An Empirical Assessment of Buoyancy and Elasticity of the Kenyan Tax System: 1973 - 2003

Abstract

One of the most significant dynamics impacting on Kenya's public revenue is the issue of taxation. Taxation is essentially concerned with restructuring the balance between current consumption and current investment, transfer purchasing power from one section of the community to another, besides raising revenue for national development. It thus becomes essential to monitor the progress of tax revenue in relation to changes in the Gross Domestic Product. The purpose of this study was to empirically analyse the likely behaviour of tax receipts in relation to changes in the tax base in Kenya, taking into account both the automatic and discretionary changes over a period of 30 years. It emphasizes that both buoyancy and elasticity are key analytical tools for designing tax policy and serve to explain the overall tax structure. The study used the Proportional Adjustment method for data analysis because it yielded better estimates of tax elasticity than the Divisia Index method, Dummy Variable approach me.th~od, or the Constant Rate Structure which required disaggregated data. The findings of the study revealed an elasticity estimate of 0.82, which is less than unity, indicative of an inelastic tax structure. It is also a pointer that incomes could be lagging behind GDP growth. Buoyancy estimates on the other hand were 1.0, which is an optimal or fairly buoyant rate. Policy recommendations based on these findings amongst others include reviewing the tax bases, limiting .exemptions in consumption policies and evaluation of non- tax policies that have impacts on bases such as GDP, interest rates, consumption, imports and inflation. The overall macro-economic environment could be improved through increased standards of literacy, predominant money economy, prevalence of honest and reliable accounting system, degree of voluntary compliance and a political system not dominated by wealthy groups who are acting m their own self interest.