Tax revenue implications of macroeconomic variables in Kenya: 1970-2005

This study examines the impact of microeconomic variable to tax revenue levels in Kenya using time series data for the 1970-2005 period. It analyses the key sources of tax revenue and, using suitable instrumental variables, establishes that there is incidentals relationship between tax revenue and its determinants. Other empirical works find that the level of taxation is significantly affected by macroeconomic variables and the way in which investment is financed. However, estimates of the magnitude of these effects of taxation are varied. The results of this study indicate that tax revenue growth depends on macroeconomic variables and social factors which include education and population. Furthermore, the results suggest that Kenya can increase her tax revenue level by reducing tax evasion and interest rates. The policy implications that emerge from the study include the need to: modernize agriculture and expand the formal sector in order to broaden the tax base; design the tax system in such a way as to make taxpayers more compliant in order to reduce tax evasion; put in place measures to empower small and medium enterprises so as to encourage people to save; encourage technical education so as to increase the size of sectors which will expand the tax base; and finally increase investor confidence by strengthening government institutions. This study suggests that further research on taxation may consider incorporating the effects of administrative capacities and tax regime changes. Such research could also usefully incorporate equality considerations and such non-tax aspects of international legal and regulatory decision making as the availability of skilled labor, infrastructure and legal and regulatory environments.