The causal effect between Tax Revenue and economic growth in Kenya

Abstract

The rapid-sporadic growth in government expenditure in Kenya has triggered concerns among policy makers on the repercussion of such growth on tax collection and the effect on the long run economic growth. The study sought to explore the relationship between tax revenue and economic growth in Kenya. The specific objectives were to; establish the causal effect between PAYE, corporation tax, value-added tax, and excise duty on economic growth in Kenya. The study was anchored on the dynamic theory of public spending, taxation, and debt, the benefit theory, ability to pay theory, neo-classical theory of growth and endogenous growth theory. The causal research design was adopted in the study. The study used secondary data that was obtained from the Central Bank of Kenya and the Kenya National Bureau of Statistics for the period 1989 to 2019. Time series analysis technique was adopted to determine the relationship between tax revenue and economic growth. The findings revealed that independently (β=1.198204, P=0.0011) and jointly (β=21.81471, P=0.0416), PAYE had a positive and significant relationship with economic growth. Results also indicated that independently ((β =1.180804, P=0.0008) and jointly (β=22.50137, P=0.0339), corporation tax had a positive and significant relationship with economic growth. Results further revealed that independently, value-added tax had a positive and significant relationship with economic growth in Kenya (β =2.823958, P=0.0011). In addition, the findings showed that independently, excise duty had a positive and significant relationship with economic growth in Kenya (β =2.423642, P=0.0040). The study concluded that tax revenue contributes significantly towards enhancing economic growth in Kenya. The study recommendation is that the government of Kenya should strengthen tax policies, which is likely to increase revenue collection. The study also recommends that the government of Kenya should make structural adjustments to value-added tax and excise duty related policies, to ensure that there is adequate collection of taxes from these channels since there are less inconvenient and burdensome to the taxpayer since they are incorporated on the price of commodities and are not paid in lump sum like direct taxes and the taxpayer may not feel the burden of the tax since the obligation to collect and remit is placed on third parties. Further, consumption taxes (VAT & Excise tax) have a wider tax base which is paramount in ensuring equitable distribution of the tax burden on the target population.