The Effects Of Tax Reforms On Tax Productivity In Kenya

Abstract

The key role of tax reforms in Kenya was to ensure that the tax systems put in place could achieve revenue mobilization and reduce fiscal imbalances persistent in Kenya. This was to be achieved through tax laws and policies intended to facilitate responsiveness of individual and overall tax system to national income. This study evaluates tax revenue productivity in Kenya for the period 1973 -2003. The productivity is measured through buoyancy and elasticity. The coefficients are measured through log regression of the taxes to the Gross Domestic Product. The analysis of this study was carried out using the Proportional Adjustment Method (PAM) that was considered appropriate due to its superiority in capturing the effects of tax reforms on discretionary tax measures and tax productivity. The analysis shows that there has been a considerable improvement of the tax revenue productivity and that the reforms made in this period had significant effect on the responsiveness of the tax system. Thus, the 1986 Tax Modernization and 1987 Budget Rationalization programmes had a positive impact on the Kenya's tax productivity especially on income and import taxes. The findings reveal that reforms had greater impact on the elasticity than buoyancy. This implies that the growth in tax revenue during the reform period was accounted for by the automatic changes rather than the discretionary policy. This study notes that the most rigid tax system was VAT. The empirical analysis indicates that reform raised the productivity of the tax system with the exception of the sales tax/VAT. This implies that significant review and rationalization of the rates under VAT is also important. Further improvements are required in the area of reduction of rates and exemptions, and increasing VAT administration capacity through a higher budgetary outlay.