, the IMF elaborated its macroeconomic framework for the ongoing IMF program. The numbers clarify how the program, derailed by the mid-year Gen-Z protests, has been adjusted to make possible the Board meeting for the combined 7th and 8th Reviews scheduled for October 30. The adjustments, unfortunately, again raise profound […]