The budget policy statement as tabled in Parliament raises the budget ceilings for the financial year 2023/24 to Sh3.6 trillion from Sh3.3 trillion for financial year 2022/23.
The tax revenue is Sh3.1 trillion against a target of Sh 2.1 trillion ordinary revenue for the financial year 2022/23, excluding Sh400 billion Appropriation-in-Aid.
How will the government mobilise Sh1 trillion more in tax revenue? Whereas large taxpayers comprise only 0.02 percent of the total taxpayers, they contribute 50 percent of the total revenue.
This, therefore, calls for the need to work on strategies to net the 99.08 percent into the tax bracket.
Tax regimes over the years have in an attempt to increase tax collection raised the tax rates. Examples of taxes that have been subject to subsequent increase over the years are VAT and excise duty.
But does an increase in tax rate lead to an increase in revenue collection? This question has been a subject of research over the years.
In 1974, Arthur Laffer, an economist coined what would popularly be known as the Laffer Curve.
This is a supply-side-based theory that visually shows the relationship between tax rates and the amount of tax revenue collected by the government at zero percent tax rate — of course, zero taxes will be collected.
But as the rate of tax increases, the revenue will increase gradually until at an optimal tax rate T*, where any future increase in tax rate will lead to a decrease in the tax collected.
An increase in tax rate beyond rate T, means that beyond this rate, taxpayers find it too expensive to pay tax, therefore, leading to tax evasion or shift to products or services that do not attract this tax.
This also leads to an increase in illicit trade as there is enough money (from evasion) that is enough to cheat the system and pay off enforcement agencies.
The million-dollar question however is, have we hit the ceiling for most of our taxes? Will a further increase lead to an increase in tax collected?
Could a reduction in the tax rate for various items lead to an actual increase in compliance and even more tax collection?
The masterstroke to achieving the revenue target, therefore, lies in determining this ideal tax rate T* that reduces the marginal tax rate, increases the tax revenue, decreases inflation and reduces unemployment.
This is the rate the Finance and National Planning Committee of the 13th Parliament will seek to achieve as we work on reducing the fiscal deficit in our budget.
The committee, therefore, looks forward to the input of economists, market players and the concerned parties in coming up with this T*.
A multi-sector working group is already conducting a survey and will be reporting its findings to the committee.