Potential Impact of Raising the Cost of Labor in our Economy

The recent proposal to introduce new taxation deductions on the employee’s payslip has been met with resistance by both employees and employers and with good reason. Any increase in taxation not only reduces the take-home amount but also directly impacts the cost of labor, as it places a financial burden on the business and can result in higher expenses related to employee compensation. Increased taxation can have a significant impact on the cost of labor, as it directly affects the financial burden borne by both employers and employees. When taxes are raised, businesses often face additional expenses, which can be passed on to workers through reduced wages, diminished benefits, or limited employment opportunities. Eventually, this raises the cost of labor and brings with it the following;

Redundancies and Downsizing due to high wage bill to employers: Businesses may see a larger wage cost when taxes rise because they must set aside more money to pay the increased tax expenses. Businesses, especially those with narrow profit margins, may feel the strain of this additional financial load. Employers may utilize cost-cutting strategies, such as personnel reductions or redundancies, in order to retain profitability. As corporations try to control costs and offset the effects of rising labor costs, these activities may result in job losses and unemployment.

Reduced earnings to employees hence affecting motivation leading to low productivity: Businesses facing higher taxation may decide to lower employee compensation or freeze salary increases in order to balance increasing tax rates and rising labor costs. Lower remuneration can impact employee motivation and job satisfaction. This in turn will affect productivity and the quality of work. Additionally, it might deter workers from making investments in their professional development and ultimately hurt productivity.

Higher level of unemployment due to high cost of wage bill by employers: Increased labor costs resulting from higher taxation can make it more challenging for businesses to hire new employees or maintain existing staff. The financial strain can result in businesses shying away from additional labor expenses, ultimately resulting in a reduction of job opportunities. Consequently, this can lead to an increase in unemployment rates as businesses opt to downsize or abstain from hiring altogether, burdened by the mounting costs of labor. Such circumstances have far-reaching implications, including decreased consumer spending and a decline in overall economic activity.

Impact on SMEs to shut down due to overtaxing: Small and medium-sized enterprises (SMEs) often operate with limited financial resources and have thinner profit margins compared to larger corporations. Increased taxation and higher labor costs can disproportionately affect SMEs, as they may struggle to absorb these additional expenses. Over-taxation, particularly on turnover, can exacerbate the financial strain on SMEs, making it difficult for them to sustain their operations and remain competitive. This can lead to closures, business shutdowns, and reduced entrepreneurial activity, impacting job creation, innovation, and economic growth in the SME sector..

Recommendations

Expand the tax bracket: Expanding the tax bracket involves broadening the tax base by increasing the number of individuals or businesses subject to taxation. This allows for a more equitable distribution of the tax burden and ensures that individuals across various income levels contribute to the nation's development. This can help generate additional tax revenue for the government, reducing the need to rely solely on labor-related taxes to fund public expenditures. The expanded tax bracket also enables the government to fund critical public services, infrastructure projects, and social welfare programs, fostering overall economic growth and societal well-being.

Innovate through infrastructure development or programs to attract more taxes: Infrastructure development can attract more businesses and economic activities, leading to increased tax revenues. By investing in utilities, transportation networks, technology, and other infrastructure projects, governments can create an attractive business environment that fosters economic growth and generates additional tax revenue. These developments create opportunities for job creation, increased production, and expanded markets, all of which lead to higher tax revenues. Tax incentives for businesses involved in research and development is a good way of encouraging them to contribute to the tax base.?

Attract more foreign investors to create a business environment and increase the number of people to be hired: The government can attract foreign investors by ensuring a favorable business environment by reducing red tape, simplifying administrative procedures, ensuring political stability, and providing investment incentives. By attracting foreign investors, more businesses are established, leading to increased job opportunities and a larger labor market, which can potentially reduce labor costs through increased competition for workers. This way, foreign businesses will be incentivized to launch businesses, expand into the Kenyan market, train experts within the country, and also hire more locals.?

Give incentives to foreign investors to set up production centers in the country and reduce high levels of unemployment: To tackle high levels of unemployment, governments can provide incentives specifically targeted at attracting foreign investors to establish production centers in the country. This way, foreign businesses will be incentivized to launch businesses, expand into the Kenyan market, train experts within the country, and also hire more locals.These incentives can include tax breaks, subsidies, grants, and streamlined regulatory processes. By incentivizing foreign investors, governments aim to boost job creation and reduce unemployment levels. With increased employment opportunities, the supply of labor expands, potentially leading to reduced labor costs as businesses have more options when hiring workers.