Taxation and Revenue Stability in Kenya

Abstract

This study examined tax buoyancy, tax elasticity and the determinants of revenue stability in Kenya. To identify the determinants of revenue stability, this study was based on the portfolio theory. Revenue instability, the dependent variable, was regressed against revenue diversification, revenue capacity, economic base instability and the quadratic form of population using the OLS method. The proportional adjustment method was used to calculate tax elasticities of various taxes. Overall tax buoyancy was calculated using the double log method. This study found that there was no short run relationship between the revenue instability and the independent variables. Although in the long run the exogenous variables had an impact on revenue instability, only economic base instability had a significant impact. The study also examined tax buoyancy and tax elasticity in Kenya. In the long-run tax revenue in Kenya was found to be highly buoyant (3.622). However there was no short- run buoyancy. Income tax, tax on international trade, V AT, tax on other goods and services and non-tax revenue were found to be highly elastic while property tax was inelastic in the long run. The results reveal that revenue diversification does not necessarily result to improvement in revenue stability in Kenya. The results also depict that most taxes are income elastic. Thus combination of these taxes is likely to increase revenue instability in case of fluctuations in national income.