Analysis of income tax system productivity in Kenya
Wawire, Nelson H. W.
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The Government of Kenya has over the years undertaken reforms in the income tax system with a view of making it elastic. Despite these efforts, studies have shown that the structure is still inelastic. However, these studies omit key factors that affect income tax revenue productivity such as tax reforms, and the structural and demographic nature of the economy. Because of this omission, the estimated income tax elasticity cannot be relied on for planning purpose and for execution of further income tax reforms. The objectives of the paper is to assess the response of income tax yield to changes in its base, discretion actions by the tax authority and unusual circumstances. The study uses time series data that was obtained from various Kenya Government documents and International Monetary Fund Financial Statistics. Regression analysis is used to estimate income tax revenue elasticity which is a measure of productivity of the tax system. The estimated results show that the income tax system is responsive to its tax base (Gross Domestic Product) in the short run but unresponsive in the long run. The response of income tax with respect to Gross Domestic Product (GDP) is found to be less than that of monetary GDP. This suggests the existence of a black economy in Kenya. Income tax yields also respond with lags to changes in its base in addition to being sensitive to discretionary changes in income tax policy and unusual circumstances. The conclusion is that Kenya’s income tax system is inelastic. The findings point to the need for more income tax reforms within the broad spectrum of the on-going implementation of the Public Finance Management programme.