The Relationship Between Tax Revenue and Economic Growth in Kenya
Abstract
The objective of this study was to analyze the relationship between tax revenue and
economic growth in Kenya for the period 2002 to 2012. The study applied the concepts
of elasticity and buoyancy to examine the relationship between tax revenue and economic
growth in Kenya for the period 2002 to 2012. Elasticity and buoyancy coefficients were
computed for individual taxes and the tax system as a whole. The elasticity of individual
tax taxes was decomposed into tax to base elasticity and base to income elasticity in order
to determine the major cause of high or low elasticity. The buoyancy estimates were
obtained by regressing the natural logarithms of actual tax revenue against the natural
logarithms of gross domestic product. The elasticity estimates were obtained by
regressing the natural logarithms of adjusted tax revenue against the natural logarithms of
gross domestic product. The adjusted tax revenues were obtained by eliminating the
revenue effects of discretionary tax measures from the actual tax revenue series. The
proportional adjustment method was used to remove the effects of discretionary tax
measures from the actual tax revenue. The study relied on secondary data obtained from
various statistical abstracts, economic surveys and budget speeches for the period 2002 to
2012. The study found out that there was a significant relationship between total tax
revenue and economic growth in Kenya in the period 2003 to 2012. However, import
duties were not responsive to changes in national income while discretionary tax
measures implemented during the period failed to increase total tax revenue. It was
recommended that there is need to reform the import duty and to redesign the
discretionary tax measures to ensure that they are more effective in raising additional tax
revenue.
Publisher
University of Nairobi,