Effects of Tax Reforms on Bouyancy and Elasticity of the Tax System in Kenya: 1963 - 2010
Omondi, Vincent Ochieng
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The Kenya government has been pursuing tax reforms in order to design a system that is viable and productive to finance and sustain government expenditure without recourse to deficit financing. The purpose of this study was to examine the effects of these reforms on tax buoyancy and elasticity estimates. The specific objectives of the study were; to determine the effect of tax modernization programme and revenue administration reforms and modernization programme on tax buoyancy and tax elasticity. The study employed regression analysis and used annual time series for the period 1963 to 2010. Secondary data from Kenya National Bureau of Statistics, Kenya Revenue Authority, Central Bank of Kenya and World Bank was used. Elasticity estimates were determined by adjusting data for discretionary changes using the proportional adjustment method. The study revealed that both revenue administration reform and modernization programme (RARMP) and tax modernization programme (TMP) were important in explaining the variations in buoyancy and elasticity of the tax system in Kenya. Although the reforms analyzed had positive effect on both tax buoyancy and elasticity, the results indicate that this was not sufficient to help generate adequate revenue to finance the ever increasing government expenditure. With an inelastic tax system, the Kenya government has to re-evaluate the implementation strategies and pursue further reforms for it to fully exploit the tax revenue potential in the economy.