Tax Effort and Determinants of Tax Ratios in Kenya
Tax Effort and Determinants of Tax Ratios in Kenya

Summary/Abstract: The study analyzes the tax effort and the factors which influence taxratios in Kenya. Tax revenue collected from 1980 to 2015 has been less thanthe government expenditure forcing the government to borrow fromdomestic banks and foreign financial institutions. Identification of thefactors that influence tax ratio to GDP in Kenya is important as it will informpolicy regarding the taxation system. Many studies have investigated thedeterminants of the tax ratio to GDP and tax effort indices using majorlypanel data research method on developing and developed countries, but afew have been conducted in Kenya. This study sought to add to the literatureand and carried out an in-depth investigation of tax ratio to GDP and taxeffort in Kenya by taking into account relevant explanatory variables andtime series research methodology. To achieve study objective, time seriesdata running from 1980 to 2015 was analyzed by use of ordinary leastsquares regression. The explanatory variables considered in the study wereper capita GDP, share of service sector in GDP, share of external debt inGDP, share of agriculture in GDP, share of exports in GDP and share ofimports in GDP. The findings revealed that the coefficients of per capitaGDP, share of service sector in GDP and share of agriculture in GDP to bepositive but significant. On the other hand the coefficients of the share ofexternal debt in GDP and share of export in GDP were negative butinsignificant. The coefficient of the share of import in GDP was positive butinsignificant. The study further found Kenya’s tax effort to be less than unitymeaning the country is not utilizing its tax capacity fully. This thereforeimplies that the country has potential of raising more tax to reduce theimbalance in its budget. The study recommends the need for political will,efficient legal system and consistency in the implementation of tax policy.Achievement of this will attract investment that will lead to increased percapita income and job opportunities which eventually translate to increasedEuropean Journal of Economics, Law and Politics (ELP) December 2016 edition Vol.3 No.2 ISSN 2518-376125taxes.

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