Direct taxes and economic growth in Kenya
Abstract
The purpose of this study was to investigate the causal relationship between direct
taxes
and economic growth in Kenya
, in particular to determine the nature of relationship
between corporate income, personal income taxes and economic growth.
It also aimed at
identifying
some of
the
factors
affecting
economic growth in Kenya
such as
labour and
investment. The study employed Ordinary Least Square (OLS) method in analyzing time
series data captured over the period 1970
-
2012. Granger causality test was then
performed to test for causal relationship between direct taxes and economic growt
h. The
empirical results shows that a unit increases in corporate income tax, personal income
tax, and labour force would increase economic growth by 0.93, 0.14 and 1957.4 Kenyan
million pounds respectively. I
t also found
out
that
,
a unit
increase in inve
stment would
decrease economic growth by 0.25 Kenyan million pounds. This kind of negative effect
on growth arises from investment such as foreign direct investment that receives
compensations in terms of tax holidays, rebates and utilization of a given pe
rcentage of
resources before paying taxes. The study therefore recommends that,
the Government,
with its move to the East should be more cautious to attract investments that are pro
-
growth and
pro
-
development. Pro
-
growth investments in an
economy
attract m
ore
corporate
income
taxes from corporate profits from such investments and also lead
s
to
creation
of employment that attracts personal income tax which promotes government
expenditure without borrowing
Publisher
University of Nairobi