dc.description.abstract | The purpose of this study is to estimate income elasticity of tax structure in Kenya during the 1962/63 to 1972/73. Income elasticity of tax structure is defined as the responsiveness of tax revenue to changes in national income when the effects of discretionary changes on tax revenue have been removed. It is usually contrasted
with tax buoyancy which is a measure of the responsiveness tax revenue to changes in national income without adjusting tax revenue for the effects of discretionary changes i.e. when changes in tax rates and tax bases which might have occurred during the period
are allowed.There are two important uses of elastic tax structure namely, economic stabilization and financing of government. expenditure. However, it is the contention of this paper that the latter, is by far the most important advantage of an income elastic tax structure in developing countries such as Kenya. The biggest problem facing these countries is the achievement of rapid economic growth and development which is necessary for the improvement of the welfare and living standards of their people. The achievement of this requires that a substantial and an increasing amount of national income of the country be saved and invested. In turn, this implies active government participation in productive investment besides its traditional role of providing social services and financing the building of infrastructure because the private sector alone cannot be relied upon to marshall enough investible funds to enable the economy grow at the required rate. Hence, there has been a tendency for government expenditure in most developing countries to grow faster than the growth of national income. In turn, this calls for equally rapid
growth in government revenues governments get their revenue from tax sources as well as non-tax sources. Because of the unreliability and other short-comings of non-tax sources of revenue, it is argued in this paper that if expenditure cont. to grow, governments in most developing countries maybe forced to rely heavily on tax sources of raising revenue. Such has the implication that tax revenues ought
to grow faster than both government expenditure and national income. To ensure this, government can either rely on discretionary changes in its tax structure i.e. tax bouyancy or it can design its tax structure in such a way that it is
income elastic. The main disadvantage of tax bouyancy is that it creates uncertainty in the tax structure which in tum
is inimical to sustained growth of business and industry.
Business as well as individuals require to plan under an environment of stable and consistant tax laws which is true only when the tax structure is income elastic. Tax bouyancy also has bad psychological effects on incentives to save, work and invest. So, for all these reasons, an income elastic tax structure i-s-preferred to a tax structure that relies heavily on disrectionary changes l.e. tax bouyancy
Although the main interest of this paper was with income elasticity, we have also for the sake of comparison, made an estimate of the bouyancy of tax structure in Kenya during the same period. Tax bouyancy was estimated using a simple linear regression method. (i. e. T = a + bY) while elasticity was measured using both simple linear method (T= a + bY) and log-linear method (T= ayb) where y is national income and T is tax revenue. The result of this exercise shows that during the period 1962/63 to 1972/73, the tax structure in Kenya was income inelastic (0.81). Due to the fact that government expenditure was increasing faster than national income, the implication
is that the country could not have relied on the elasticity of its tax structure alone to finance increments in government., expenditure. To bring about rapid increases in its tax revenues it was seen that government resorted to discretionary changes in her tax structure. The observed inelasticity of tax structure on the other hand, was mostly a result of the inelasticity of
indirect taxes (0.63) which were responsible for 60% of total tax revenue. Direct taxes made up mainly of Personal Income tax and corporation tax were income elastic but only just (1.09). The inelasticity of indirect taxes was caused by the fact that the two major indirect taxes namely, excise taxes and import duties were income elastic being 0.83 and 0.66 respectively. It was found that these two taxes were income
inelastic mainly""'because of widespread use of specific instead of ad valorem taxes, low rates of tax on commodities whose rate of consumption is high as well as harrow tax bases.
To ensure that the tax structure in Kenya becomes elastic in future, the paper makes certain recommendation. In the field of indirect taxation it is recommended that
a widening of excise and import tax bases and increase of rates of tax on commodities whose consumption is expanding fast. As for direct taxes, the paper recommends a reduction in allowances of various kinds and the use of a more progressive rate structure | en |