When Kenyan President William Ruto recently announced a proposal to exempt workers earning up to KSh 32,333 a month from Pay As You Earn (PAYE) income tax, he raised an important question for governments across the region: how can tax policy help low-income workers cope with rising living costs?
The proposal, which is still subject to the legislative process, is intended to leave more money in the pockets of workers earning modest incomes. For households struggling to cover food, housing, transport and other essential expenses, even a relatively small increase in take-home pay can make a difference.
Ethiopia has a similar question to consider. How effectively does its tax system protect low-income workers, and what further measures are needed to ensure that people who work can meet their basic needs?
Kenya’s proposal offers a useful starting point for this discussion. But the lesson is not simply that Ethiopia should copy another country’s tax policy. It is that tax relief should be assessed in relation to workers’ actual earnings, their tax obligations and the cost of living. Reducing taxes can help, but the benefits depend on who receives the relief and whether the additional income is sufficient to improve household welfare.
What Kenya’s Proposal Means for Ethiopia
Kenya’s proposed exemption would raise the amount of monthly employment income that workers can earn before paying PAYE tax to KSh 32,333. Under the existing system, the first KSh 24,000 of monthly income is subject to a 10 per cent tax rate, alongside a personal relief arrangement. The proposed changes would alter this treatment, although their final impact will depend on the legislation adopted.
The proposal reflects a policy choice to reduce the tax burden on lower-income earners while adjusting the wider tax structure. Its significance lies in the recognition that taxation affects workers’ disposable income and their ability to meet household expenses.
Ethiopia has also revised its employment-income tax system. Income Tax Amendment Proclamation No. 1395/2025 increased the monthly employment-income tax-exempt threshold from 600 birr to 2,000 birr and adjusted the income-tax brackets.
This change provides tax relief to workers whose earnings fall within the revised brackets. However, its effect must be considered against the level of wages and the cost of essential goods and services. A higher tax-free threshold can increase take-home pay for workers who would otherwise pay tax on the exempt portion of their earnings. Yet the benefit may remain limited when wages are low and household expenses are high.
The relevant question, therefore, is not simply whether Ethiopia has introduced tax relief. It is whether the relief is sufficient to protect workers with modest incomes and whether the broader tax system distributes the burden fairly.
Kenya’s proposal provides an opportunity for Ethiopian policymakers, trade unions and researchers to examine these questions more closely.
Tax Relief Can Help, but Who Benefits?
Tax relief is an important policy instrument because it allows eligible workers to retain a greater share of their earnings. When the cost of living rises, reducing the tax burden can provide some immediate breathing space for households.
However, the benefits are not the same for everyone.
Workers who pay income tax may gain from a higher tax-exempt threshold or lower tax liability. But workers whose earnings are already below the taxable threshold may receive no direct benefit from a further exemption. They may be among those facing the greatest financial difficulties, yet changes to income tax alone may do little to improve their circumstances.
This distinction matters for Ethiopia, where workers’ earnings vary considerably across sectors and occupations. A tax measure that benefits formal-sector employees who pay income tax may not directly assist workers who earn too little to be taxed. It may also fail to reach people in informal employment who do not benefit from the same arrangements as formally employed workers.
Tax policy should therefore be assessed in terms of its actual impact on different income groups. Policymakers need to consider how many workers benefit, how much additional income they retain and whether that gain meaningfully improves their capacity to meet essential expenses.
The aim should be to design a tax system that provides meaningful relief to low-income earners without overlooking those whose earnings are already too low to generate a direct tax benefit.
Lower Prices Do Not Always Mean Greater Affordability
The discussion of tax relief also connects to a wider question about how Ethiopia measures the cost of living.
Government officials have at times highlighted Ethiopia’s relatively low prices for selected services, including electricity and water, as well as measures to subsidize fuel. Such interventions can reduce household expenses and should be recognised when assessing economic policy.
However, a comparison of prices alone does not provide a complete picture of affordability.
A litre of fuel may cost less in Ethiopia than in a neighbouring country. But if workers in that country earn substantially more, they may find it easier to afford the same quantity of fuel. What matters is not only the price of a product, but also the income available to purchase it.
One way to assess this relationship is to calculate how many hours a worker must work to afford a litre of fuel or another essential item. This approach can provide a more meaningful comparison of purchasing power than nominal prices alone.
Ethiopia could use this method to examine the relationship between wages and the prices of fuel, electricity, transport, food and other necessities. Such an assessment would require reliable, comparable data on prices, earnings and working hours.
The point is not to dismiss subsidies or lower utility tariffs. These measures can provide genuine relief. Rather, their benefits should be evaluated alongside workers’ earnings and the overall cost of living.
The same principle applies to taxation. A reduction in tax liability may increase take-home pay, but its practical value depends on the amount saved and the expenses that income must cover.
Economic protection should be assessed not only by how much essential goods cost, but also by whether workers can afford them with the income they earn.
Tax Relief Cannot Replace Fair Wages
Tax relief and fair wages serve different purposes. Tax relief reduces the amount of income tax eligible workers pay, while wage policy addresses the level of earnings workers receive for their labour.
For a worker who pays income tax, a reduction in tax can increase disposable income. But if the wage itself is inadequate, the additional amount may not be enough to cover basic expenses. For a worker who pays no income tax because their earnings are already below the taxable threshold, further tax relief may provide no direct financial gain at all.
This is why tax reform should be considered alongside wage policy. Improving take-home pay is valuable, but it cannot by itself guarantee that workers earn enough to maintain a reasonable standard of living.
Ethiopia’s Labour Proclamation No. 1156/2019 provides for the establishment of a Wage Board comprising government, employer and trade union representatives, together with other relevant stakeholders. The Board is intended to help determine and periodically revise minimum wages based on economic development, labour-market conditions and other considerations.
Making this mechanism operational would provide an institutional foundation for evidence-based minimum-wage determination. It would also create a formal process through which workers’ needs, employers’ circumstances and broader economic conditions could be considered.
Tax relief and a national minimum-wage system should not be viewed as competing policies. One concerns the share of earnings workers retain after tax; the other concerns the minimum level of remuneration covered workers should receive. Both can contribute to improving living standards when designed and implemented effectively.
Building a Fairer and More Effective Policy
For Ethiopia, the policy challenge is to combine tax reform with measures that address low earnings and the cost of living.
First, the government should assess the effects of the revised employment-income tax thresholds on workers across different income groups. Such an assessment should examine the amount of tax saved, the number of workers who benefit and the extent to which the relief improves disposable income.
Second, tax policy should be considered alongside reliable evidence on household expenditure and purchasing power. Comparing Ethiopia’s prices with those of other countries can be informative, but comparisons should also take account of differences in wages and income. This would help policymakers determine whether lower nominal prices translate into meaningful affordability for workers.
Third, the Wage Board provided for in the Labour Proclamation should be operationalised, with meaningful participation by government, employers and trade unions. Its work should be based on transparent criteria, credible economic and household data, regular reviews and effective enforcement.
Finally, social dialogue should play a central role in shaping these policies. Trade unions can contribute evidence about workers’ earnings and living costs, while employers can provide information about productivity, employment and the capacity of different sectors to pay. Government should use this engagement to develop policies that protect workers without ignoring the wider economic conditions in which businesses operate.
These measures would help move the debate beyond isolated tax changes towards a more comprehensive approach to workers’ economic security.
Beyond Tax Cuts: Protecting Workers’ Purchasing Power
Kenya’s proposed income-tax exemption is a timely reminder that tax policy can play an important role in protecting low-income workers. By allowing eligible employees to retain more of their earnings, governments can help households manage their expenses.
But tax relief is not a complete solution to low wages or the rising cost of living. Its benefits depend on workers’ tax liabilities, the amount of income they earn and the prices they face. Those who already pay little or no income tax may need other forms of support, including fairer wages and stronger labour protections.
Ethiopia has already revised its employment-income tax thresholds. The next step is to assess the practical effects of that reform while strengthening the policies and institutions needed to improve workers’ living standards.
That means looking beyond nominal prices and tax rates to the relationship between earnings and essential expenses. It also means turning the legal provision for a Wage Board into a functioning mechanism for evidence-based minimum-wage determination.
The objective should not be to choose between tax relief and fair wages. It should be to ensure that workers retain a reasonable share of their earnings, receive fair remuneration for their labour and can afford the necessities of life.
Tax relief can put more money in workers’ pockets. Fair wages and sound economic policies must help ensure that the money they earn is enough to live on.
