Wealth Tax, also called “Equity Tax” refers to a tax levied on the total or market value of a taxpayer’s personal assets that may include their bank deposits, company shares, fixed assets, cash, motor vehicles, real property, pension plans, money funds, owner-occupied house and trust funds.
Proponents advocating for imposition of a wealth tax, argue that it is a more equitable form of taxation especially in societies with significant wealth disparities thus promoting fairness and equality by taking into account the taxpayers overall economic status and their ability to pay.
Current global wealth tax landscape
Tax equity drives the overall distribution of income and wealth, as well as facilitating economic growth and development in a country. Globally, out of the 38 member countries of the Organization for Economic Co-operation and Development (OECD), those that currently impose wealth taxes are four. These are Norway, Belgium, Switzerland and Spain charging a wealth levy on fortunes above €700,000, with rates ranging from 0.2% up to 2.5%. There has been a sharp decline in the number of countries imposing this form of taxation, falling from 12 countries in the 1990’s to the current four.
Several commentators and policy makers have argued that in order to generate tax revenues and reduce income inequality in Africa and wealth distribution, there is a need to impose a wealth tax on net worth of high-net-worth individuals (HNWI) and multinational corporations (MNC) operating in African Countries. With an estimated total of $ 2.1 trillion in private wealth and close to 136,000 HNWIs each holding $1 million and above, with majority from South Africa, Egypt, Nigeria and Kenya, the continent is ripe for imposition of a wealth tax.
In a 2022 report published by the New World Wealth and Henley & Partners, Kenya is ranked 5th in Africa in terms of the number of HNWI, with an estimated 5,000 dollar millionaires residing in Nairobi with less than 0.1% of the general population own more wealth than the remaining 99.9%. Tackling economic inequality could aid in the uplifting the lives of millions of people out of poverty, secure sustainable economic growth and unify the country more.
Proposed measures for imposing Wealth Tax in Kenya
Introduction of a wealth tax as one of the measures to curb inequality was recently reignited by the President of the Republic of Kenya with the statement, “the current tax regime is over-taxing trade and under taxing wealth”. The subject of imposing a wealth tax in Kenya is however not novel. In 2018, the Treasury sponsored an Income Tax Bill that sought to impose a higher maximum tax rate of 35% on income of more than Ksh. 9 million per annum or Ksh. 750,000 a month. This bid was however stalled after the views collected from members of the public who were not in favour of it. Some of the measures that can be adopted is for the HNWIs to be charged a levy on their net worth, taking the form of a higher tax rate for high-income earners. Rates to be applied for net wealth taxes may be determined solely based on the wealth of the taxpayer or the aggregate value of the wealth of members of a family.
The personal income tax could also be reformed by introducing further bands for top earners at higher rates and adjusting them annually in line with inflation. Other measures may take the form of introducing an inheritance tax, increasing land rates for high value and large tracts of idle land, imposition of high capital gains at the same rate as income and expansion of its application to include listed shares and movable properties.
Conclusion and recommendations
The opportunities that present themselves by imposing a wealth tax include raising of significant amounts of revenue, with experts estimating it has the potential to earn the country up to Ksh. 125 billion in additional revenue. This will ease the burden of taxation currently held by a few taxpayers and reduce wealth inequality currently bedevilling the country by improving wealth redistribution and lowering levels of poverty as a result of improved government services.
Critics on the other hand, have argued that it discourages wealth accumulation which drives economic growth as investors may shy away from investing in the country, hereby hindering local and foreign investments due to additional taxation on their investments. A wealth tax is also considered difficult to administer, particularly in determining the fair market value of assets that lack publicly available prices leading to valuation disputes between tax authorities and taxpayers. Such uncertainty may tempt some wealthy individuals to try to evade the tax.
By Britah Omondi.
