Category: Law

As Parliamentarians Pay Tax:We Still Need Tax Reforms

Even as MP’s start paying taxes, Kenya Revenue Authority[KRA] needs a Lesson in some simple economics.To help them here is a simple lesson.Suppose that every day,  ten men go out for beer and the bill for all ten comes  to 100 KSH…If they paid their bill the way we  pay our taxes, it would go something like  this.The first four men (the poorest)  would pay nothing.The fifth would pay 1KSH.The sixth  would pay 3KSH.The seventh would pay  7KSH.The eighth would pay  12KSH.The ninth would pay 18KSH.The tenth  man (the richest) would pay 59KSH.

So, that’s  what they decided to do..The ten men  drank in the bar every day and seemed quite happy with  the arrangement, until one day, the owner threw them a  curve ball.”Since you are all such good  customers,” he said, “I’m going to reduce the cost of  your daily beer by 20KSH”. Drinks for the ten men would  now cost just 80KSH.The group still wanted to pay their  bill the way we pay our taxes.So the first  four men were unaffected.They would  still drink for free. But what about the other six  men?The paying customers?

How could  they divide the 20KSH windfall so that everyone would get  his fair share?They realised that 20KSH divided by  six is 3.33KSH. But if they subtracted  that from everybody’s share, then the fifth man and the  sixth man would each end up being paid to drink his  beer.So, the bar owner suggested that it  would be fair to reduce each man’s bill by a higher  percentage the poorer he was, to follow the principle of  the tax system they had been using, and he proceeded to  work out the amounts he suggested that each should now  pay.And so the fifth man, like the first  four, now paid nothing (100% saving).The sixth  now paid 2KSH instead of 3KSH (33% saving).The seventh  now paid 5KSH instead of 7KSH (28% saving).The eighth  now paid 9KSH instead of 12 KSH(25% saving).The ninth  now paid 14KSH instead of 18KSH (22% saving).The tenth  now paid 49 KSH instead of 59KSH (16% saving).Each of the  six was better off than before. And the first four  continued to drink for free. But, once outside the bar,  the men began to compare their savings.”I only got  a dollar out of the 20KSH saving,” declared the sixth  man.He pointed to the tenth man,”but he  got 10KSH!””Yeah, that’s right,” exclaimed the  fifth man. “I only saved a dollar too. It’s unfair that  he got ten times more benefit than me!” ”That’s  true!” shouted the seventh man. “Why should he get 10KSH  back, when I got only 2KSH? The wealthy get all the  breaks!”

“Wait a minute,” yelled the first  four men in unison, “we didn’t get anything at all. This  new tax system exploits the poor!”The nine men  surrounded the tenth and beat him up.The next  night the tenth man didn’t show up for drinks, so the  nine sat down and had their beers without him. But when  it came time to pay the bill, they discovered something  important. They didn’t have enough money between all of  them for even half of the bill! And that,  boys and girls, journalists and government ministers, is  how our tax system works.The people  who already pay the highest taxes will naturally get the  most benefit from a tax reduction.Tax them too  much, attack them for being wealthy, and they just may  not show up anymore.In fact, they might start drinking  overseas, where the atmosphere is somewhat  friendlier.We need to reduce  the amount of Tax we pay particularly the amount paid by investors local and foreign,industry and other job creators

For those who understand, no explanation  is needed.For those who do not understand, no  explanation is  possible.The Tax brackets maybe slightly off but the concept is the same