This document discusses the potential for Kenya to adopt a flat tax system. It provides background on flat tax systems internationally, noting countries that have adopted them since the 1940s, many of which experienced strong economic growth. Examples discussed include Hong Kong, Eastern European countries, and Russia. Academically, Milton Friedman, Robert Hall, and Alvin Rabushka have proposed variants of a flat tax. Proposed benefits include simplicity, eliminating bias against capital formation, and reducing penalties on work and entrepreneurship. Potential downsides include reducing the government's ability to redistribute wealth and that a flat amount of tax is less fair for lower-income individuals. The document concludes that a broad tax base could make a flat tax system closer to neutral

1. Tax Reform (Part 1): Time for a Flat Tax system in Kenya? By Mohamed Ebrahim
Background
A flat tax rate provides proportional taxation to all individuals. In 1940 Jersey became the first
country in the world to adopt a flat tax system at the rate of 20% and in 1947 Hong Kong
followed with a rate of 16% (currently 15%). More recently Eastern Europe
http://www.globalpolitician.com/22020-europe has led the flat tax revolution starting with
Estonia in 1994 with a rate of 22% followed by Latvia, Lithuania, Russia, Serbia, Ukraine,
Georgia and Romania. Other countries with a flat tax system include Iraq, Kyrgyzstan, Iceland,
Macedonia, Mauritius, Mongolia and Montenegro. The common thing with these countries is
that most of these countries have experienced exceptional economic growth and significant
growth in tax revenue. http://www.iris.org.il/blog/archives/422-IRIS-Exclusive-All-Flat-Tax-
Countries-Experiencing-Explosive-Growth-Rates.html
International experience
Hong Kong in 1947 was one of the poorest places on the planet, however since the
introduction of a flat tax combined with other free-market policies led to dramatic increases in
economic performance. It does not tax dividends, capital gains, wealth, gifts nor does it have a
Value Added Tax. It has a salaries tax on all employment income, with personal and child
allowances so high that 70% of the population pay no tax at all. Nevertheless, it has a flat
business profit tax regime.
The Russian Federation is a considered a prime case of the success of a flat tax; the real
revenues from its Personal Income Tax rose by 25.2% in the first year after the Federation
introduced a flat tax, followed by a 24.6% increase in the second year, and a 15.2% increase in
the third year.[15] The Laffer curve predicts such an outcome, attributing the primary reason
for the greater revenue to higher levels of economic growth stemming from the introduction of
the flat tax.
Academic Support for a flat tax system
Milton Friedman proposed a negative income tax (a type of flat tax) in his 1962 book Capitalism
and Freedom. The basic idea is the same as a flat tax with personal deductions, except that
when deductions exceed income, the taxable income is allowed to become negative rather
than being set to zero. The flat tax rate is then applied to the resulting "negative income,"
resulting in a "negative income tax" the government owes the household, unlike the usual
"positive" income tax, which the household owes the government.
Robert E Hall and Alvin Rabushka (1995) of the Hoover Institution have proposed an integrated
approach to taxation wherein both business and personal income are taxed once only and at
one rate. This approach to taxation achieves horizontal equity, the principle that people with
similar incomes should bear similar tax burdens. Vertical equity is achieved as people pay more
tax as they earn more, the proportion being the same.

2. Daniel J Mitchell - McKenna senior fellow in political economy at The Heritage Foundation, “
Traditional income tax systems punish the economy, impose heavy compliance costs on
taxpayers, reward special interests and make a nation less competitive. A flat tax system
dramatically reduces these ill effects. More importantly it would reduce government power
over the lives of taxpayers and get it out of the business of trying to micromanage the
economy. There will never be a tax that is good for the economy, but the flat tax moves the
system much closer to where it should be – raising revenues that governments demand, but in
the least destructive and least intrusive way possible.” (20 March, 2006)
The Adam Smith Institute in the UK recently suggested a single rate of 22% and a tax free
personal allowance of GBP 12,000. It is estimated that this would result in an initial loss of
revenue of GBP 50bn (10% of government revenue), which would need to be made up by
raising other taxes possibly consumption taxes. However, it can be argued that, if the higher
marginal tax rate is eliminated, more high income people would consider relocating back to the
UK, it reduces the incentive to evade tax i.e. catch in the tax net a significant portion of the
underground economy and it would encourage savings and investment.
Key Pros and Cons of a flat tax system
Pros Cons
1 Simplicity- reducing compliance 1 Reduces the wealth redistributive powers of the
costs government
2 Eliminates bias against capital 2 Unfair, as the utility of Kshs 1,000 for a person
formation, by ending the double earning Kshs 25,000 is more than that of a
taxation of income person earning Kshs 250,000 and they pay the
same amount of tax.
3 Reduces penalties on work, risk
taking and entrepreneurship
Conclusion
If the tax base is broad enough so that it does not discriminate between the different sources of income
and provides little or no incentives for aggressive tax planning, the flat rate system could be much closer
to neutral than the present graduated tax system for individuals.
NB: Part 2 of the article will be on proposal on specific measures to be adopted in Kenya’s tax reforms.
I have recently relocated from Calgary, Canada to my
hometown of Mombasa, I hold an MBA from the prestigious
Manchester Business School of The University of Manchester,
England. My Master's dissertation was on Risk Management in
Islamic Financial Institutions. I am also a Certified Public
Accountant of Kenya, a Chartered Management Accountant
and is a Fellow member of the Chartered Institute of
Corporate Treasurers and Institute of Financial Accountants. I
can be reached at mohamedebrahim22@gmail.com