Is there a case for simplifying tax calculations?

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

28 June 2009

Several readers have asked for help in calculating their Pay As You Earn (PAYE) tax. I will choose a lady by the name Betty (second name withheld for obvious reasons) who says that she earns a gross of Sh45,00 per month. Betty’s salary is a good figure because it will demonstrate how the progression is done from one tax bracket to the next.

Assuming that she makes pensions contributions to the National Social Security Fund only (Sh200), her taxable income is then Sh44,800. Next we take the first Sh10,164 from her salary and tax it at the rate of 10 percent. This yields Sh1,016.4.

After removing the first bracket, the remaining salary is Sh34,636 and from this, we remove the second bracket of Sh9,576. This is taxed at 15 percent giving Sh1,436.85. The remaining salary is now Sh25,060.

Next we subtract the third bracket of Sh9,576 and tax it at 20 percent. The result is Sh1,915.20; and the salary remaining is Sh15,484. The fourth tranche is also Sh9,576 and it is taxed at 25 percent. This comes to Sh2,394.

After removing the fourth bracket, the remaining salary is Sh5,908. This amount is taxed at the highest rate (30 percent) to give Sh 1,772.40.

The next step is to add up all the taxes from all the brackets. That is 1,016.40 + 1,436.85 + 1,915.2 + 2,394 + 1,772.40 = Sh8,534.85. This is the gross monthly tax due.

But Betty is also entitled to a monthly tax relief of Sh1,162. This is removed from the gross tax and the amount collected from her salary should be Sh8,534.85 –  Sh1,162 = Sh7,372.85. But the taxman doesn’t like dealing with decimals thus this is rounded off to Sh7,373.

It is that easy; sorry, that complicated! In my view, this working can be simplified in two phases. First, the brackets are divided in very odd amounts – Sh 10,164 for the lowest level and Sh9,576 for the others. These can be simplified to equal amounts of a flat Sh10,000.

If this was done, Betty’s gross tax would come to a more “rounded” Sh8,440.00 instead of the awkward Sh8,534.85! Thus the total PAYE collected by KRA from all taxpayers would not change by a significant amount.

The second simplification involves charging tax at a flat rate. Currently, the top bracket begins at Sh38,893. The gross tax for those earning this amount comes to Sh6,762.45. This is equivalent to 17.4 percent of their salary.

Thus the tax rate can be fixed at a flat rate of 17.4 percent (OK, 17.5, for further simplicity) for every one. This however might not be easily acceptable since some people (lower income earners) would find their taxes increasing while others would see a reduction.

While the first response would be to oppose such a plan because it increases taxes for “the poor”, there is another side to the debate. In the current method, the higher your earnings, the higher the percentage of tax that you pay. Isn’t that equivalent to punishing people because they earn more? What have the low-income earners done to deserver a lower tax rate?