The trade-off between tax revenue and seigniorage revenue in financing fiscal deficits in Kenya, 1974-2003

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University of Dar es Salaam
The subject of seigniorage and tax smoothing has generated a lot of interest in developing countries in recent years especially in the presence of persistent fiscal deficit problems. The main argument has been whether governments in these third world countries have a seigniorage incentive in an attempt to reduce the distortionary costs associated with conventional taxes and at the same time finance the fiscal deficit. This study applies modem time series econometric techniques such as exploratory data analysis and cointergration analysis on time series data in the period between 1974 and 2003 to investigate whether there is any evidence of tax smoothing. It attempts to establish the nature of relationship between seigniorage, tax revenue and fiscal deficit. Based on the empirical findings of this study, the main conclusions are that there is a substantial evidence of tax smoothing in Kenya where both explicit and implicit tax rates, namely tax rate and inflation respectively, are proved to be random walk processes. There is also evidence of a complementary relationship between tax revenue and seigniorage in the sense that they move in the same direction which further implies that tax rate and inflation are jointly used as tools for revenue correction which reduces the distortionary effects of each. Further fiscal deficits are seen to drive both seigniorage and tax revenue. The main policy implication is for the government to start taking account of both revenue and efficiency objectives of taxation when creating money. It is also imperative for the government to develop a seigniorage policy which considers the optimal taxation principles not only to raise funds in times of crisis but also to supplement the domestic revenue.
Available in printed form, East Africana Collection, Dr. Wilbert Chagula Library, Class mark (THS EAF HJ9111.T34 K34)
Tax administration, Revenue, Public finance
Kamande, M.W (2005) The trade-off between tax revenue and seigniorage revenue in financing fiscal deficits in Kenya, 1974-2003.Master dissertation, University of Dar es Salaam, Dar es Salaam.