Taxing for the right to food: The role of taxation in food security
The right to food is an essential and basic right to which all Kenyans are entitled. The tax system can help or hinder the achievement of food security in Kenya. Tax justice is about progressive tax policies and practices that tackle inequality, including the inequality of access to food.
Over the past year, tax policies in Kenya have come under special scrutiny. For instance, the re-introduction of Value Added Tax (VAT) on petroleum products, a move that was made to raise additional revenue to finance our national debt, has had a significant effect on individual incomes and indirectly affected access to food (Muchira, 2018).
As a result, the objective of financing debt has overtaken the promise to pursue and achieve food security. However, policy objectives should be balanced against one another. Decisions to introduce or amend taxes should be accompanied by an evaluation of the impact on the right and access to food, amongst other rights.
A defining element of an individual’s ability to access food is the tax policy that influences not only the total cost of the food but also the amount and value of income they earn that enables them to purchase that food. Tax policy is the choice made by the government on what to tax, who to tax and how much to tax. Tax policy can be designed to achieve particular objectives such as redistributing wealth to deal with income inequality; discouraging the use of certain goods like alcohol or tobacco, or protecting or raising funds to restore the environment through the taxation of carbon emissions.
The objectives reflect political priorities which can be influenced by many factors including the amount of national debt, development needs or even campaign promises. For instance, the current government, as part of the “Big Four” Plan, has committed to achieving food security.
Tax policy is what forms and defines the relationship between citizens and the state (Christians, 2009). At the heart of this relationship are the promises of the government to respect and refrain from infringing upon human, social and economic rights; and the obligation of citizens to pay taxes to finance public services. These promises and obligations are recognised as the social contract, or, in Kenya, the Constitution of Kenya 2010. Article 201 of the Constitution provides for the principles of public finance, which stipulate that the burden of taxation shall be shared fairly, and expenditure shall promote the equitable development of the country.
Further, Article 209 specifies the revenue-raising powers of the government including the powers to impose taxes and charges. Finally, the government is required to take legislative, policy and other measures to achieve the progressive realisation of Article 43 on economic and social rights, which includes the right to be free from hunger and to have adequate food of acceptable quality. The need to undertake progressive legislative and policy-making measures, highlighted under Article 21 of the Constitution, underscore why tax policy is key.
Tax justice is about ensuring that revenue raised through progressive and fair tax systems is allocated to the delivery of quality public services and that it guarantees sustainable and accountable governance. It means that all people pay their fair share of tax. Tax justice connects taxation to rights, which is key to understanding why taxation matters to food security.
One of the crucial advocacy points of tax justice is progressive tax policy. A progressive tax policy can not only generate public revenue, but it can also distribute tax contributions fairly in order to alleviate economic and gender inequalities (ActionAid, 2018). ‘Progressive’ here means that high-income earners should pay more tax, both in absolute and relative terms, than low-income earners. However, specific taxes sometimes hit the most vulnerable the hardest – the very antithesis of tax justice. Take VAT for example, which is an indirect tax levied on the value added by producers, suppliers and service providers at each point in the supply chain and ultimately borne by the consumer. Instead of being progressive, it is commonly viewed as a regressive tax since it uses a flat rate, which is applied to all categories of consumers including low-income earners. This often results in poorer people unjustly paying a higher proportion of their income in taxes.
In order to protect low income earners, policymakers often introduce exemptions or zero-rates for basic goods such as food or fuel. An exemption regime means that no VAT will be applied on the supply of the good, but producers cannot claim a credit for the VAT they pay on inputs to produce the good. The effect this often has is that the VAT incurred by producers of that good throughout the supply chain will be factored into the cost to the final consumer. The zero-rated regime applies a rate of 0% on the supply of the good but permits the producer to claim refunds on any VAT incurred throughout the supply chain. This means that an exempt regime may ultimately not be as beneficial in meeting the objective of reducing the cost of an item, though this depends on the supplier’s price point.
In Kenya, as of July 2018, basic goods that qualify for VAT exempt status include the supply of natural water, maize flour, cassava flour, wheat flour, unprocessed milk, vegetables, fruits, nuts, cereals, a variety of seeds, bread, milled rice, eggs and meat. The number of items exempted in the list above, determine the products that can be accessed by low-income earners without paying VAT. The exempted basic items do not include cookware items considered essential for safe and clean preparation of food, storage facilities for long term maintenance of food items, dried or canned foods. This may indicate that policymakers have not fully considered all that is required for low-income earners to be able to realise their Article 43 right.
Alongside the re-introduction of VAT on petroleum products, petrol, diesel and kerosene, levies apply. Some of these levies include road maintenance, petroleum development, petroleum regulation and railway development. Higher fuel costs affect transport, an important factor for access to and the affordability of, food.
Income taxes can also affect the value of income in the hands of consuming citizens. The Pay As You Earn (PAYE) system in Kenya uses a graduated approach whereby the tax rate increases as taxable income increases. Rates vary between 10% and 30% and are applied to specified annual income brackets. They provide a threshold designed to exempt low-income earners from the tax. Understanding the impact that inflation can have on the real value of income is an important factor for defining income brackets, as inflation can undermine the impact of these kinds of progressive policies.
Inflation reflects the rate at which the costs of living rises annually, resulting in individuals spending a higher proportion of their salaries on goods and services than the previous year. To mitigate against this effect, salaries are usually increased by, at a minimum, the same level as inflation. Due to the increase in salaries, individuals may artificially fall into higher income brackets and qualify for higher tax rates.
In response, policymakers undertake an annual review and adjustment of income brackets to reflect the impact of inflation. In June 2016, the National Treasury opted to review and adjust the income tax bands after over 10 years, raising the bands by 10% and increasing the monthly personal relief. The Government of Kenya has since reviewed the bands upwards for a second time, citing the increased cost of living (Igadwah & Juma, 2018).
However, these amendments have been criticized as being insufficient for the 10-year period in which no adjustments were enforced. The National Treasury did not issue further adjustments for the financial year 2019. By causing individuals to artificially fall into higher tax brackets, government policies (or lack thereof) perpetuate income inequalities that affect the purchasing power of individuals.
Policy decisions relating to the taxation of agricultural inputs may also impact upon the cost of production of these goods and indirectly contribute to increased consumer prices. Crucially, agricultural pest control products, previously zero-rated, are now subject to tax at 16%, whilst petroleum products are now subject to VAT. These items contribute to the production of food in Kenya and their cost will ultimately be factored into the final consumer price.
Contributing to the pressure on individual incomes, the Finance Act 2018 increased the excise duty applicable to mobile money transaction costs from 10% to 20%. Mobile money has enabled citizens to transact, save and borrow without the use of formalised financial institutions. Unfortunately, the increase in taxation of this service impacts the real value of income passing through this platform since the burden of excise duty has been passed on to the consumer, which has further implications for income inequality.
When reviewed separately, it is often difficult to build a comprehensive understanding of the link between tax policy and access to food. Tax policy must be viewed as a whole and not just as individual tax heads applied to different tax bases. These tax bases overlap, the impact of VAT on consumer prices and choices is further exacerbated by PAYE and the influence of excise duties on the real value of income or income inequality. A higher cost of food combined with a lower income frustrates an individual’s access to adequate food of acceptable quality.
Furthermore, inaccessibility of storage and cookware, place the acceptable quality of food at risk. In order for the government to progressively secure the right to be free from hunger and have adequate food of acceptable quality, tax policymakers must take the time to evaluate and understand the consumer trends of the country’s poorest and what it takes to secure consistent access to food. Intentionally progressive VAT, PAYE and excise duty policies can indeed contribute to ensuring an increase, even marginally, of food security.
Joy Ndubai is a tax and tax justice advocacy expert with significant experience working on tax within civil society and private sector spaces. She is currently a Global Tax Advisor at ActionAid.