The Relationship Between Macro-economic Factors and Tax Collection: the Case of Kenya Revenue Authority

Abstract

Kenya Revenue Authority (KRA) collects more than 95% of all government revenue. Through taxation, government is able to raise revenue that is sufficient for public spending without too much borrowing. Tax revenue may be affected by various factors such as inflation, unemployment, tax rates, level of actual income and foreign direct investment. A number of studies have been done in Kenya as far as tax collection is concerned but still we are not effective thus the study was meant to identify if macro-economic factors affect tax collection in KRA and if so what is its relationship and level of significance. The study was based on descriptive case study method. Quarterly data from 2005-2014 was collected using secondary method then was coded and entered into Statistical Package for Social Sciences (SPSS, Version 22.0) for analysis. From the research findings, the amount of tax collected has been on an upward trend since 2005-2014. The rate of Inflation has been fluctuating longitudinally since 2005 with the highest inflation rate in the second quarter (April- June) of 2008. FDI was significantly high in the year 2005 and 2014. The rate of unemployment maintained a plataeu state till 2009 when the increase became exponential. There was continuous increase in the level of disposable income since 2005-2014. From the study we can conclude that the rate of unemployment has high level of significance as opposed to other variables. Rate of inflation comes second whereas level of disposable income and FDI comes third and fourth respectively as shown by the equation; Y= -6.847+ 1.470(ROI) + 0.0000(FDI) +0.168(LDI) + 15.012(ROU). The researcher recommends that the rate of unemployment be reduced. Policy makers should come up with policies to control the inflation rate in Kenya since it negatively affects tax collection. The limitations the study encountered was that the ten year period data was not long enough to take into consideration the prereform periods. Further research should be done on other macro-economic factors like GDP and corruption since the ones mentioned in the study are not the only factors affecting tax collection. The study focused on overall tax collection and not on specific type of taxes.