The Effects of Tax Incentives on Economic Growth in Kenya

Abstract

Due to limited private investment and financial resources in developing nations, governments resort to the use of fiscal policies such as tax incentives to boost economic growth. Despite the implementation of tax incentive policies, these measures have failed to boost economic growth and instead slowed it. The study sought investigate the effect of tax incentives on economic growth in Kenya. Specifically, the study aimed to determine the impact of tax incentives on economic growth and to establish the existence of ta long-run and short-run relationship between tax incentives and economic growth in Kenya. The hypothesis of the study was tested using secondary timeseries data spanning from 1980 to 2020. Data on tax incentives (investment allowance and accelerated depreciation) was sourced from the Global Revenue Statistics Database, while for the other variables, it was sourced from the International Monetary Fund database, the Penn World Table 10.0, and the World Bank development Indicators. By estimating the Autoregressive Distributed Lag Model, the results indicated that investment allowance exerted the most significant impact on economic growth, resulting in an average rise of 6.2 percent in both the short run and the long run. Accelerated depreciation contributed to a long-term increase in economic growth by 1.5 percent. Assessment of the long-run and short-run effects of tax incentives indicated that accelerated depreciation and investment allowance was found to have a positive impact on long-term economic growth, resulting in an increase of 1.5 percent and 5 percent, respectively. In the short run, investment allowance had a significant negative impact on economic growth, reducing it by 7.3 percent. Based on the findings, it is recommended that the Kenyan government prioritize the utilization of macro-fiscal investment incentives as a strategic approach to foster economic growth. Additionally, automation of granting incentives is highly recommended in addition to prioritize increased investment in equipment allowance