The relationship between corporate tax and investment in Kenya

Abstract

Empirical research and theory on the relationship between taxes and investment indicate that taxes are a key matter for the decision of enterprises on where and how much to invest. The aim of this study was establishing the relationship between investment rate and corporate tax rate in Kenya. This study was a descriptive time series correlation study with investment rate as a percentage of GDP as the dependent variable and total corporate tax as the independent variable. Regression analysis was used to find the relationship between corporate tax and investment rate. The data used covered the period 1993 to 2012. Secondary data was used in the analysis. The data included the annual values of GDP in Kenya, the annual values of investment and the annual rates of corporate tax. The data was electronically collected from the Kenya National Bureau of Statistics, from the International Monetary Fund and from the United Nations Statistics Department. The findings of this study indicated that the relationship between corporate tax and investment rate in Kenya was positive, but weak, meaning that the variation in investment rate was not strongly explained by variation in total tax. It was concluded that there are other factors other than taxation rate that have a bearing on investment, and the government of Kenya should therefore not focus on corporate taxation as a strategy to attract or stimulate investment. The study recommends that other non-corporate tax factors should be used to control investment in Kenya; if these factors are investigated and identified, they will provide a useful insight in their control in a manner to improve investment in Kenya.