By Billy Mijungu
Efficient Value Added Tax collection can sustainably inform a reduction in income tax. International experience shows that economies which shift the tax burden from labour to consumption record higher compliance, stronger household spending, and broader revenue bases. The resulting increase in disposable income places extra savings directly into citizens’ pockets, improving economic wellbeing while sustaining government revenues.
Countries such as New Zealand and Singapore deliberately structured their tax systems around low income taxes and efficient consumption taxes. New Zealand relies heavily on a broad based GST with minimal exemptions, allowing personal income tax rates to remain moderate while maintaining high compliance. Singapore complements low PAYE rates with a consumption driven tax model, enabling strong household savings and sustained public investment.
The experience of Estonia further demonstrates the benefits of reducing labour taxation. By flattening and lowering income tax while strengthening VAT administration, Estonia expanded its tax base, reduced evasion, and improved economic participation. The outcome was higher overall revenue despite lower headline tax rates.
In Kenya, payslip deductions currently total approximately 40.25 percent, with 6 percent allocated to NSSF savings, leaving an effective tax burden of 34.25 percent. This level of labour taxation discourages productivity, savings, and formal employment.
If the housing levy were progressively reduced to a minimum sustainable floor of 0.3 percent to support the revolving fund, total deductions would fall to 33.05 percent. Comparable housing funds in countries such as Germany and Austria operate successfully with minimal payroll deductions supplemented by consumption and employer contributions, proving sustainability does not require excessive salary levies.
SHIF deductions and voluntary contributions are projected to generate between KES 133 billion and KES 157 billion annually, yet collections remain below KES 70 billion. This mirrors early challenges faced by South Korea’s health insurance system, which only achieved full funding once contributions were partially shifted toward consumption and indirect taxation, reducing resistance from wage earners.
Reducing VAT from 16 percent to 14 percent while introducing a 2 percent Social Health Authority levy on goods and services would align Kenya with models used in Japan and France, where health and social insurance are partially financed through consumption based levies rather than payroll alone. This approach spreads the burden across the entire economy, including the informal sector and non wage earners, while improving payslip outcomes.
Under this model, total deductions would settle at approximately 36.03 percent inclusive of NSSF savings, improving disposable income without undermining social funding.
The next strategic phase should be the progressive reduction of PAYE, currently capped at 30 percent. A reduction of 0.5 percent every six months would lower PAYE to 20 percent within ten years. Ireland and Poland adopted similar gradual PAYE reductions, achieving higher employment participation and expanded tax compliance without revenue collapse.
At a 20 percent PAYE ceiling, Kenya’s maximum payslip taxation would decline to approximately 26.03 percent within a decade. This would place Kenya closer to emerging low tax economies that prioritise consumption, savings, and productivity over punitive labour taxation.
Through efficient VAT collection, moderate consumption levies, and gradual PAYE reduction, Kenya would transition toward a low tax economy characterised by strong spending power, improved income retention, broader compliance, and sustainable public financing.
