Tax Reforms and Revenue Productivity in Kenya

Abstract

An appraisal of the fiscal structure analysis in Kenya reveals a very large imbalance between government revenue and expenditure which has over the years resulted in large and chronic fiscal deficits. This persistent fiscal deficit has greatly hampered government performance in its primary objectives of provision of public goods and services and also in funding of both the recurrent and development expenditures. Under this threat of fiscal crisis, many developing countries have had to make projections of additional revenue that can be realized within the existing tax structures. These projections indicate the need to activate additional means of revenue generation. Tax reforms have been the agenda of many developing countries. This study, therefore, sets to establish the implication of tax reforms on revenue productivity for the period 1990-2010 in Kenya using elasticity and buoyancy models. Proportional adjustment method (PAM) was used due to its superiority in adjusting tax revenue figures in order to estimate elasticity. Empirical findings suggest that for the period under study, the Kenyan tax system was in general not productive despite several reforms and measures undertaken. This is highlighted by buoyancy and elasticity less than unity for all taxes except for excise duty. VAT and direct taxes were the mostly affected by reforms as the difference between elasticity and buoyancy was above 0.2