Housing Principal Secretary Charles Hinga, on Wednesday, May 24, delved deep into the circumstances that lead to low-income earners paying more in taxes and essentially becoming net contributors to the government scheme rather than net beneficiaries.
In a press briefing at State House, PS Hinga noted that low-income earners suffered the penalty of poverty in what is termed as poverty tax.
As a result, they end up paying the cost of basic needs and utilities at an extra cost than the middle-income-earning person.
"Poverty tax is that people pay for water at 172 per cent more than the average person. They pay for electricity between 45 and 145 per cent more than the average person. They also pay to use facilities such as a toilet," he stated.
In a breakdown, he noted that Kenya hosts over 1,400 informal settlements which is attributed to the huge income disparities. As a result, rent subsequently increases and hence pushes the majority who are unable to afford to reside at the premises, end up relocating to a cheaper place.
He gave examples of Kenyans who resided in slums such as Kibera and Mukuru - indicating that they were driven by circumstances owing to the high cost of living.
"Land in Kibera and Mukuru is very prime but why are people living there? It is because they have been pushed out but they have to stay closer to where they work. They are hard-working Kenyans but their incomes are very low because they cannot afford the expensive rent so they take up any space," he pointed out.
Hinga, however, explained that the distinct difference between the two slums is that funds derived from the World Bank can only upgrade settlements on government land as opposed to private land.
"The large part of Kibera is government land so they took over the land and built shanties. The case of Mukuru is different, they set up settlements on private land.
"The biggest amount of money that we get to address the issue of slum upgrading comes from World Bank. World Bank has made it very clear that one of the conditions is that we cannot take the funds into private land," he added.
To put it into perspective, if the World Bank contributed Ksh20 billion to upgrade settlements in Kiambu and Kitale, the government would remit less than Ksh500 million to Kiambu where private land majorly prevails as opposed to Kitale which would get Ksh1 billion owing to the large tracts of government land.
Understanding Poverty tax
Poverty tax is where people with lower incomes, particularly those living in low-income areas, incur higher expenses and pay more in resources including but not limited to money, time, health, and opportunity costs.
A recent study by World Bank showed that in low-income countries, consumable income is lower than market income.
This means that the money that someone has to spend and save after taxes, and subsidies is less than the salary made from work and investments.
The study concluded that despite the attempts by fiscal policies (the use of government spending and taxation to influence the economy) to positively impact an economy, they end up causing poor households to become poorer.
How Do Rich Countries Manage?
A question comes into play: how do richer countries manage to collect more revenue and not end up leaving poor households worse off?
According to the World Bank study, rich countries rely heavily on direct income taxes - which consequentially puts a burden on richer households and ends up supporting the poor households through public transfers.
Low and middle-income countries often collect indirect taxes such as Value Added Tax which predominantly fall on everyone and public transfers in these cases are not enough to cushion the poor households.
The latest statistics from the Kenya National Bureau of Statistics (KNBS) painted a grim picture as the average monthly income for Kenyans stands at Ksh20,123.
Currently, World Bank classifies Kenya as a lower middle-income country with a Gross National Income (GNI) per capita of Ksh241,467.