What are Taxes and Why Do We File Them Every Year

Tax is money you pay the government for the rendering of public services.  Just recently, President William Ruto declared his intention to increase tax revenue by sh.500 billion by June this year. For an average Kenyan citizen, this is not something they’d like to hear. Nobody likes paying taxes. Yet, paying tax has been the norm since time immemorial. We pay taxes because it’s our way of paying for public services the government gives the citizens of a country. For example, public healthcare, public education, infrastructure, etc.

To think that your tax money is not being spent appropriately and you cannot see where it goes is enough to give you qualms. Especially if it’s all about black budgets and politicians giving themselves raises. But also,  this is virtually inevitable. No matter how efficient a tax system is, someone is always going to be unhappy. Paying taxes is a government mandate. In this article, we shall learn about what taxes are, why we need to pay our taxes and the pros and cons of paying taxes to us and the overall impact on society.

How Do Taxes Work?

In Kenya, or any given country, there are public services. This includes public education, law enforcement, healthcare, education etc. These services often need funding and the people who work in these organisations also have to be paid. As citizens, we pay for these services indirectly with taxes. There are different types of tax with specific regulations for each.

For a given type, tax is levied on income while others are indirect like Value Added Tax (VAT). The tax system is designed in such a way that makes everyone pay their fair share of taxes. So on the money you take home, there’s a certain percentage you must pay in taxes. For me, I often like to think of tax as a service charge fee for living in a country. The Kenya Revenue Authority (KRA) is in charge of collecting and accounting for tax revenue in Kenya.

5 Reasons Why We Pay Tax

Paying taxes is an obligation for every citizen of a country. So why do we need to pay our taxes? Here are some reasons why you should always file your taxes every year.

1. Taxes raise money for government services and projects. The government has many projects that it wants to accomplish for the growth of the country.  Some of these projects include infrastructural development like building roads, schools, hospitals etc and also fund public services. For this to be possible, it needs us to fund this through tax. Hence, we essentially build a better society to live in with our taxes.

2. Redistribution of wealth in a society. Through tax, the government can lower the divide between upper income earners and lower income earners. This is done by implementing the progression tax system. Here, upper income earners pay higher taxes compared to low income earners. In this way, everyone gets to fairly pull their weight of the economic conditions of the country. 

3. To promote the well being of society. Part of your tax money goes to social and welfare programs like food and nutrition programs and public health systems. When you pay your taxes, you contribute towards the general well being of the society.

4. It is your duty to pay tax as a citizen. Taxes are involuntary charges we have to pay to the government as required by law. Because we don’t like to pay taxes, we tend to evade them. This is punishable by law. It is your obligation as a citizen of a country to submit your taxes from any money you take home. This ensures fairness and equity when it comes to sharing your burden on economic growth.

5. Through tax, we get to build, maintain and improve infrastructure. This includes schools, hospitals, public libraries, law enforcement agencies etc.

What are the Advantages of Paying Tax?

Here are some of the benefits of paying your taxes:

1. Taxes fund education. As of 2023, about 7 million adults in Kenya are illiterate. This is quite alarming because we depend on literacy for national development and fulfilment of an individual’s goals. When we pay taxes, we contribute towards giving education opportunities to underprivileged communities and bridging the educational gap.

2. Funding healthcare systems. Money that goes towards building hospitals, medical research, health insurance etc come from our taxes.

3. Salaries and pensions for government employees form tax. Employees who work in government offices are indirectly paid by us with our tax money.

4. Funding law enforcement. The government uses the revenue earned from tax to provide training, buy equipment and improve the infrastructure of our defence forces, including the police, air and sea patrol, customs and excise and paramilitary forces. When this is done, security of the country’s borders is ensured.

5. Having a reliable record. Paying your taxes means that the government has no business coming after you for failure of filing your tax returns.

What are the Disadvantages of Paying Tax?

Here are the problems and challenges that comes with paying your taxes:

1. You have less money to spend. When a certain percentage is taxed on the income you are receiving, you are left with less money to spend on consumer products. As a result, the national GDP growth rate decreases because of low consumption.

2. Taxes may discourage people from working hard. Human beings work on a reward system. We get motivated when the returns are guaranteed. If you have to pay high taxes for the high income you are earning, you may be demotivated from working hard because a huge portion of your income is inevitably going to be deducted for tax purposes.

3. Tax schemes may be considered unfair. There are always questions and opinions based around who should pay more taxes and who should be exempted from paying tax. Even if a tax system is fair, there will always be someone who is not content with the tax code a country uses.

4. Investments might suffer. Some people pay high taxes and are left with less money to put towards investments and securing their financial future while meeting their daily needs.

5. Some people and big corporations often try to avoid paying taxes. Wealthy people and big corporations will try to find loopholes and create a corporate structure that gives them a leeway to avoid taxes. This is a problem because other income earners are left with the burden of paying heavy taxes, while they do not contribute anything at all. 

6. Money may be spent in an ineffective manner. We don’t like paying taxes because we do not get what we perceive as value for our money. This is especially true if you cannot see any improvement on the state roads, public schools, hospitals etc and politicians act opportunistically with our tax money.

Conclusion

For someone to be a taxpayer, there are certain exceptions, regulations and qualifications that must be considered for who the type of tax pertains to. In Kenya, as a rule of thumb, anyone who is 18 years of age and has stable income is obligated to pay taxes to the government. It is therefore vital to understand what taxes are, how the tax system works, how taxes are calculated, why taxes work differently and how to put together a tax plan that works for you.

When you have this knowledge, you can learn tips and tricks on how to avoid paying taxes legally and overally having the tax system work for your good. Taxes are the main source of revenue for the government. They are collected for specific purposes, hence the different types of tax. We shall be looking at these types of tax, tax planning and how to file your taxes as we keep progressing in the field of personal finance.

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