Effect of Tax Policy Reforms on Revenue Collection in Kenya

Abstract

Taxation is the main government revenue source in almost all jurisdictions. Due to its significant function, taxes have been employed to accomplish two objectives. One is that taxes are used to raise adequate money to pay for government spending without having to borrow extensively. Second, it is used to generate revenue in an efficient and equitable way with little harmful economic consequences. To increase revenue for public financing and widen the tax base, several tax systems around the globe have undergone reforms. Tax policy reforms are anticipated to positively influence on the revenue collected. The research objective was determining the effect of tax reforms on Kenya’s revenue collection. The study was based on optimal taxation theory, ability to pay theory and economic deterrence theory. The independent variable was tax reforms while the control variables were interest rate, inflation and unemployment rate. The dependent variable the research endeavored to describe was the revenue collection in Kenya. The data was obtained on a quarterly basis for ten-year duration (Jan. 2012 to Dec. 2021). A descriptive research technique was applied in the research, with a multivariate regression model utilized in examining the link between the research variables. The research findings resulted in 0.479 R-square, signifying the selected independent variables could account for 47.9% of revenue collection in Kenya, while the other 52.1 percent was as a result of other factors not explored in this research. The F statistic was significant at a 5% extent possessing a p=0.000. This indicates the model was effective in describing revenue collection in Kenya. Further, the findings demonstrated that higher tax reforms yields a substantial rise in revenue collection in Kenya while unemployment rate negatively affects revenue collection. Interest rate and inflation did not possess significant effect on revenue collection. The research recommends that there is need to manage tax reforms and unemployment rate since they have a major impact on revenue collection. The research further acclaims the necessity for future researchers to conduct a study for a longer period of time to capture the effects of economic cycles like recessions and booms.