The World Bank has outlined a strategy that could strengthen Kenya’s revenue system by addressing inefficiencies, inequities, and distortions in the current tax framework.
- •In its latest Public Finance Review (PFR) report, the bank emphasizes the need to expand the tax base, reduce exemptions, and promote fairness while ensuring that the system supports economic growth.
- •It notes that Kenya’s current tax system suffers from a narrow tax base, inadequate progressivity, and numerous exemptions that distort markets and suppress revenue collection.
- •Legislative reforms needed to modernize Kenya’s property tax regime face long timelines and uncertain outcomes.
“These issues significantly limit the country’s capacity to raise additional revenues and constrain the potential for equitable growth. Addressing these structural problems is critical to improving fiscal sustainability,” the Bretton Woods institution said in the report.
The report identifies land and property taxes as promising yet underutilized sources of revenue. These taxes are typically stable and non-distortionary, offering predictable long-term income. Implementing effective property taxation is administratively demanding, requiring substantial investments in systems, training, and enforcement.
“Kenya is at high risk of debt distress and decisive reforms are urgently needed to keep debt sustainable while promoting growth and jobs,” said Qimiao Fan, World Bank Division Director for Kenya, Rwanda, Somalia, and Uganda.
“Pathways of continued fiscal slippages or severe austerity measures are economically and socially costly,” said Marek Hanusch, World Bank Lead Economist and Program Leader. “There is another way that is more sustainable based on packages of reforms.”
Reform Areas
Personal and Payroll Tax Reforms: By making personal income tax (PIT) and payroll levies more progressive and simplifying tax systems for micro, small, and medium enterprises, Kenya can encourage formalization and equity. Phasing out mortgage interest deductions alone could yield an estimated 0.25% of GDP annually.
Income Tax Base Broadening: Rationalizing inefficient and regressive exemptions in both PIT and corporate income tax (CIT) could generate up to 2.2% of GDP in additional annual revenues.
Value Added Tax (VAT) Reform: Removing poorly targeted VAT exemptions could enhance efficiency without harming low-income households, especially if done as part of a broader reform package.
Property and Leasehold Tax Enhancements: Raising leasehold rents and reforming county-level property taxes can contribute at least 0.14% of GDP per year, split between national and local governments.
Corrective Taxes for Social and Environmental Outcomes: Introducing a carbon tax on fuel and increasing excise taxes on alcohol, tobacco, and sugary drinks could raise 0.18% and 0.6% of GDP respectively. Revenue recycling would protect vulnerable populations from adverse impacts.
