10 Reasons Why Over Taxation Of Kenyan Businesses Is Counterproductive To The Economy

By Steve Biko Wafula / Published March 22, 2023 | 3:51 pm

KEY POINTS

High taxation rates can lead to a brain drain. When taxes are high, highly skilled professionals may choose to leave the country and work in countries with lower tax rates. This results in a loss of skilled labor for Kenya, which can have a negative impact on the economy.

KEY TAKEAWAYS

High taxation rates can lead to tax evasion and avoidance. When taxes are too high, businesses may seek to evade taxes by not reporting all their income or by shifting their profits to other countries with lower tax rates. This results in a loss of revenue for the government, which could have been used to fund public services.

Over-taxation is counterproductive to an economy because it reduces consumer demand, discourages entrepreneurship and innovation, leads to inflation, increases tax evasion and avoidance, reduces foreign investment, results in reduced savings, and can lead to political instability.

When taxes are too high, businesses may choose to relocate to other countries where taxes are lower, leading to a loss of tax revenues and employment opportunities in the country. Excessive taxation also reduces the incentives for businesses to invest in the country, ultimately stifling innovation and economic growth. Furthermore, high taxation rates can result in a loss of revenue for the government, reduced capital formation, and increased political instability.

Excessive taxation can have a significant impact on the economy of a country, and Kenya is no exception. The high taxation rates in Kenya have led to several adverse effects, including businesses shutting down and relocating to other countries. In this article, I will discuss why too much taxation is counterproductive to the Kenyan economy.

High taxation rates reduce disposable income, which is the money available to households after taxes. When disposable income decreases, households have less money to spend, which leads to a decrease in consumer demand. As a result, businesses that rely on consumer spending may experience reduced revenues and, in some cases, may be forced to shut down.

Excessive taxation reduces the incentives for businesses to invest in Kenya. When taxes are high, businesses may choose to relocate to other countries where taxes are lower. This loss of businesses not only results in reduced tax revenues for the government but also reduces employment opportunities in the country. Businesses are the primary drivers of job creation, and when they leave, the unemployment rate may increase, which has a negative impact on the economy.

High taxation rates discourage entrepreneurship and innovation. Startups are the backbone of any economy, and they are essential for job creation and economic growth. When the tax burden is high, entrepreneurs may be deterred from starting businesses because of the high cost of operation. This ultimately stifles innovation and economic growth in the country.

High taxation rates can lead to an increase in the informal sector. When the formal sector becomes too expensive to operate in, businesses may choose to operate in the informal sector. The informal sector is not taxed, and therefore, businesses that operate in this sector are not required to pay taxes. This results in a loss of revenue for the government, which could have been used for public services such as healthcare and education.

Excessive taxation can lead to inflation. When the government imposes high taxes, businesses may choose to pass the cost of the taxes to consumers by increasing prices. This results in increased prices of goods and services, which ultimately leads to inflation. Inflation has a negative impact on the economy as it reduces purchasing power and increases the cost of living.

High taxation rates can result in reduced foreign investment. Foreign investors are crucial for economic growth as they bring in foreign capital and technology. However, when taxes are high, foreign investors may choose to invest in other countries with lower tax rates, resulting in a loss of foreign investment for Kenya.

High taxation rates can lead to a reduction in savings. When taxes are high, households may have less money to save. This can result in reduced investments and reduced capital formation, which ultimately reduces economic growth.

High taxation rates can lead to political instability. When taxes are perceived to be unfair or too high, citizens may become disgruntled and may take to the streets to protest. This can lead to political instability, which can have a negative impact on the economy.

In conclusion, excessive taxation has numerous negative effects on the economy of Kenya. It reduces consumer demand, discourages entrepreneurship and innovation, leads to inflation, increases tax evasion and avoidance, and reduces foreign investment.

About Steve Biko Wafula

Steve Biko is the CEO OF Soko Directory and the founder of Hidalgo Group of Companies. Steve is currently developing his career in law, finance, entrepreneurship and digital consultancy; and has been implementing consultancy assignments for client organizations comprising of trainings besides capacity building in entrepreneurial matters.He can be reached on: +254 20 510 1124 or Email: info@sokodirectory.com

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