Ruto's ZAKAYO-Taxation: The Failure of "mama-mboga" and Wheelbarrow Economics.

The dust created by the "hustler atawale" bullwack has indeed settled. The narrative, as sweet as it was to some ears, has been replaced by a shareholder mentality that has not gone well with a majority of Kenyans, even those who supported the current regime with their own lives. In a surprising turn of events, the Kenyan government's enactment of the Finance Act 2023 has raised concerns about its compatibility with the bottom-up economic model championed by the current president during his campaign. The Finance Act has introduced a series of tax changes, including higher rates, new impositions, and alterations in various tax categories. However, the unintended consequence seems to be a potential setback to the very principles of empowering small and medium-sized enterprises (SMEs) and low-income households that the bottom-up economic model seeks to promote.

One of the most contentious aspects of the Finance Act is the heightened taxation across multiple fronts. The surge in taxes, particularly on income, value-added goods and excise items, is poised to cast a shadow over the anticipated benefits of a bottom-up economic approach. Here's why and how this high taxation may negatively affect the economy, SMEs and low-income households, potentially leading to the failure of the bottom-up economic model.

First, it has and will put an undue strain on SMEs. It seems that Zakayo has forgotten that the backbone of any thriving economy is its SME sector. These enterprises, often operating on slim profit margins, now find themselves grappling with increased taxes. From withholding taxes on rental income to higher excise duties on certain goods, SMEs are facing a substantial financial burden. This added strain threatens their ability to invest, expand, and create jobs – all of which are vital components of the bottom-up economic philosophy.

Secondly, it is already clear that the new tax regine is Reducing Investment and Innovation. For instance, the imposition of a 15% tax on income repatriated from branches or permanent establishments will discourage foreign investment. Businesses may reconsider establishing or expanding their operations in Kenya due to the financial implications of repatriating profits. This not only stifles economic growth but also impedes innovation and the introduction of new technologies, which are crucial for the evolution of SMEs and the overall economy.

Third, high taxation is already greatly impacting Low-Income Earners. The bottom-up economic model centers around uplifting low-income earners (the so-called wanjikus, mama mbogas and bodabodas) and yet, the Finance Act introduces two additional tax rates for individuals, with the highest rate set at 35%. The move contradicts the narrative of promoting inclusive growth by burdening those who can least afford it. Low-income households may find their disposable income further diminished, affecting their purchasing power and, consequently, local demand for goods and services.

Furthermore, it is dampening consumer spending on even essential goods and services. With increased rates on certain goods and services, consumers are likely to feel the pinch in their wallets. Higher prices for essential items and reduced disposable income may lead to a decline in consumer spending. This downturn in demand could reverberate throughout the economy, negatively impacting businesses of all sizes and contributing to a sluggish economic environment.

Lastly, the preferential tax regime for qualifying intellectual property income may benefit larger corporations but poses a challenge to smaller businesses that lack the resources to engage in such arrangements. This could create an uneven playing field, hindering the growth of small businesses and undermining the principles of fairness and inclusivity embedded in the bottom-up economic model.

In conclusion, while the Finance Act 2023 may have been enacted with the intention of bolstering government revenues, its unintended consequences may jeopardize the very foundations of the bottom-up economic model. The government must carefully reassess the impact of these tax changes on SMEs and low-income households, seeking a balance between revenue generation and the sustainable growth of the economy. A constructive dialogue between policymakers, businesses, and citizens is crucial to address concerns, foster understanding, and chart a course towards a more equitable and prosperous economic future for Kenya.