The Relationship Between Government Revenue and Economic Growth in Kenya

Abstract

Economies with large public sectors grow slowly because of large tax wedges but a lack of growth-enhancing government initiatives may stymie growth in countries with very small governments. Governments need to perform various functions in the field of political, social and economic activities to maximize social and economic welfare. Government revenue impacts economic growth through meeting the various governmental needs. Though all taxes have disincentive effects, taxes that reduce incentives to invest in human or physical capital and innovation are particularly damaging. The objective of this study was to determine the relationship between Government revenue and economic growth in Kenya.

The study adopted a descriptive research design. This study was a case study of one country since only Kenya was involved. The study used secondary data collected from the Central Bank of Kenya, KNBS, KIPPRA, and Ministry of Finance, Public libraries and National Budget and other Government records including import duty, excise duty, income tax and Value Added Tax (VAT) which comprised the tax revenue. In addition, the study collected data on non tax revenue. Collected data was presented using tables and figures.

The study concludes that there is an inverse relationship between economic growth and Import duty. As import duty increases the economic growth declines and vice versa. With regard to excise duty, this study concludes that as increase in excise duty slows it reduces the rate of economic growth. On Income tax, the study concludes that established Income Tax leads to continuous increase in revenue obtained by government. The study further concludes that there is a direct relationship between Income tax and economic growth. The study concludes that increase in VAT leads to positive effects on the rate of economic growth. Regarding Economic Growth, the study concludes that there has been an increase in the Economic Growth in Kenya over the years. However, the study concludes that the rate of economic growth has been gradual.