With the introduction of housing levy charged at 1.5 percent of the gross salary on top of the Social Health Insurance Fund (SHIF) at a rate of 2.75 percent, the share of deductions on the payslip has seen disposable income shrink by a big margin.
For instance, with the housing levy and now SHIF, those employees whose salaries ranged between Sh100,000 to Sh1 million now part with Sh27,665 to Sh351,282 from Sh25,115 to Sh310,482.
Notably, only 3.3 million Kenyans are in formal employment compared to 16.7 million in the informal sector.
This implies that the burden of deductions that is Pay As You Earn (Paye), housing levy, SHIF and NSSF falls heavily on the salaried workers primarily in the formal sector.
As a result, disposable incomes have reduced, thus eroding the purchasing power of consumers.
In one of the interviews with the executive director of Federation of Kenya Employers, she noted: “The enforcement of the housing levy and the SHIF, alongside Paye, has placed an increased financial burden on both employers and employees. Our members report that this has reduced disposable incomes for workers significantly dampening consumer spending.”
While President William Ruto holds the view that increased taxes could improve delivery and quality of public services, amidst funding the ballooning public debt, the tax-to-gross domestic product (GDP) ratio has fallen, indicating that more Kenyans are withholding their money.
This is in tandem with the impact of Laffer Curve — an economic theory that shows the relationship between taxes and revenue.
Incentive to work
It explains that when taxes go beyond a particular point, people’s incentive to work and pay up reduce.
While Paye collections rose by 9.8 percent to Sh543.19 billion from Sh494.9 billion, upwards revisions of Paye saw payslip contract by Sh40,800 for those earning Sh1 million.
