The proposal by Uganda’s policy makers in the finance ministry to raise Shs4.8 trillion through new taxes on fuel, sugar, and high-income earners is a reflection a pressing fiscal reality: the need to strengthen domestic revenue. But the structure of these taxes risks undermining the very development goals the country seeks to achieve.
At the core, the policy prioritizes revenue mobilization. But sound tax policy must balance revenue with growth, equity, and macroeconomic stability. In this case, those priorities appear misaligned.
Fuel taxation illustrates the contradiction. Fuel is a foundational input across agriculture, manufacturing, and transport. Raising its cost increases production expenses economy-wide, ultimately weakening competitiveness. For a country pursuing industrialization, this creates a policy tension, promoting growth while simultaneously taxing its key drivers.
The same concern applies to higher taxes on essential goods like sugar and cooking oil. These are not luxury items but household staples. Their taxation disproportionately affects low-income earners, introducing regressive effects into a policy that otherwise attempts progressivity through higher taxes on top incomes. The modest relief offered through adjustments to income tax thresholds is unlikely to offset rising living costs.
Macroeconomic implications are equally important. Fuel and food-related taxes are inherently inflationary, with effects that extend beyond individual goods into the broader economy. As prices rise across supply chains, the result may conflict with efforts to maintain price stability.
There is also a structural concern: informality. Uganda’s tax base remains narrow, and increasing the burden on compliant taxpayers may push more activity into the informal sector. This would weaken long-term revenue collection and institutional capacity.
While the introduction of capital gains and property taxes improves fairness, their timing raises questions. Uganda continues to compete for investment, and higher taxes on capital may discourage both domestic and foreign investors at a critical stage of economic transformation.
None of this diminishes the importance of domestic revenue mobilization. However, the composition of taxation matters. A system heavily reliant on consumption taxes, particularly on essential goods, may generate short-term gains while constraining long-term growth.
Uganda’s policy challenge is not simply to raise revenue, but to do so in a way that supports its broader economic strategy. Without better alignment, these reforms risk becoming counterproductive. A rethinking through these proposals is urgently needed or they risk suffocating critical investments necessary for broader macroeconomic goals.
By Michael Kaluya, Ph.D.
Author is a Professor of Economics in Dallas, TX
