We are a little over a month into the new administration of President William Ruto. At this early stage we can see that some things have changed, others not so much.
One definite change is that our new President’s speeches were much more politically-heavy than we might have been used to. In his inaugural speech, he mentioned increasing judicial allocations, campaigned for the appointment of the six appeals court judges (which he promptly did), made the inspector general of police accountant (done again), as well as mentioning fuel subsidies, fertilizer costs, youth unemployment, financial inclusion and a number of other important policy issues.
But it is the President’s speech during the opening of the 13th Parliament that I want to draw attention to. It was just as politically-heavy, spending little time on the just-concluded elections and more time on the President’s legislative agenda. This is very important. Past presidents who have sailed into the State House with a super-majority legislative vote may not have recognized the opportunity the time has presented them. The current President seems fully aware that his ambitious legislative agenda will have to be approved by a Parliament where his coalition does not have the overwhelming majority of recent years. The president presented his legislative goals to the bicameral parliament very early on. I list some of the President’s stated goals below.
The President explained that under his administration he is keen to see agricultural productivity – of farmers, fishermen and pastoralists – increase “dramatically”. He also stated that Parliament should do its duty by supporting the allocation of land for affordable housing. Perhaps most memorable, he announced his intention to change the tax system by taxing wealth, consumption, income and commerce, in that order. And he lamented the land fragmentation caused by Kenyans who wanted to buy 50×100 plots of land for themselves and were successful.
Underlying each and every one of the issues that the President mentioned in the paragraph above is the country’s vital and essential issue. Questions of its availability, its productivity, its cost, and the alternative uses to which it can be put are unavoidable and inescapable in enabling the President’s agenda to be achieved. In terms of productivity, large chunks of productive land lie fallow and unused—’owned’ by those who don’t want to use it. The state will find it difficult to buy land for affordable housing – because land is far too expensive precisely where housing is so urgently needed. I’ve lived in a house where the door to the shower wouldn’t open fully because at some point that door would bang on the shower head when opening. The price of the land, dear reader, is written in this shower room. There are numerous blocks of flats in Nairobi where if the hood of the car parked first doesn’t fit snugly under the stairs to the apartment, the gate just won’t close. The price of the property, dear reader, is written in the parking lot of this apartment – and somewhere else in the apartment, I’m sure. (In fact, the price of land is so high that it has proven and will continue to prove an obstacle to improving the country’s infrastructure; land leveling, for example, cost KSh 33 billion during the construction of the standard-gauge railway.) And the land fragmentation that the President attributed to What is rightly regretted is a combination of these two factors: the fact that large tracts of land are unavailable to a public that would otherwise have put them to more productive use; and the fact that land prices are high and rising so that it is viewed as a more permanent commodity in which to invest family savings, so that smaller and smaller plots of land are of increasingly higher value. In short, solving the land problem in Kenya is now fundamental to the success of any government. A day of reckoning must come soon, and it is better to anticipate it.
The state will find it difficult to buy land for affordable housing – because land is far too expensive precisely where housing is so urgently needed.
There is a simple solution to each of these problems, although I must qualify this statement by saying that “simple” does not necessarily mean “simple”. Land is a natural resource; it is not made by anyone. There are schools of economic thought that state that taxing such natural resources for national benefit is the best way to realize their value in the interests of the people. Let’s examine this thinking further with a thought experiment.
For example, imagine that there is a flat tax rate for land of say 1,000 KSh per acre per month or 12,000 KSh per year.
(It would be important that such a new tax be offset by a corresponding cut in the income tax, in order to stay within the President’s stated principle of taxing wealth before income.)
We will now examine the impact of this tax on Family A, who own the quarter acre on which they built their family residence. Such a tax would be 250 KSh per month or 3,000 KSh per year. In all likelihood, Family A could pay them, even without crediting income tax. But let’s now examine the impact of this tax on family B, who own 100 acres of land. Such a tax rate would be 100,000 KSh per month or 1.2 million KSh per year. As mentioned earlier, since this amount is deductible from that family’s income tax, such a family would do so only unwilling to pay this tax unless they already farm the land or otherwise get it to produce at least the KSh 1,000 (per acre per month) required to pay the tax. In other words, only the owners of idle land (or rather, the idle owners of productive land) would be troubled by this tax regime change.
(It gets even more interesting when the tax rate is a flat percentage based on the value of the property. Let’s say the tax rate is 2 percent per annum. A property worth 1 million KSh would have an annual tax of 20 KSh entail, 000. A package worth KSh 100m would yield a rate of KSh 2m per year This is even fairer, all because an empty lot in Nairobi city center loses us a lot more productivity than an acre of land in Samburu This is what is known in economics as a land value tax and is the holy grail of tax policy.
If a property tax were introduced, one of three things would happen in a very short period of time. Families like family B could sell their land. The immediate availability of large lots for sale in order to avoid the tax would have the economically salutary effect of driving down the price of land fairly quickly, Use it for careful planning. We would have to be careful to avoid the mistakes of the past, when planning for the use of this most important resource was largely non-existent and land allocation fell victim to corruption. Even if newly available land is to be bought by a new owner, it should be carefully allocated to those who would actually farm it productively, and such allocations should not be corrupt. Japan achieved this by having local land committees make these decisions, and this fair redistribution of land ushered in the nation’s economic prosperity.
Alternatively, Family B could lease the land at the tax rate or slightly more. Although theoretical, a land lease rate of KSh 1,000 per acre per month is fairly fair and would allow a good farmer to use the land – the youth unemployed of our day. (Such an approach, while helpful, would not be a silver bullet and would need to be accompanied by advisory services, the provision of capital, market development assistance and other support.) This would immediately help reduce unemployment – the number one economic problem of our time – and to achieve the goal of increasing national agricultural productivity that the President spoke about in his speech.
An empty lot in downtown Nairobi loses us far more productivity than an acre of land in Samburu.
Eventually, Family B could use the land as it should have been used all along to generate the KSh 1,000 per month needed to pay the tax – and keep the land.
All of these outcomes, provided they are performed correctly, are beneficial. In China, for example, grain production increased by 70 percent in the decade after land redistribution. However, to differentiate and isolate these beneficial outcomes from typical Kenyan venality, property tax must be inevitable. It may be necessary to provide public information as to whether or not tax has been paid on a property. Also, land redistribution should involve the public, as was the case in Japan. In addition, the institutions responsible for these processes should be staffed with people who are beyond any doubt. It is also important to note that a certain reading of Article 209 of our Constitution could potentially prevent the national government from levying such a property tax. As such, sound legal advice should be obtained before proceeding with these changes.
Dear Mr. President, Please tax the country and not your people.