Macroeconomic determinants of Tax Revenue Share in Kenya

Abstract

Kenya's fiscal structure reveals that government expenditure and revenue have maintained consistent growth patterns with expenditures always exceeding revenues. The imbalance between revenue and expenditure results in largefiscal deficits. Even after undertaking tax reforms the taxes have not been as productive as desired. A poor tax performance, in terms of raising revenue can either mean deficiencies in tax structure or an inadequate effort on the part of the government, both of which are influenced by various factors. The main objective of this study was to establish the macroeconomic determinants of tax revenue shares in Kenya for the period 1970-2005 especially the economic development and structural factors. The study is important because an ability to monitor the economic and structural changes and their impact on tax revenue is crucial to the financial stability of a nation.

The study has utilized a model of tax effort that was used by Teera (2002) in establishing the determinants of tax revenue share in Uganda. Annual time series data for the period 1970-2005 has been used. The study has employed Ordinary Least Squares (OLS) method to estimate the long-run cointegrating equation and also the short run error correction model.

The estimated long-run results indicates that tax revenue share in Kenya is determined by the level of per capita income, imports, agriculture, manufacturing, external debt and trade liberalization. In the short run, only variables of manufacturing, terms of trade and tax reform are significant.

The main policy implications derived from the study are: that possible future direction of policy in Kenya lies on the above variables that determine the tax revenue share and hence policies should be formulated to influence their impacts. Of particular importance is for the government to use appropriate taxation policies to ensure that fax revenue productivity from imports is always positive.