The effect of value added tax on economic growth in Kenya

Abstract

The study’s objective was to determine the effect of value added tax on economic growth in Kenya. The research design adopted in this study was causal study. The target population for this study consisted of the quarterly reports on the state of the Kenyan economy in relation to productivity as measured by Gross Domestic Product (GDP), consumer prices as measured by consumer price indexes (CPI), and employment as measured by the unemployment rate, from the inception of VAT as administered by Kenya Revenue Authority (KRA) from 1990 to 2014. This study used secondary data which consisted of VAT rates, gross domestic product growth rates, consumer price indices and unemployment rates which were obtained from Kenya Revenue Authority (KRA), International Monetary Fund (IMF), Kenya National Bureau of Statistics (KNBS) and The World Bank data bases respectively, for the study’s period as this period is representative and long enough to capture the responsiveness of changing VAT rates. With regard to the effect of VAT rates on economic growth as measured by GDP, the findings indicated that a percent change in the incident rate of GDP is an increase of 7% for every unit decrease in VAT. It can therefore be concluded that there exists a significant negative relationship between VAT rates and GDP; hence the researcher recommended that KRA should strive to reduce and/or maintain a low VAT rate in order to increase overall GDP. As regards the effect of VAT rates on economic growth as measured by CPI, the findings indicated that a percent change in the incident rate of CPI is an increase of 9.2% for every unit increase in VAT. It can therefore be concluded that there exists an insignificant positive relationship between VAT rates and CPI; hence the researcher recommended that KRA should strive to reduce and/or maintain a low VAT rate in order to maintain low levels of inflation (CPI) within the economy. With regard to the effect of VAT rates on economic growth as measured by unemployment rate, the findings indicated that a percent change in the incident rate of unemployment rate is an increase of 1.2% for every unit increase in VAT. It can therefore be concluded that there exists a significant positive relationship between VAT rates and unemployment rate; hence the researcher recommended that KRA should strive to reduce and/or maintain a low VAT rate in order to maintain low unemployment rates within the economy.