Regressive tax reforms and economic welfare in Kenya

Abstract

This study discussed some recent critical literature on value-added tax (VAT) in Kenya relating to its contributions to economic growth rate. The study employed the tools of quantitative empirical analysis technique to evaluate the contribution of VAT for the economic growth rate of Kenya economy. The first objective was to examine the effect of VAT reforms on economic growth rate. The tools of empirical analysis used are multiple regression models as abstractions of the respective sectors considered in the study and also descriptive statistics. The study considered a vector of economic development indicators as dependent variables and regressed each on GDP per capita growth rate. Moreover, in order to make clear decision and summarize the study, the inclusion of all factors that affect GDP were regressed. The fiscal authorities in Kenya introduced series of reforms in the tax system ranging from continual revisions in tax rate to harmonization and instituting new tax reforms that are relatively easy to administer. Despite these measures, the GDP growth rate per capita has not responded to the changes in the reforms of the tax system. This study examined the effect of the tax system in Kenya and its major handles using annual data covering the period between 1983 and 2013. The Singer method of dummy variables was employed in order to make adjustment for the effect of discretionary tax measures. The empirical results indicated that GDP growth per capita were positively related to increase in VAT revenue collected and the regressive tax reforms that were made during the period under study. Moreover, in order to make clear decision and summarize the study, factors that affect GDP per capita growth were considered and regressed together with VAT revenue on GDP per capita. The analysis showed that, except exchange rate, all the other variables i.e. inflation rate, trade balance, real interest rate and foreign direct investments affected the GDP growth rate per capita positively. The analysis showed that regressive tax reforms revenue had a considerable contribution for the improvement of the welfare of citizens under the period of study for their inclusion in the VAT model resulted to be significant. Therefore, value added tax as a measure of indirect taxes is the most effective tax to introduce the reforms. It is the most effective source of generating income for enhancing economic growth in Kenya. Therefore the State should impose more VAT reforms to sectors in which VAT had contributed the least as compared to other economic variables considered in the study. Although the other factors contributed positively to the GDP growth rate, the effects of such contributions were statistically insignificant only exchange rate as a factor that influences GDP. This makes it necessary for increased policy reforms to such sectors where the contribution effects were insignificant.