effect of tax revenue and economic growth of Kenya

 effect of tax revenue and economic growth of Kenya

ABSTRACT

The study examines the effect of tax revenue and economic growth of Kenya, from 1980 to 2007. To attain this objective, relevant time-series secondary data were collected from the Central Bank of Kenya (CBN) Statistical Statement, Federal Inland Revenue Service (FIRS), and previous works done by scholars. The collected data was analyzed using the ordinary least square method. The results display that tax revenue has a significant positive effect on economic growth. That is it highpoints the channels through which tax revenue impacts and economic growth in Kenya. The study also tells that grants and other revenues have no adverse results in an increase. However, tax revenues can only appear its full potential on the economy if Government can come up with fiscal laws and legislations and support the existing ones in line with macroeconomic objectives, which will check-mate tax offenders to minimize evasion, corruption, and tax avoidance. These will get about improvement in the tax management and responsibility and transparency of government officials in the management of tax revenue. Above all, these will increase the tax revenue base with a resulting increase in growth.

 

 

INTRODUCTION

The tax return has been a scene of global significance as it touches every economy, notwithstanding national variations (Oboh& Isa, 2012). Tax is a necessary charge caused by a public authority on the benefits and properties of individuals and companies as designated by the government Decree, Acts or Laws unrelatedly of the appropriate amount of assistance of the payer in revenue (Omotoso, 2001). Tax payment is not for the real exchange of goods and services but a transfer of resources and income from the private sector to the public sector to produce some of the nation’s economic and social goals (Okpe, 2000).

Such purposes may be in for of high level of employment,

1. economic growth in kenya

prices, rapid increase of gross national product, favorable balance of adjustments position, development of a free-market economy, compensation of collective demands, equitable income redistribution, improvement of infant industries, the reassurance of priority sector, support of balance population development and growth of labor and capital development (Onoh, 2013). The level of tax paid by the citizens and the items challenged is determined by the administration. Such a decision, according to Ngerebo and Masa (2012), is based on the worth of the projects or programs. The Government intends to execute, which is the main factor of the budget -size.

The Government courts rates, basis, the citizens of type and period to pay the tax, on the development of the economy coveted, and the Government’s consideration of the model of living of the citizens. The amount to which the impact of taxation is handled is conditioned on the level of permission with tax payments, which is further conditioned on the level of tax learning. Taxes were affected the property size of Government, the energy and consistency of activities of businesses, the consumption pattern of somebody, the capacity to advance and save the growth path of the economy. This included revenue from product sharing, executives, and corporate earnings tax on oil and mining companies (Pfister, 2009).

Different advances to the nature and elements of the tax system with the attachment to budget problems of improved economies emphasize the significance of the issue of mutual communication between taxes (tax burden) and industrial growth (as a primary aim of the economic policymakers). Therefore, this paper points to estimate the influence of individual classes of taxes on industrial growth by appropriating regression analysis on the OECD countries for the period 2000 – 2011. The study is based on an extended neoclassical growth model of Mankiw, Romer, and Weil (1992). When estimating the influence of assessment on the economic dynamics, it is impossible to work with statutory tax rates because they have little explanatory power when it comes to the design of the real tax burden. Due to this, fabulous tax share and alternative World Tax Index were used for approximation in this paper.

According to Bhartia (2009), a tax theory may come from the hypothesis that their indigence is not any bond tax paid and goods obtained from state projects. In this party, there are two theories, GDP is generally used as an appointee of the economic wellbeing of a country, as well as to gauge a country’s measure of living. (Investopedia, 2009) The definition of the study is derived from (Omotoso, 2001). Tax is an obligatory charge required by a public power on the commission and characteristics of individuals and companies as stipulated by the government Decree, Acts or Laws irrespective of the exact amount of service of the payer in return. This paper is about Tax revenue and gross domestic product in Kenya.

 

PROBLEM STATEMENT

Tax is a method of increasing the revenue for the day to day running of government projects. Government activities include generating reserves and using the same to give security, social amenities, infrastructural amenities, etc., for the inhabitant of the country. Base on this, it is worthy of note that the objective of taxation is in tandem with the functions of Government (AKHOR, 2016).

However, it is shown that the role of assessment in promoting economic growth in Kenya is not felt, primarily because of its poor administration. The significant hurdles facing tax management in Kenya include frontiers of professionalism, poor accountability, lack of awareness of the general public on the imperatives and benefits of taxation, corruption of tax directors, tax evasion and evasion by taxing systems, connivance of taxing officials with demanding residents, lower rate of tax, poor method of tax collection, etc. Individual and Tax administration agencies suffer from limitations in human resources, tools, money, and machinery to meet the ever-increasing difficulties and challenges. The negative attitude of most tax collectors toward taxpayers can be linked to poor remuneration and motivation.

 

Objectives

To assess the impact of taxation as a tool of economic growth.

Specific objective

1. The study was guided by the following specific goals.
2. To determine the effect of Human resource on the economic growth of Kenya.
3. To establish the impact of Natural resource as a tool of economic growth in Kenya
4. To assess the effects of capital formulation as a tool of economic growth in Kenya

 

Research question

1. What is the impact of taxes on economic growth in Kenya?
2. What are the policy implications that the Government can implement based on the research findings?

 

Significance of the Study

A study of Kenya’s taxation and its influence on long term economic increase is crucial towards the success of the formidable Vision 2030 aims. Experiences of several countries suggest that tax plans must reflect the institutional characteristics of a country (Goode, 1993). For example, in low to middle-income nations, for instance, Kenya, the budget deficits can be plugged by tax revenue. As such, the share of increased government revenues lies in taxation. Moreover, in a country like Kenya faced with the difficult task of making up for revenue shortfalls in a slow-growth economy, and at the same time finance the poverty reduction programs and provide growth-enhancing incentives, modeling for a tax structure which could impact positively on growth would be a milestone contribution.

Moreover, because taxation has been noted to influence either absolutely or negatively on growth, the conclusions of this paper would be informative in terms of policy implications in Kenya engaging with revenue shortfalls and dangerous external debts. This study, consequently, attempts to develop a model that policymakers may utilize in the future when designing a direct and indirect tax structure capable of determining economic growth. Additionally, the statistical significance of crucial components in deciding Kenya’s industrial extension is expected to review the nature of the linkage connecting taxation revenues vis-à-vis the economic growth and how common causality impacts on inter-temporal economic improvement for the current and forthcoming generations. This will again be beneficial to policymakers who will guarantee reasonable use of tax revenues to achieve economic growth. In this study, the focus is made on economic growth resulting from taxation because growth is among the key objectives of any government. Also, it is of paramount significance to be aware of the supplement of indirect and direct taxes to this objective as a means of assessing the overall impact of economic policy on the financial increase.

 

JUSTIFICATION

 

 

 

 

 

 

 

CHAPTER TWO

LITERATURE REVIEW

EMPIRICAL REVIEW

 

The expediency theory

This theory asserts that every tax proposal must pass the test of practicability. It must be the only consideration weighing with the authorities in choosing a tax proposal. Economic and social objectives of the State as also the effects of a tax system should be treated as irrelevant. This proposition has a truth in it since it is useless to have a tax that cannot be levied and collected efficiently. There are pressures from economic, social, and political groups. Every group tries to protect and promote its own interests, and authorities are often forced to reshape tax structure to accommodate these pressures. In addition, the administrative set up may not be efficient in collecting the tax at a reasonable cost of collection. Taxation provides a robust set of policy tools to the authorities and should be effectively used for remedying economic and social ills of the society, such as income inequalities, regional disparities, unemployment, cyclical fluctuations, and so on.

 

The socio-political theory

Adolph Wagner advocated that social and political objectives should be the deciding factors in choosing taxes. Wagner did not believe in the individualist approach to a problem. He wanted that each economic issue should be looked at in its social and political context and an appropriate solution found thereof. The society consisted of individuals but was more than the sum total of its individual members. It had an existence and entity of its own which needed preservation and taking care of. Accordingly, a tax system should not be designed to serve individual members of society but should be used to cure the ills of society as a whole. Wagner, in other words, was advocating a modern welfare approach in evolving and adopting a tax policy. He was explicitly in favor of using taxation for reducing income inequalities. He maintained that private property and inheritance were the result of state policies and not because of any God-given rights. The State, therefore, had the right to control the ownership of property and its inheritance in the interests of the society as a whole. Wagner’s ideas, though much-criticized at that time, are now the hall-mark of fiscal policies of modern State.

The benefits-received theory

This theory proceeds on the assumption that there is basically an exchange or contractual relationship between taxpayers and the State. The State provides certain goods and services to the members of the society, and they contribute to the cost of these supplies in proportion to the benefits received. In this quid pro quo set up, there is no place for issues like equitable distribution of income and wealth. Instead, the benefits received are taken to represent the basis for distributing the tax burden in a specific manner. This theory overlooks the possible use of the tax policy for bringing about economic growth or economic stabilization in the country. The cost of service theory: This theory is very similar to the benefits-received approach. It emphasizes the semicommercial relationship between the State and the citizens to a greater extent. The implication is that the citizens are not entitled to any benefits from the State, and if they do receive any, they must pay the cost thereof. In this theory, the country is being asked to give up essential protective and welfare functions. It is to recover the value of the services scrupulously, and therefore, this theory, unlike the benefits received one, specifically implies a balanced budget policy. In the process, the State is not to be concerned with the problems of the income distribution. No effort is to be made to improve income distribution, and no notice is to be taken if the policy of levying taxes according to the cost of service principles deteriorates it further.

Ability to pay theory

This approach considers tax liability in its exact form-compulsory payment to the State without quid pro quo. It does not assume any commercial or semi-commercial relationship between the country and the citizens. According to this theory, a citizen is to pay taxes just because he can, and his relative share in the total tax burden is to be determined by his relative paying capacity. This doctrine has been in vogue for at least as long as the benefits theory. An excellent account of its history is found in Seligman. This theory was bound to be supported by socialist thinkers because of its conformity with the ideas and concepts of justice and equity. However, the doctrine received equally strong support from non-socialist thinkers also and became a part of the theory of welfare economics. The basic tenet of this theory is that the burden of taxation should be shared by the members of society on the principles of justice and equity and that these principles necessitate that the tax burden is apportioned according to their relative ability to pay.

 

TAX POLICIES ON TAXATION

Tax policy affects the economic growth rate through the impact on the cost of production factors; the increased output per employee can be decomposed into four elements: increased capital stock per employee, the average productivity growth of capital, increasing labor supply for each employee, the productivity growth of work environments. So the taxes that affect output per employee affect one of these factors. The fees that impact on production levels per employee are acting on the following channels

Wage tax: leads to reduced benefit additional time(reducing the supply of labor), reducing real income(increasing offer of employment) and profitability related to the accumulation of new skills to employees, which can reduce the average quality of jobs (in reverse, the exemption from tax for some educational regions increase the quality of work).Although the effect would decrease the workload given by the economy, there are factors that suggest that in some cases salary tax may increase employment offer- if people can vary labor supply, if they will continue to work until the marginal benefit (net salary) is equal to the minimal opportunity cost (the value assigned to a leisure forgone by), on the other hand, increased tax drops net income increasing employment supply.

 

Capital tax: Capital tax distorts the marginal conditions of equilibrium, leading to lower saving rates (and therefore investment) and the balance of capital stock if the tax on savings income (interest) recorded an increase, price increases in future consumption relative to current use, which stimulate current consumption and lower savings. Increasing saving rates lead to increased production per capita.

Income tax: Income tax impact on growth is a controversial topic: the most significant difference between the actual cost of capital (net) and the gross price, the higher the total return for the investment to be profitable, the lower the investment. The regime of deductibility for depreciation and other non-monetary expenses and the limits of the deduction for interest costs are significant. Moreover, the discriminatory treatment of different forms of capital (profits, dividends, savings) can substantially decrease the rate of return on investment.

Value-added tax: This type of charge does not change the relative prices of current-future consumption, so that should not affect the decision to invest in human or physical capital. But if there is an unevenly applied tax on production or use, it changes the allocation of production factors between sectors of the economy. If the charge determines to move elements of production in industries with enormous technological growth or in industries with similar production functions of sub unitary degrees, the long-term growth rate is affected.

 

Economic Growth

Dwivedi (2004) states that economic growth is a sustained increase in per capita national output or net domestic product over a long period of time. It implies that the rate of inflation of the total production must be higher than the price of population growth. Another quantification of economic growth is that national production should be composed of such goods and services which satisfy the maximum want of the maximum number of people. Economic growth can be determined by four critical determinants, namely, human resources, national resources, capital formation, and technological development. Economic growth is the increase in the number of goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product. Growth is usually calculated in practical terms, i.e., inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. ‘Economic growth’ or ‘economic growth theory’ typically refers to the growth of potential output, i.e., production at ‘full employment,’ which is caused by growth in aggregate demand or observed output (Nzotta, 2007). Increases in productivity are a significant factor responsible for per capita economic growth, especially since the mid-19th century. Most of the financial situation in the 20th century was due to reduced inputs of labor, materials, energy, and land per unit of economic output

DETERMINANTS OF ECONOMIC GROWTH

Human Resources (HR)

Human Resources officers develop advise on and implement policies relating to the effective use of personnel within an organization. Their purpose is to assure that the business hires the right judgment of staff in courses of skills and expertise and that training and construction possibility is accessible to employees to improve their appearance and performance the employer’s enterprise aims. Human Resources officers are involved in an assortment of activities needed by organizations, whatever the size or type of business. These cover areas such as; working practices, recruitment, pay, condition of employment.

National Resources

Recent empirical research by Jeffrey Sachs and Andrew Warner in Natural resource Abundance and Economic Growth has uncovered a strong and robust cross country relationship between economic growth and the abundance of, or addiction on, and natural resources support that appears to influence growth. Prime, countries that are wealthy in natural resources experience boom and busts, not only due to merchandise price variations in world markets but also due to resource processes that typically perform occasional upswings in export earnings that cause the social currency to appreciate in real terms to the disadvantage of other export industries. This appearance is known as “Dutch disease.” Furthermore, in less advanced cases, the conflict for huger Resources rents may lead to a combination of commercial and political power in the hands of aristocracies that, once disability, use the rent to appease their political followers and thus secure their hold on power, with stunted or undermined democracy and sluggish growth as a consequence.

Capital Formation

Capital Formation is a theory used in macroeconomics, financial economics, and national account. It is a specific statistical thought used in national accounts statistics, econometrics and macroeconomics. It refers to a measure of the net additions to the (physical) capital stock of a country(or an economic sector) in an accounting period, or, a ratio of the significance by which the total physical capital stock increased during an accounting period. In a much broader or vaguer sense, the term “capital formation” has in more recent times been used in financial economics to refer to savings drives, setting up economic institutions, fiscal measures, public borrowing, development of capital markets, privatization of financial institutions and development of secondary markets.

 

OVERVIEW OF LITERATURE REVIEW

From a review of a study done by Gale and Andrew (2016) on how changes to the individual taxes influence long haul economic development, the outcomes proposed that not all-expense changes will have a similar effect on growth. Furthermore, the study inspected that changes that enhance incentives, diminish existing appropriations, maintain a strategic distance from bonus picks up, and dodge shortage financing will have more propitious consequences for the long haul size of the economy, yet may likewise make exchange offs amongst value and proficiency. A study conducted by Ching-Chong (2016), examined the impacts of capital tax collection on development and commercial development demonstrated that capital tax collection has definitely unique has implications in the short run and over the long haul. Over the long haul, the duty moving effect overwhelms the utilization impact yielding an overall constructive outcome of capital tax collection on consistent state monetary development.

Be that as it may, in the short run, the utilization impact turns into the dominant power bringing on an underlying negative effect of capital tax collection on the balance development rates. In general, the correlation between taxation and economic growth seems to be stronger for developing economies. In a country like Kenya, where there is no clear framework that is followed when designing on taxation structure, the findings of this paper will go a long way in terms of identifying the policy implications to the policymakers when creating to change the tax structure. Additionally, the findings will enhance policy formulation, implementation as well as undertaking an assessment on an on-going basis. In view of this, the study, therefore, intends to conduct an empirical investigation not only on taxation effect on the growth of an industrial economy but also the interplay of direct and indirect taxes and their impact on economic growth.