A determination of the relationship between tax collected and financial repression in Kenya

Abstract

The hypothesis of financial repression emphasizes a situation where the government limits access to funds in repressive systems. It involves laws, regulations, restrictions and taxes imposed by the government to disallow financial institutions from operating at their full capacity. In a repressed economy, the government has at its disposal huge resources to fund expenditure while the rest of the economy scrambles for meager resources left. The objective of this study was to determine whether there is a relationship between tax and financial repression in Kenya. The study employed the use of descriptive study design where descriptive statistics was used. The study used secondary data from Central Bank of Kenya covering the period from 2007 to 2012 and the analysis done through regression and correlation analysis using SPSS software. The study found that the tax base in Kenya is broad with tax collection growing at over 15 per cent per year – with over 70 per cent of domestic income being generated from taxation. It also established that financial repression is a factor of tax in the country with tax collection being affected by multiple factors including interest rates, bank reserves, credit allocation and exchange rate movements. The study therefore concluded that there is a positive relationship between tax and financial repression, though taxation in Kenya is not a sufficient factor to generate financial repression on its own.