On Efficiency, Equity, and Optimal Taxation: Reforming Kenya’s Tax System

Kenya faces numerous challenges and complexities in formulating and implementing tax policies, undermining the effectiveness of the taxation system. These issues include structural inefficiencies like a narrow tax base, difficulties in taxing informal sectors, misalignment between the tax code and economic structure, over-reliance on key tax heads, and a complex political environment. Mandatory annual revisions through the Finance Bill introduce further obstacles due to insufficient evaluation of previous revisions and increased complexity for taxpayers/businesses. These challenges highlight the urgent need for a more strategic approach to tax policy in Kenya that balances responsiveness, economic analysis, evidence, and stability (Kemboi & Kagume, 2024).[1]

An ideal tax system efficiently generates the necessary public revenue with minimal economic distortion, ensures equity by taxing individuals fairly according to their ability to pay, maintains simplicity for ease of tax understanding and administration, ensures transparency for accountability, offers neutrality to prevent market distortions, operates cost-effectively, adapts to change flexibly, provides stable expectations for planning purposes, and has a broad tax base to avoid overburdening any single group

[1] Kemboi, L. K., & Kagume, J. (2024). Political Economy Analysis of Taxation Policy in Kenya-IEA Kenya. https://ieakenya.or.ke/?wpdmdl=3304

Fact Sheet on Socio-economic Data: Isiolo; Kakamega; Kilifi; Mombasa and Nakuru Counties

The Closing Gaps in Devolved Health Service Delivery1 is a five-year USAID-funded project implemented by the Institute of Economic Affairs in consortium with its partners Concern Worldwide, Development Initiatives and Urban Institute. The interventions fashioned for the project are premised on responding to three overlapping and contextual challenges of (i) inadequate health financing and inefficiencies in spending;

(ii) weak oversight and accountability; and (iii) gaps in health policies which impede county delivery of quality health services.

This document presents the FACT SHEET on Social and Economic Indicators for the five project focus counties – Isiolo, Kakamega, Kilifi, Mombasa and Nakuru. This health and socio-economic fact sheet will provide a baseline information set for the first project objective on inadequate health financing. As part of the project baseline analysis which will lead to co-creation with the target counties, this fact sheet provides a well of information which will underpin the development of the questionnaire for the political economy analysis (PEA) for each of the five counties. While this fact sheet will feed into the baseline data, it will also be useful for driving evidence driven discourse.

The FACT SHEET on Social and Economic Indicators is a compendium of data points on administrative, demographic, gender, health, and public finance management at the national and county levels of government.

In 2013 Kenya commenced the transition from a centralized to a decentralized governance system comprising of the national government and 47 county governments. Devolution aims to enhance service delivery to citizens by bringing the resources closer to them. Among the devolved functions is health with national government retaining the functions of policy formulation and managing the referral hospitals. As highlighted in Article 186 of the Constitution of Kenya, 2010 there exist exclusive and shared functions and powers of the respective levels of government therefore creating the need to track and compare the progress made across counties post devolution.

And Then, Floods…A critical macroeconomic assessment of IMF Conditionality on Kenya, 2021-present

Political Economy Analysis of Taxation Policy in Kenya

Kenya’s tax policy formulation and implementation face challenges and complexities influenced by the country’s political ecosystem, structural and institutional factors, access and influence asymmetries, and the dynamic nature of tax laws and administration methods. However, it is unclear how much of the tax code is guided by conventional wisdom rather than solid empirical evidence and relevant economic literature. This lack of clarity raises concerns about the tax system’s transparency, effectiveness, and efficiency in supporting development goals. Furthermore, the development of new taxes and frequent changes in tax laws and policies do not always appear to be adequately informed by rising demands for infrastructure spending or the provision of rights, indicating the need to investigate the factors underlying these irregular and frequent changes in taxation.

Furthermore, the formal and informal processes that shape tax policy changes require further investigation to understand the underlying dynamics and power structures at work. To identify the root causes of these policy problems and provide insights for designing more effective and equitable tax policies and administration methods, a comprehensive analysis of Kenya’s political economy, encompassing the structural and institutional factors involved and the type of evidence behind tax policy changes, is required.

The Kenyan Tax Code is shaped by several political economy issues, the most important of which is the need to collect enough revenue to meet development goals. The development needs referred to here are always in the form of concrete things, key examples of which include buildings roads, and might not necessarily refer to public services. According to Scott (2022), a tax code is a set of laws and regulations that outline the general public’s rights and responsibilities regarding taxation.[1]The Kenyan Constitution, 2010 is the primary law in the Kenyan legal context, outlining principles of taxation, giving the powers to tax, and establishing the institutions that oversee each part of the taxation function.

[1] Scott, Michelle P. “Tax Code Definition.” Investopedia, 2019. https://www.investopedia.com/terms/t/tax-code.asp.

Follow Up Assessment of the Medical Equipment Leasing Project: Should it be Extended?

The leasing of medical equipment, commonly known as the MES project in Kenya, having lapsed by end of 2022, was intended to turn around specialized health service provision in the country through private public partnership arrangements. County health facilities were supplied with diagnostic medical equipment on a lease basis and in turn would remit lease payments annually to contractors through the national Ministry of Health. This study is a follow up on a past IEA Kenya value for money assessment of the MES project in Kenya. Overall, it sought to answer the lingering question of whether plans for its extension are justifiable or not. As a prelude, this study sought to respond to two other research questions. The first on the current implementation status of the MES project and the second on whether the project’s intended objectives have been realized. The analysis was based on a review of purposely-identified two main government reports, the Senate Ad Hoc Committee on the MES project report for 2019 and the Office of the Auditor Generals reports on the Financial Statement of National Government and County Governments for the financial year 2019/20 and 2020/21. Media articles and other relevant literature were also reviewed and synthesized for complementary information.

Study findings reveal some success stories particularly in regard to improved scale up and access to diagnostic medical care. However due to cases of failure of delivery of medical equipment compounded by underutilization of delivered medical equipment in just over 25% of the counties, overall service delivery was sub-optimal. Lack of transparency in fiscal information made it difficult to establish the total cost incurred in the implementation of the MES project against estimated project cost. Besides, the MES project transactions and lease payments are riddled with audit irregularities and accountability questions. Furthermore, establishment of whether implementation of the MES project has realized its intended objective of enhancing geographical equity in access and affordability of key health services to all Kenyans was constrained. Fragmented and incomprehensive information on the MES project is largely the reason behind this challenge.

KENYA IN 2040: Mapping Kenya’s future – Four different scenarios

The Institute of Economic Affairs in Kenya has established a tradition of periodically reflecting on visible and less palpable trends in Kenya’s socio-political and economic environment. This curiosity is informed by the need to generate insights and attempt to direct disciplined conversations on the future of Kenya, its institutions, and its people.

It is evident that 2022 presents an opportunity to re-examine and reflect on Kenya’s future. Kenyan society and the country’s economy, still coming to terms with the covid-19 pandemic, now have to navigate a global geopolitical transition that will have lasting repercussions. While these exogenous shocks are out of the country’s control, Kenya’s ability to deal with a changing external environment and pursue its national development goals are very much a function of its institutions and policy framework. Accordingly, the Kenya in 2040 scenarios will focus on the quality of these institutions and the direction policy takes. Scenario building techniques are important in moments of uncertainty and as tools for questioning comfortable narratives that people are accustomed to telling themselves

In addition to the qualitative analysis of the interplay between institutions and policies, the IEA has partnered with Oxford Economics Africa to lend this scenario analysis qualitative credibility by formally modelling the various scenarios. Not only does this produce a more vibrant picture of the economic outcomes, but it also allows for more informed discussion and policy debates. Unlike many other scenario projects that have been undertaken, this edition contains an element of prescription. We maintain that the country’s future is far from pre-determined, and that healthy debate and public discourse is the main channel through which to pursue the most desired outcome. May the scenarios presented in this publication contribute towards identifying that outcome and making Kenya’s path towards that outcome clearer.

COSTING THE CONSUMER MANDATE OF THE JUDICIARY IN KENYA

Problem-Driven Political Economy Analysis of Judiciary’s Resource Allocations

52 Economic Fallacies

The 52 Economic Fallacies is a compilation of 52 essays that refutes common statements about the Kenyan economy that lack sound Economic reasoning. It will be used to educate the public on how a modern economy should work. It will be used to spark debate about the roles of the government and the private sector in market formation, regulation, and consumer protection.