World Bank Calls for Tax Reform in Kenya: A Balancing Act Between Equity and Growth

The World Bank has urged Kenya to revamp its income tax framework, proposing a new structure for Pay-As-You-Earn (PAYE) taxation. The plan introduces a sixth income bracket, aimed at creating a fairer distribution of the tax burden while addressing economic inequalities.

Under the new system, the highest marginal tax rate would increase from 35% to 38% for monthly incomes exceeding KSh 800,000. At the same time, lower-income earners would see reductions in their tax rates. For instance, those earning below KSh 166,677 would benefit from lower rates, with salaries between KSh 24,000 and KSh 32,333 taxed at 15%, down from the current 25%.

Intermediate earners, making up to KSh 500,000, would face a marginal rate of 32.5%, while those earning between KSh 500,000 and KSh 800,000 would pay 35%.

The proposed framework is designed to be revenue-neutral, ensuring the government doesn’t lose overall tax income while shifting the burden towards higher earners. The multilateral lender argues this change is necessary to alleviate the disproportionate tax pressure on low-wage workers, who are also facing rising levies such as a 1.5% housing tax, 2.75% social health contributions, and increased National Social Security Fund (NSSF) deductions.

These combined factors have contributed to a steady decline in real wages over the past five years. For example, average monthly wages fell from KSh 62,256 in 2020 to KSh 55,451 in 2023.

The World Bank’s analysis shows that the reform would yield marginal benefits for low-wage earners while requiring high-income individuals to contribute more. A worker earning KSh 50,000 monthly might see a slight net income rise of about KSh 179, whereas someone earning KSh 1 million could lose an additional KSh 12,100 in taxes.

Despite its limited reach, affecting less than 10% of formal-sector employees, the plan retains overall tax revenue by shifting the burden to wealthier citizens. According to the World Bank, a steeper, progressive tax curve could encourage low-income workers to transition into formal employment. This would expand the tax base over time while easing the Treasury’s fiscal challenges without further squeezing the majority of Kenyan households.

The larger question remains: Should Kenya prioritize taxing the wealthy to uplift the majority, or maintain its current growth-focused model at the expense of equity? The World Bank argues that a progressive tax structure could strike a balance, fostering inclusivity while addressing the nation’s widening fiscal gaps.

This reform marks a pivotal moment in Kenya’s economic policy discourse, one that could shape the nation’s fiscal future.