Impact of Taxation on Economic Growth in Kenya

Abstract

Impact of taxation on economic growth is a big area of interest for policymakers and tax specialists, which has also piqued the interest of researchers and academics over the years. Objective of the study was to identify the impact of taxation on economic growth in Kenya. The theories that guided this study were the endogenous growth theory and the optimal tax theory. The study used a longitudinal research design in determining the impact of taxation on economic growth in Kenya. Secondary data was used for the years 1970 to 2020, a period of 51 years. The analysis was done by use the of SPSS. To identify the level of association of the study variables, the study employed regression analysis. The results from the regression coefficients show that money supply and FDI had a significant positive impact on growth of the economy. However, trade showed a negative and significant impact on the growth of economy. On the other hand, Inflation and public investment had an insignificant positive impact on economic growth. The results further showed that taxation had a negative but insignificant impact on economic growth similar to interest rate. The study concludes that money supply and foreign direct investment has a positive and significant impact on growth of the economy. It also concludes that trade has a negative impact on economic growth. On the other hand, the study concludes that taxation, public investment, inflation, and interest rate has an insignificant effect on growth of the economy. The study recommends policies that would increase money supply and FDI while reducing restrictions to trade.