Revenue Effects of Tax Reforms, Economic Growth and Political Environment in Kenya

Abstract

This study investigated the effect of tax reforms, economic growth and political environment on total tax, direct tax and indirect tax revenues using annual data for the period 1964-2016. Various techniques of analysis were employed: descriptive statistics, multi-segment regressions and non-linear regression. Results show that: all taxes responded positively to each of the tax reforms; changes in all taxes were affected by the reforms because GDP was also growing; economic growth has positive significant effect on all the categories of taxes; Government effectiveness has positive impact on indirect taxes; and that even though government control of corruption effect on tax revenues is statistically insignificant, it could promote the revenue generation more than economic growth. These findings have a number of policy implications: the government should put more emphasis on governance in order to promote revenue collection. Government effectiveness and control of corruption would go a long way to enhance tax compliance, reduce tax avoidance and evasion, eliminate illicit flows and reduce illegal collusion between tax payer and tax administrator that may deprive government of due revenues.  Secondly, government must work towards designing and implementing in the reforms that make the tax system more buoyant, and link it more to economic growth.

Key Words: Tax Revenues; Tax Reforms; Economic Growth; Governance/political environment; Budget Deficit; Public Debt.