Moderating influence of technology adoption on the relationship between trade liberalization and tax performance in Kenya

Abstract

Tax revenue is a major source of government revenue all over the world as it aids the government in the maintenance of political, social and economic objectives. However, based on the recent tax collections, it is evidenced that the tax revenues in Kenya are underperforming primarily because of tax administration. Due to this conceptual gap, the study examined the moderating effect of ICT usage and trade liberalization on government tax revenues in Kenya. The study had the following objectives; to assess the effect of trade openness on government tax revenues in Kenya; to establish the impact of international trade on government tax revenues in Kenya; to determine the effect of foreign direct inflows on government tax revenues in Kenya; and to moderating effect ICT usage on trade liberalization and government tax revenues in Kenya. The study was underpinned by the theory of public finance and public choice and the theory of competitive advantage. The study adopted an explanatory research design and used secondary data sources from the Kenya National Bureau of Statistics (KNBS) and the Central Bank of Kenya and UN Comtrade as the sources of information. The researcher used secondary data that span 32 years from 1990 to 2021 because of the sampling adequacy for the regression modelling. Data was analysed descriptively and inferentially before it is presented in tabular format. The descriptive statistics showed that the tax revenues on consumption have grown from 85% in the 1990s to 90% of government tax revenue in 2021 while non–tax revenues have averaged 15% in the 1990s to 10% of government tax revenue in 2021. The indications are that tax collections have largely lagged behind the GDP growth. The trade openness ratio has constantly dropped from over 55% in 2012 to 24% in 2019. The tax ratio has dropped from 20% in 1994 to 8% in 2021, while the trade tariffs have averaged 8% in 2004 and 2021, while the FDI: GDP ratio is marginal and has stayed relatively below 5%. Based on the regression analysis, the trade openness (β1 = 0.5547; t = 8.73, p < 0.00) and trade tarrifs (β2 = 0.6422; t = 10.15, p < 0.00) and ICT usage (β4 = -0.7889; t = -2.60, p < 0.05), were statistically significant while FDI (β3 = -0.0585; t = -0.89, p > 0.00) was not significant in explaining the changes in tax revenue. The study findings showed that the ratio of external trade and international taxes has a positive effect on tax revenue while the ratio of FDI does not. ICT usage has a negative moderating effect on tax revenue. Based on the findings the study rejected H01, H02 and Ho4 but does not reject H03 and concludes that trade openness and Trade Tariff have a positive impact on tax revenue in Kenya, while FDI does not. ICT usage has a negative moderating effect on tax revenue. The study recommends that the government t