The effect of taxation on economic growth in Kenya (1993-2023)

Abstract

The major aim of this study is to evaluate the effect of taxation on economic growth in Kenya specifically the impact of income tax, import duty tax, VAT and excise duty on GDP of Kenya from 1993-2023. The data used in this study was obtained from Kenya National Bureau of Statistics and the World Bank. The time series data used in this study was tested for stationarity and cointergration. The data was Stationary at first difference which prompted the use a Vector Error Correction Model (VECM) in order to establish the impact of these taxes on Kenya’s economic growth. The findings indicate that all four taxes (import duty tax, VAT, excise duty tax and income tax) have positive and statistically significant effects on GDP with Income tax having the strongest positive effect on GDP in the short run followed by import duty tax, VAT in third and Excise duty tax having the smallest positive effect on GDP. Therefore, based on the above findings, the study recommends that the government should firstly, enhance Income tax revenue since income tax has the strongest positive effect on GDP and this can be through expanding the tax base to include more taxpayers. Secondly, increase Import duty tax revenue given that import duty tax significantly contributes to GDP and this can be done by strengthening customs enforcement to minimize tax evasion. Thirdly, with VAT showing a positive contribution to GDP, the government should aim to enhance VAT revenue through implementing measures to improve compliance. Lastly, increase Excise duty tax revenue since excise duty tax positively impacts GDP by enhancing monitoring and enforcement of excise duty collection on targeted goods