Tax Gap And Economic Performance In Kenya

Abstract

Tax is the main source of revenue for most developing nations and development of any country is dependent on revenue generation. This is because government expenditure is dependent on the availability of revenue. In this study, the researcher sought to find out the relationship between tag gap and real GDP which is a proxy of economic performance in Kenya. Data from KNBS, the Kenya revenue authority and World Bank micro data was used and was analyzed using the Stata software. Annual time series data spanning from 1987 to 2018 will be used for analysis. Linear regression model was used to come up with autoregressive distribution lag model. The results showed that there was a significant negative relationship between the two variables. Other variables included in the model that affect real GDP include interest rates and inflation rates that affect the explained variable negatively while capital formation and employment levels cause a positive effect on the dependent variable. In conclusion, more enforcement should be put to reduce the tax gap to increase economic performance. The study will help the government adopt strong fiscal policy measures that put more efforts in increasing tax base to widen tax levels but not increasing tax burden. It will aid the KRA in the digital touch process to ensure maximization of tax revenue collection hence increase in government expenditure leading to economic development. Furthermore, it will help improve the available literature on factors that result to increase in tax gap and come up with strategies of minimizing it. Further areas for research will be proposed at the end of the study.