EFFECTS OF TAXATION ON THE ECONOMIC GROWTH IN KENYA

VICTOR ONYANGO OKOTH

19S01ABA118

A MANAGEMENT RESEARCH PROJECT SUBMITTED IN PARTIAL

FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE
DEGREE OF BACHELOR OF COMMERCE FROM AFRICA NAZARENE
UNIVERSITY.

MAY 2023
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DECLARATION
I hereby affirm that this research project entitled “EFFECTS OF TAXATION ON THE
ECONOMIC GROWTH IN KENYA” submitted to Africa Nazarene University, is proof that
the work I completed under Dr. Michael Musembi's direction for the school of business is original
and hasn't been submitted to or accepted for credit at any other institution of higher learning.

Name: Victor Onyango Okoth Reg. No. 19s01aba118

Signed……………… Date ……………………

Supervisor

As the university supervisor, I have given my approval for this request to be examined.

Dr. Michael Musembi.

Signed……...………………. Date …...……………………….

AFRICA NAZARENE UNIVERSITY, NAIROBI, KENYA

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DEDICATION.
Thanks to the efforts of the researchers, this study is devoted to the individuals who motivated me.
From peers, acquaintances, parents and guardians who assisted me while working on this project
encountered challenges. I also want to thank my supervisor, who has been a huge assistance to me,
for this study. Finally, thanks to the All-Powerful God for having given me a long life and dedicate
my work to him. I value your knowledge, bravery, mental toughness, safety, and talents. We
provide you each of these.
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ACKNOWLEDGEMENT
I want to start by praising and giving gratitude to God, the Almighty, for His fortune, which
made it possible for me to successfully complete my study. I want to give thanks to my Dr.
Michael Musembi, research supervisor, for enabling me to conduct my study and for his
essential advice during this process. His ambition, sincerity, vision, and energy inspired me a
lot during the period. He has demonstrated to me the most effective approaches to gathering
information and presenting it. Working and studying under his direction was a huge pleasure
and joy for me. I am very thankful for everything he has given me. Thanks to my friends and
research peers for their constant inspiration and true assistance throughout this study project.
Lastly, I want to thank everyone who supported me in some way as I worked to complete the
research.
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TABLE OF CONTENT

DECLARATION ............................................................................................................................................ i
DEDICATION. .............................................................................................................................................. ii
ACKNOWLEDGEMENT ............................................................................................................................ iii
TABLE OF CONTENT ................................................................................................................................ iv
LIST OF TABLES ....................................................................................................................................... vii
LIST OF FIGURES .................................................................................................................................... viii
LIST OF ABBREVIATIONS....................................................................................................................... ix
DEFINITIONS OF TERMS .......................................................................................................................... x
ABSTRACT ................................................................................................................................................. xi
CHAPTER ONE ............................................................................................................................................ 1
INTRODUCTION AND BACKGROUND OF THE STUDY ..................................................................... 1
1.0 Introduction.............................................................................................................................................. 1
1.1 Background of the Study. ........................................................................................................................ 1
1.2.1 Taxation. ............................................................................................................................................... 3
1.2.1.1. Direct taxes ................................................................................................................................... 4
1.2.1.1.1. Income tax. ........................................................................................................................... 4
1.2.1.2. Indirect taxes ................................................................................................................................ 5
1.2.1.1.2. Value-Added Tax. ................................................................................................................ 5
1.2.1.1.3. Import duty. ......................................................................................................................... 6
1.2.2. Economic growth. ................................................................................................................................ 7
1.2.4. Kenya’s tax structure ........................................................................................................................... 9
1.3. Statement of the problem ......................................................................................................................10
1.4. General Objectives................................................................................................................................12
1.4.1. Specific Objectives. ........................................................................................................................12
1.5. Research Questions...............................................................................................................................12
1.6. Significance of the study. .....................................................................................................................12
1.7. Limitations of Study. ............................................................................................................................13
1.8. Conceptual Framework .........................................................................................................................13
CHAPTER TWO .........................................................................................................................................15
LITERATURE REVIEW ............................................................................................................................15
2.0 Introduction............................................................................................................................................15
2.1 Theoretical Review. ...............................................................................................................................15
2.1.2. Neoclassical theory. .......................................................................................................................16
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2.1.3. The Benefit Theory. .......................................................................................................................16

2.1.4. Theory of Optimal Taxation ...........................................................................................................17
2.1.5. Keynesian Theory ..........................................................................................................................18
2.2 Empirical Review ..................................................................................................................................19
2.2.1 Income Tax and Economic Growth .................................................................................................19
2.2.2 Value-Added Tax (VAT) and Economic Growth ..............................................................................21
2.2.3 Import Duty and Economic Growth ................................................................................................24
2.3 Research Gap .........................................................................................................................................26
Table 2.1 Summary of Literature Review and Research Gaps.................................................................27
CHAPTER THREE .....................................................................................................................................31
RESEARCH METHODOLOGY ................................................................................................................31
3.0 Introduction............................................................................................................................................31
3.1 Research Design ....................................................................................................................................31
3.2 Research Site .........................................................................................................................................32
3.4 Sampling Design ....................................................................................................................................32
3.5 Data Collection Methods. ......................................................................................................................32
3.6. Diagnostic Tests....................................................................................................................................33
3.6.1. Normality Test ...............................................................................................................................33
3.6.2. Auto-correlation test .....................................................................................................................33
3.6.3. Multicollinearity Test. ....................................................................................................................33
3.7. Data Analysis. ......................................................................................................................................34
3.8. Privacy and Ethics. ...............................................................................................................................34
3.9. Validity and Reliability.........................................................................................................................35
CHAPTER FOUR .......................................................................................................................................36
DATA ANALYSIS, PRESENTATION, AND INTERPRETATION ........................................................36
4.1. Introduction...........................................................................................................................................36
4.2. Response Rate.......................................................................................................................................36
4.3. Descriptive Statistics ............................................................................................................................36
4.4. Diagnostic Tests....................................................................................................................................38
4.4.1. Normality Test ...................................................................................................................................38
4.4.2 Auto Correlation Test .........................................................................................................................38
4.4.3. Multicollinearity Test. .......................................................................................................................39
4.4. Trend Analysis ......................................................................................................................................40
4.4.1. Gross Domestic Product ....................................................................................................................40
4.4.2 Income Tax .........................................................................................................................................40
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4.4.3. Value Added Tax ...............................................................................................................................41

4.4.4 Import Duty. .......................................................................................................................................41
4.5. Regression Analysis..............................................................................................................................42
4.6. Correlation Analysis .............................................................................................................................44
CHAPTER FIVE .........................................................................................................................................46
DISCUSSION, SUMMARY, CONCLUSION AND RECOMMENDATIONS ........................................46
5.1. Introduction...........................................................................................................................................46
5.2. Discussion of Findings. .......................................................................................................................46
5.3. Summary and Conclusions of Main Findings. .....................................................................................47
5.4. Recommendations.................................................................................................................................48
5.5. Limitations of the Study. ......................................................................................................................49
5.6. Areas of Further Research. ...................................................................................................................50
REFERENCES ............................................................................................................................................51
APPENDICES .............................................................................................................................................60
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LIST OF TABLES
Table 2.1: Summary of Previous Research Review and Knowledge Gap…………………….…26
Table 4.1: Descriptive Statistics…………………………………………………………………35
Table 4.2: Model Summary………………………………...……………………………………38
Table 4.3: ANOVA …...……………………...………………………………….………………38
Table 4.4: Coefficients ………………………………………………………………………….39
Table 4.5: Correlation …………………………………………………………………………..40
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LIST OF FIGURES
Figure 1.1: Conceptual Framework……………………………………………………….…….12
Figure 4.1: Trend in GDP growth rate………………………………………………………….36
Figure 4.2: Trend in Income Tax……………………………….……………………………….36
Figure 4.3: Trend in VAT ……………………………………………………………………….36
Figure 4.4: Trend in Import Duties…………………………...………………………………….37
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LIST OF ABBREVIATIONS
ARDL - Autoregressive Distributed Lag
CBN -Central Bank of Nigeria.
CED -Excise duties.
EPZ- The Export Processing Zone.
FIRS -Federal Inland Revenue Service.
GDP- Gross Domestic Product.
GNP- Gross National Product Gross National Product.
GST- Goods and Services Tax. A
KNBS- Kenya National Bureau of Statistics.
KRA- Kenya Revenue Authority.
LDcs- Least Developed Countries.
OECD- The Organization for Economic Cooperation and Development.
OLS-Ordinary Least Square.
PAYE- Pay As You Earn.
PCI-Per Capita Income.
PPT –Petroleum Production Tax.
SSA-Sub-Saharan Africa.
SPSS- Statistical Package for the Social Sciences
VAT- Value-Added Tax.
WHT- withholding tax.
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DEFINITIONS OF TERMS
Consumer Price Index: is a measure of a market's weighted average price for a mix of products
and services that families often purchase.
custom duty: The charge imposed on import and export of products custom duty.
Corporate Tax: A sort of direct tax imposed on the profits or assets of corporations and other
similar legal bodies.
Direct Taxes: Taxes that are paid directly to the entity that levied them.
Economic Growth- is a rise in economic products and service production when compared to one
historical period to another.
Ex post facto study design: is a technique that compares groups based on dependent variables
that already exist.
Excise Duty- is any tax imposed on manufactured goods that is applied during production rather
than at the time of sale.
Fiscal policy- The utilization of public spending and taxation, specifically macroeconomic
conditions, is known as fiscal policy.
Import Duty- A nation's customs officials collect import duty, which is a tax, on both imports and
some exports.
Indirect taxes- are taxes that can be transferred to another company or person. typically levied
against a producer or supplier, who subsequently passes the tax on to the buyer.
Tax Burdens- the percentage of total revenue in a certain period that is used to calculate how
much tax was paid by an individual, business, or nation during that time.
Tax Reforms- modifying one or more taxes' or the tax system's structure will help them work
better and achieve their goals.
The neoclassical model- is a growth economic model that demonstrates how the combination of
labor, capital, and technology produces an economic growth rate that is steady.
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ABSTRACT
According to the notion of endogenous growth, internal forces rather than external ones primarily
control growth of the economy. Exploring the effects of taxes on the growth of the economy is
now possible thanks to the emergence of endogenous growth theory. Analysis of tax incidence
and growth effects can be predicted by explicitly modeling the human choices that brings out
growth. For the purpose of determining whether there is any agreement regarding how taxes impact
the pace of growth of economy, this research examines the theoretical and empirical data. This
research will examine the effect of taxation on economic growth in Kenya. Two specific variables
direct and indirect taxes were broken into income tax, VAT, and Import duty. a collection of time
series encompassing 2009–2020 is used for this study. Economic Growth i.e., GDP, is used as the
response variable, while taxation i.e., Income Tax, VAT, and Import Duties as the predictor
variables. While the government raises money through taxes, the fundamental issue in the study is
that taxes have both beneficial and adverse effects on the economy. Tax revenue is never enough
to cover all of the government's expenses, which forces the government to borrow money. A
number of tax policy changes have been implemented in Kenya, including the most recent Finance
Act 2021, which was published in the gazette on July 1st and expanded the scope of the VAT tax,
driving up the cost of goods and raising people's living standards. The general objective of this
research is to examine the effect of taxation on economic growth in Kenya while the specific
objectives is to examine the extent to which income tax, VAT, import duty affects economic
growth in Kenya because they represent the primary taxation methods used by the Kenyan
government. The following research questions served as the focus of the study: To what extent
does value-added tax affect the economic growth in Kenya? How does income tax affect the
economic growth in Kenya? What effects do Import have on the economic growth in Kenya? The
study embraced the Optimal Taxation, Endogenous, Neoclassical, Benefit, and the Keynesian
Theories. The purpose of the study, which used a descriptive correlational research approach, was
to determine whether there is a correlation between taxation and economic growth in Kenya and
how taxation affects that relationship. Secondary data from the K.R.A., OECD, C.B.K., K.N.B.S.,
and Treasury from a certain time period up to 2023 were used in the research design. The
correlation between the response and predictor variables together with how the variables relate to
one another were then determined using a regression model using SPSS. The results from the
regression coefficients reveals that VAT had a positive and a significant effect on the economic
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growth, Income Tax has a negative and significant effect on growth of the economy, and Import
Duties had a negative and an insignificant effect on economic growth. 48.7% of the variance of
the economic growth (GDP) is explained by Income Tax, Value Added Tax, and Import Duties.
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CHAPTER ONE

INTRODUCTION AND BACKGROUND OF THE STUDY

1.0 Introduction.
Since the Kenya’s independence, the connection between taxation and growth of the economy has
been a crucial one in the economic field. The GDP of a nation is influenced by its tax burden. The
traditional neoclassical models did not establish the theoretical connection between these
characteristics and economic growth. The background of the study, problem statement, objectives
or purpose of the research, research questions, significance of the study, limitations, and
conceptual framework are all discussed in this chapter.

1.1 Background of the Study.

The duty of the state is to guarantee the welfare of its people by providing public goods and
services. To perform such a role, they need financing. Taxes are primary source of revenue for
financing public expenditures in Governments. According to Omar (2021), taxes are essential
payment given to the authorities by people or businesses in order to fund operations. Redistribution
of income and wealth is the objective of governmental fiscal policy. When a country's production
possibility frontier expands, the economy grows (Gbeke & Nkak, 2021). As a macroeconomic
policy instrument Taxes influence the magnitude and pace of economic growth in various nations.
(Adeusi, Uniamikogbo, Erah & Aggreh, 2020).
Because it has an impact on every economy, independent of national boundaries, the necessity for
tax payments has become a global phenomenon. According to Nwachukwu et al. (2022), several
governments, like those in Canada, the United States, the Netherlands, and the UK have
significantly shaped their economies by tax taxation through personal income taxes, VAT, and
corporation income tax. Duncan (2019) claims that due to the growing fiscal budget deficits, the
role of taxation in the redistribution of income and wealth has been given less attention than the
importance of taxes in generating revenue for both developing and established nations. According
to OECD (2020), taxes are primarily collected by the government for two purposes: first, to
implement its tax policies of dispersing income and wealth, and second, to offer services to the
public. Taxes may have beneficial effects on economic growth if they are combined properly, but
they may also have negative ones (Nguyen, 2019). The average tax-to-GDP ratio in the OECD
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(2022) was greater in 2021 than it was in 2010, when it was 31.5% of GDP. In 32 different nations,
the tax-to-GDP ratio was higher in 2021 than it was in 2010. The two Nations with the highest
increases were the Slovak Republic (7.8 p.p.) and Korea (7.5 p.p.). Other countries with rises of
more than 5 p.p. were Spain, Japan, Greece, Poland, and Portugal.
Taxation is seen as a measure to combat economic depression in Sub-Saharan Africa, which results
in national growth (Adegbite 2022). Reforms intended to lessen the burden of tax structures that
impede economic progress have been initiated by nations in this region. According to Caldeira et
al. (2020), tax revenue other than from natural resources accounts for 13.2 percent of the GDP on
average. An estimated 0.58 of the entire tax effort is average. In other words, SSA countries have
the ability to raise 23% of gross domestic product on average in non-resource taxes if they fully
implement it. In 2020, in the midst of the COVID-19 crisis, the unweighted average tax-to-GDP
ratio for the 31 nations in this publication (the "Africa (31) average") was 16.0%, a reduction of
0.3 percentage points (p.p.) from 2019. Total tax receipts, including required social security
contributions, are expressed as a percentage of gross domestic product (GDP) in the tax-to-GDP
ratio. The Latin American and Caribbean (LAC) (21.9%), OECD (33.5%), and Asian and Pacific
economies (19.1%) all had higher averages in 2020 than Africa (31) did (OECD 2022).
It is important to remember that taxes and the economy are related; thus, the structure and rate of
growth of the economy have an impact on both taxation and growth rates, which, depending on
the circumstances, might have an opposite effect on the state's revenue. According to Li, Xiong,
and Xie (2018) and Dramane (2022), taxes also support structural reform, welfare advancement,
and economic progress. To encourage growth in the economy, a tax's design and finance are
crucial. Kenya has enjoyed a duration of sustained growth of the economy in the last decade, with
an approximate annual growth rate in GDP of 16%. Kenya's economy has grown from a nominal
GDP of Ksh 3.17 trillion. $ 52 billion in 2010 to $ 154 billion in 2019, moving the country from
85th to 61st in the global rank (KNBS, 2020). The question of whether taxes promote growth is
one that has been the subject of continuous theoretical discussion. Since Kenyan independence,
the most crucial issue in economies has been how the taxes and growth of the economy are related.
Through its public revenue, the Kenyan government seeks to stimulate and direct its objectives for
social and economic growth (Duncan 2019). Despite the fact that government spending directly
affects economic growth, these costs must be covered through taxation.
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According to Kenya Revenue Authority (2019), direct and indirect taxes normally make up the tax
structure. Direct taxes are broadly categorized as either corporate, income (Pay as You Earn
(PAYE)), withholding, rental income, or presumptive. Excise taxes on desired commodities like
cigarettes and alcohol, taxes on imported goods, and taxes on locally produced products and
services all fall under the category of indirect taxes. the focus of this research is to comprehend
and offer insights into the impacts of income tax, VAT, and import duty on the growth of Kenyan
economy. Since a significant portion of Kenya's total revenue comes from income tax, the
country's economy is also continuously expanding. So, in-depth investigation of income taxes and
related impact on GDP is necessary. To better understand income taxes and how they impact
economic progress, this study was initiated.

1.2.1 Taxation.
Tax is a required obligation that the authority enacts without any compensation or use of the
proceeds for public investment Kowal and Przekota (2021). Taxes are frequently imposed in order
to govern enterprises, prevent the production of particular goods and services, safeguard small and
local firms, lessen income inequality in society, and manage inflation (Edewusi & Ajayi, 2019).
The fact that taxation is a significant in order to help the government reach its economic objectives,
the financing for all three levels of government is essential. The government of every country will
work to increase tax revenue because of the importance of taxation in providing funding the
government for a variety of uses, its the capacity to influence consumption behaviour that
contribute to economic growth, put exerting pressure on economic factors, and it’s the capacity to
influence consumption behaviour (Asaolu et al. 2018). In most civilizations around the world,
according to Nwachukwu et al (2022)., taxes are seen as an essential instrument for a country's
development and progress. The degree of wealth created by economic hardships endured in a
community is one of the key indicators by which development and growth in that population may
be assessed. The two main categories of taxes in the tax structure are direct and indirect taxes. It
is thought that households that consume taxable goods pay indirect taxes rather than direct taxes,
which are paid by the factors that generate revenue. When compared to direct taxes, indirect taxes
make up a larger portion of total tax revenue. Income tax, capital gains tax, and value-added tax
are examples of direct taxes. Import duty, excise tax, and value-added tax are examples of indirect
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taxes (Kadenge 2021). These taxes are just the main forms of taxation in Kenya, and they have an
impact on growth of the economy as will be covered below;
1.2.1.1. Direct taxes
Direct taxes (DT) cannot be transferred to another person and are imposed on people responsible
for bearing the charge Mazen (2022). Direct taxes, such as head taxes, income taxes, land use
taxes, property taxes, etc., are paid directly by the taxpayer. Taxation is determined by how easily
the tax burden can be transferred. All taxes paid from income, such as a salary or other money
derived from private, individual, or communal activity, are considered direct taxes. Stermugu &
Ballkoçi(2022) claim that these taxes are significant in terms of the quantity of taxpayers, exposed,
and applied with specific percentages on income or profits. The Consumption Tax, Social
Insurance Contributions, Personal Income Tax, Wealth Tax, Company Income Tax, and other
taxes are included under direct taxes. The direct taxes, that will be looked in this section were
briefly discussed.

1.2.1.1.1. Income tax.

Kadenge (2021) claims that income tax is a fee levied on each and every dollar of a person's
income. According to Gitu 2019, taxable employment income includes salary, wages,
commissions, bonuses, allowances, and reimbursement for termination of work or self-
employment. Income taxes are a type of direct tax that apply to both people and businesses. The
Income Tax Act (Cap. 470 Laws of Kenya) governs how it is handled. It also includes, among
other things, withholding tax (WHT), Pay as You Earn (PAYE), and corporation tax. For residents,
the general corporate tax rate is 30%, even though the individual tax rate varied from 10% to 30%.
Kenya's personal income tax rate is a charge that is made on many forms of income, including
dividends, interest, pensions, and wages. The Kenyan government depends heavily on the personal
income tax rate for its funding. Businesses and partnerships that employ people are expected to
withhold tax a month's worth of salary or compensation on each pay day from employee in
accordance with the highest tax rates and send that money to KRA no later than the ninth of the
following month (Kenya Revenue Authority, 2019).
Omar (2021) asserts that income tax makes up the majority of the total tax revenue, which is mostly
collected by the KRA. For the most part, it is gathered monthly from people and yearly from
entities. Depending on the demands of the economy, government policies may increase or decrease
income tax. Kadenge (2021) claims that income tax is utilized to achieve equality goals through
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rationalizing tax brackets and rates; in other words, depending on the goal, tax brackets may be
widened or increased in number, and tax rates may be raised or lowered. Gordon (2005), asserts
that Income tax laws may shape financial decisions, and over time, lower tax rates will lead to a
larger economy. Rate cuts would boost the after-tax returns from investing, working, and saving,
but they would also boost the after-tax income people now get, lowering their need to work, save,
and invest. Economic activity is typically increased by the first effect through substitution effects
and decreased by the second through income effects.
1.2.1.2. Indirect taxes
According to Albina (2022), indirect taxes refer to the ones that are ultimately paid by consumers
who utilize products or services and are purportedly directed to the producing companies, or
producers. Usually, they are covered by the item's price, concealed, subject to little social control,
and the majority of purchasers have little to no reaction to them because they pay for the goods
and don't realize that they have also paid a tax to the dealer. Particularly, Indirect taxes are assessed
and collected in accordance with the trade of commodities and services. Indirect taxes include
Excise Tax, Value Added Tax, Custom Duties, etc. According to research done in emerging
nations, indirect taxes have a positive effect on economic growth (Nguyen, 2019). Value Added
Tax is a fee imposed on the goods and services that are purchased (Ikeokwu & Micah, 2019).
Kenya's tax system underwent a significant revision when the value added tax was implemented.
The goal of import taxes extends beyond bringing in money for the government; it also includes
protecting new businesses and discouraging the importation of items made domestically
(Fasoranti, 2013). Because higher prices would result from import duties, it is the consumer or end
user who must bear the cost. Import tariffs may be assessed as fraction of the purchase amount of
the products or as a fixed sum on a specific item (Ukolobi and Oboro 2021).
1.2.1.1.2. Value-Added Tax.
The VAT Act of 2013 VAT was introduced as a tax that was imposed on the supply of goods and
services. The supplies are divided into three categories: zero-rated, exempt, and standard rated. At
various points in the production process and at various degrees of product or service distribution,
the tax is levied on the value added (The National Treasury and Planning, 2022). The VAT is
planned and made possible to be collected at each stage of the manufacturing and distribution
process. It is a tax on the quantity of goods and services that the end user eventually uses.
According to this interpretation, VAT is a consumption tax that is levied from individuals who just
pay a little amount of tax so that others who pay it can avoid paying the whole amount of the fee
 6

(Omodero, 2020). As a result, this taxation turns into a real way of increasing the amount of
government revenue that is available for spending on various government functions.
According to Oraka et al. (2017), VAT is a charge that is ingested at every phase in the cycle of
absorption by final consumer of the good or service. According to a comparison of the VAT rates
among countries, Cameroon's VAT is 19.25%, South Africa's is 14%, Zambia's is 17.5%, and
Egypt's is 10%. Others include Kenya (12–16%), the UK (17.5%), and India (between 5.5% and
14.5%) (Ordu, 2021). VAT is amongst the main taxes that affects company owners among those
levied in Kenya. The majority of products that are purchased are subject to VAT, which is an
indirect kind of tax paid by the final user of the goods and services. In essence, it is the discrepancy
between what a production spends on inputs, and what they bill for the finished items. Since the
final consumer is responsible for paying the tax, one may claim that the goals of the adoption of
VAT have been met. Additionally, it has made it possible for the government to generate more
revenue.
1.2.1.1.3. Import duty.
Import duty is a tax levied on goods carried into or out of the country based on tariffs specified in
the tariffs manual book, and it covers any levy, duty, and so on. The East African Community
Customs, Kadenge (2021), is currently in charge of administering this tax. All imports into the
colony began to be subject to customs duty in Kenya approximately 1923 (Omar 2021). The tax
was enacted in order to defend the developing manufacturing sector, particularly the brewing
sector. Any charge, tax, duty, cess, imposition, tax, or surtax imposed by any Act is included.
According to Amity et al. (2019), referenced by Omar (2021), import duties raise the cost of
imported items, causing customers to choose domestic products since they are less expensive. A
Nation might use the import duties as a strategy to affect the quantity of commodities that are
imported or exported outside of the count in an effort to maintain B.O.P equilibrium. The National
Treasury and Planning (2022) claims, in order to discourage the importation of certain goods, Ad
valorem (% of import value) or a set duty rate are the two ways that import tariffs are computed.
The rate scheme is established on the general category of commodities, whereby completed items
are subject to the highest rate of duty while Capital products and raw materials are tax-free. Import
duties may have an impact on economic growth since they boost the price of imported goods,
which is likely to cause imports to decline and domestic product demand to rise. Increased
manufacturing costs and, consequently, higher profits for indigenous companies may be made
 7

possible by import duties. The administration of an emerging economy will enact tariffs on goods
that are imported on industry sectors that it wants to help foster, which raises the price of imported
goods and creates a home market for locally made goods while seeking to keep those sectors from
being pushed out by more competitive pricing, Kadeng (2020).

1.2.2. Economic growth.

Aliyu (2020) defined, economic growth as the rise in an economy's size amid two points in time
as indicated by gross domestic product. The GDP is the total net amount of all commodities and
services generated within a country's borders within a certain period of time. According to Edewusi
& Ajayi, (2019), taxation, is a fiscal tool that can be utilized by the administration in promoting
the growth of the economy Governments in both rich and emerging economies heavily rely on
taxes to promote economic growth. The Kenyan economy was doing nicely before worldwide
COVID-19 outbreak; real GDP growth was 5.4 percent in the year 2019 (World Bank, 2020).
Closer inspection indicates, But, in 2020, that actual GDP growth abruptly came to a halt as
inflation started to accelerate. The emergency actions i.e., lockdowns taken by the government in
compliance with the measures made by the World Health Organization (WHO) to limit the
coronavirus's spreading may have had a major effect on the global economy. Due to these controls,
the country's financial account, exports of services, remittances, and external position all suffered
in 2020 (IMF, 2020). Since taxes have an impact on the economy and have effects on business and
individual behaviour, the correlation between taxation and growth is debatable. Egbuhuzor and
Tomquin (2021) claim that a variety of economic metrics, including the gross domestic product
(GDP, the human development index, and per capita income, can be used to approximate economic
growth. However, economic indicators will be used in this research to give a view of the economy
and a better knowledge of it. The GDP, gross national product, and per capita income are a few
examples of these metrics. Growth in the economy is conceptually characterised as a consistent
rise in national income or production due to purposeful manipulation of economic indicators by
the government via the use of fiscal or monetary policy tools (Etim et al., 2021).

1.2.3. Taxation and economic growth in Kenya

In Kenya generally there are two kinds of taxes that is direct taxes and indirect taxes. The sum
submitted to the government directly as income tax are referred to direct taxes. VAT, excise duty
 8

and custom duties are examples of indirect taxes paid when buying products and services (KRA,
2020). VAT is levied on products and services sold in Kenya or entering the nation. The standard
VAT rate for all ordinary products is 16%. According to Mwangi (2022), There are particular
excise duty rates on all items, with the exception of food supplements and the sale of excisable
services, which are now levied at 10% of their value. Import duty, excise duty, VAT, import
declaration change, and railway development levy are now examples of customs duty. According
to (KRA, 2020), when products are imported, the following expenses apply, depending on the type
of item, an import declaration fee of 2.25% of the value of the commodity is due, within the
minimum of Ksh. 5000, a 1.5% railway development levy is also charged. In this study taxation is
measured in terms of income taxes, VAT, and import duties.
Through its public revenue, the Kenyan government seeks to promote and direct its objectives for
social and economic development (Duncan 2019). Despite the fact that government spending
directly affects economic growth, these costs must be covered through taxation. The most favoured
method of generating revenue is taxation. Omar (2021) asserts that taxes cause the economy to
contract by lowering disposable income, which in turn lowers household saving and investment
capacity and willingness. Increasing taxes to finance expenditure affects one's capacity for
investing and creating employment. The cost of doing business is increased by taxes for both
domestic and international investors. Taxation can have a beneficial or adverse effect on growth
of economy by increasing revenue or decreasing incentives in the economy. Kenya's GDP to tax
ratio reached its highest point in 2014, when it was 19.3%, and its lowest point, 6.1%, in 2002. In
Kenya, taxes impede SMEs' expansion (Omar 2021). Economic growth is not feasible
without taxation revenue. Hence, using taxes to raise money will either accelerate or decelerate
the rate of economic growth, which will have an effect on the rate. According to their investigation,
OECD (2020), Kenya's tax to GDP ratio fell by 1.1% from 18.5% in 2017 to 17.4% in 2018. In
contrast, the average of 30 African nations increased by less than 0.1% point during the same time
period, reaching 16.5% in 2018. In 2018, the average of the 30 African nations increased by 1.4%.
Over the same time period, Kenya's ration decreased by over 0.5%, from 17.9% to 17.4%. Kenya
had the greatest tax to GDP ratio in 2014 (19.3%), and the lowest in 2020 (16.1%). Nguyen (2021)
looked at the effects of personal income, firm income, and consumption taxes, noting that
reductions in income tax, also known as the sum of person and firm income, had a big effect on
private consumption, GDP, and investment. By lowering the average income tax rate by a unit
 9

percentage, GDP increases by 0.78%. The impacts of VAT on economic growth were examined
by Gunter (2019), who found that the relationship is significantly nonlinear: at low rates and minor
rate changes, the effects are almost zero, while at high beginning tax rates and substantial rate
changes, the economic harm increases.

1.2.4. Kenya’s tax structure

Kenya's taxation system before independence was denoted by a small tax structure made up of
regressive tax including the poll, land, and hut taxes. Following independence, the government
started the process of modernizing the tax system by passing contemporary tax laws, including
those pertaining to the sales tax, customs duty, income tax, and excise duty. In the 1960s and early
1970s, tax laws and procedures were the same throughout the East African Community (EAC),
which comprised the nations of Uganda, Kenya, and Tanzania. Each Partner State kept using the
same tax rules when the Community disintegrated in 1977, which they gradually adjusted to meet
their particular circumstances. (The National Treasury and Planning 2022). According to Treasury
(2022), Kenya's tax system faces many difficulties that negatively affect revenue collection.
Kenya, for example, continues to fall short of the intended Even with the substantial efforts the
government has made to improve the tax system, the East African Community aim of 25 percent
of gross domestic product needed for EAC Monetary Union still stands. Particularly, Over the
previous 10 years, ordinary revenue as a percentage of GDP has usually been declining, from a
peak of 18.2% in the fiscal year 2013/14 to 13.8% in the fiscal year 2020/21. This pattern draws
attention to the structural problems with the tax system. The structure of taxes refers to how much
of the total tax revenue it receives.
In Kenya, other than VAT taxes on goods and services produced the biggest percentage of tax
collections in the year 2020 (OECD 2022), at 29%. Personal income tax contributed 26%, which
was the second-highest percentage of tax receipts in 2020. The Kenya Income Tax Act 2021 states
that income tax is a direct tax levied on a person's income from employment, self-employment,
business entity profits, as well as incomes from rent, dividends, interests, pensions, royalties, and
management or professional fees, among other sources. The majority of the government's tax
revenue in Kenya comes from income tax. To keep up with the economic growth and development
of each era, Kenya's tax structure has undergone ongoing revision. To control numerous revenue
streams, regulations on various tax types have been gradually created and modified. As of now,
 10

Kenya's tax system consists of corporate and individual income taxes, value-added tax (VAT)
agricultural land-use taxes, taxes on natural resources, land and housing taxes, excise taxes,
import-export levies, taxes for environmental protection, and taxes on registration. Taxation is
now the primary source of income.

1.3. Statement of the problem

Implementing taxes is crucial since it is how governments throughout the world get money to
finance their operations and guarantee that services are delivered effectively (Ndirangu 2022). To
increase revenue and promote economic growth and development, governments can use a number
of fiscal policy tools, including taxation, Egiyi (2022). In order to support an increase in public
spending, economic growth frequently results in a greater need for tax income, but it also improves
a country's capacity to do so. Kimani (2021) claims that the administration of Kenya consistently
runs a fiscal deficit, one of the most essential and likely statistics to quantify the effects of revenue
shortfalls on the economy as a fiscal policy. In addition, Kimani (2021) found that Kenya's tax to
GDP ratio has been falling over the past few years, average 17.7percent between 2013 -2019 while
recording 19percent and 16.7percent, respectively, indicating a negative correlation in the
country's GDP and tax collections. Furthermore, the Kenya's GDP has averaged 5.85% during the
past few years, prompting questions about why taxes as a percentage of gross domestic product
have been falling rather than rising in tandem with the country's economic expansion. Over the
previous 10 years, the economy of Kenya has apparently developed substantially, with a GDP
growth rate of roughly 6% each year, according to Mwangi (2022). From a nominal GDP of Ksh
3.17 trillion, Kenya's economy has increased. According to KNBS (2020), the country's GDP rose
by $ 154 billion in 2019 from $ 52 billion in 2010, pushing it up to the 61st position in the world.
When compared to the Ksh 1.4 trillion tax income in the financial year 2017–18, Kenya's tax
revenue in the current fiscal year (FY) 2018–19 reached a new record of Ksh 1.5 trillion. In contrast
to the 5.1% growth the year before, revenue climbed by 11.3% (KRA, 2019). However, according
to data from the International Monetary Fund (2021), Kenya's overall borrowing increased from
48.6% of GDP in 2015 to roughly 69% of GDP in 2020. The external public debt as of September
2020 was 51.4% of the entire debt stock of Ksh. 7.1 trillion.
This mixed tendency suggests that the empirical literature has not sufficiently accounted for the
contradictory correlation among tax revenue and economic development. Kenya had the highest
 11

economic growth rate in 2010 (8.4%), but it has stuck at 5.85% on average over the past ten years
(Kimani 2021). As a result, despite positive growth being reported year after year during the same
time, Issues exist over the likely reason for this economic growth stopping and the declining trend
in the tax-to-GDP ratio. Tax experts and policymakers are very concerned about the effects of
taxation on economic growth and development, and academics and researchers have become
increasingly interested in the topic throughout time (Mwangi 2022).
There exists Several empirical investigations on the relationships between taxes and growth in the
economy various countries. These includes, Nguyen et al. (2021, Neog and Gaur (2020) and Gashi
et al. (2018), Zidar (2019), Kithinji (2019), Ouma (2019), Ordu and Omesi (2022), Awa and
Ibeanu, (2020), Monica and Kazeem (2020), Omodero's (2020), Omondi (2022), Shah et al.
(2020), Alam and Sumon (2020), Aluko and Obalade (2020), and John (2018). However, due to
difference in various conditions such as regulatory frameworks, employment rate, population,
market integration and Market efficiency, these research' conclusions cannot be broadly applied
for the case of Kenya. However, the research done in Kenya was varied and equivocal, with
inconclusive results. In relation to Value Added Tax, Awa and Ibeanu, (2020), taxation and
economic expansion are positively correlated. On the other hand, Monica and Kazeem (2020),
analysed the impact of Value Added Tax on economic growth in Nigeria and found that VAT
above 10% threshold put the economy in jeopardy and below 7.5% threshold value neither hurts
the economy nor decrease the people’s quality of life. Regarding income taxes, Zidar (2019) two
years after the policy change, tax reduction (cuts) was demonstrated to have a positive impact on
the growth of the economy. However, it was shown that tax reductions for low- and middle-income
individuals had a greater impact on growth than tax cuts for those with high incomes. Adeusi et
al. (2020discovered a significant adverse effect of income tax on the growth of the economy. While
Adeusi et al. (2020) found a positive correlation between the variables. Aluko and Obalade (2020),
who examined the connection between imports and economic growth in twenty-six (26) South
African countries, demonstrate that there is no causal connection between imports and economic
growth in the majority of the countries in the model. Numerous research has been conducted on
the topic of taxation and economic growth, as evidenced by the empirical investigations
incorporated in this literature review. Many geographic regions have been studied in this area of
concern. The research' conclusions vary, despite the fact that they have concentrated on the impact
of taxes on economic growth. The majority of these research have been unable to show a precise
 12

connection between the effects of taxation or fiscal policy and growth of the economy. According
to the aforementioned figures, Kenya's tax revenues and economic growth fluctuate; it is necessary
to determine whether there is a correlation and causality between variables in order to understand
why. By analysing the connection between tax income and economic growth in Kenya, this study
seeks to close the information gap.

1.4. General Objectives.

The general objective is to study the effects of taxation on economic growth in Kenya
1.4.1. Specific Objectives.
i. To investigate the effect of value-added tax on economic growth in Kenya
ii. To determine the effect of income tax on economic growth in Kenya.
iii. To examine the effect of Import duty on economic growth in Kenya.

1.5. Research Questions.

i. To what extent does value-added tax affect the economic growth in Kenya?
ii. To what extent does income tax affect the economic growth in Kenya?
iii. To what extent does Import duty affects the economic growth in Kenya?

1.6. Significance of the study.

The findings of this study will serve as a foundation for the formation of tax policy by decision-
makers, as well as for actions focused at guaranteeing highest and effective collecting money
through various levels and rates of taxation that have a favourable impact on the economy. The
Kenya Revenue Authority, which is the nation's major revenue collection agency, would make use
of the findings of the study results in terms of applicability by using them to create a strategy that
will increase the collection of revenue as a source of funding for public operations.
The study's findings will aid researchers in the areas of governance, public finance, and economics
in advancing their work in taxes, public debt management, international trade, and other related
fields. Due to the small number of studies that have been done, the current study will increase the
amount of knowledge already available on taxation in a local context. There were suggestions
made for other study areas that will be offered as soon as future researchers are able to spot research
 13

gaps and develop pertinent research themes. Future academics and researchers who conduct
additional research on this subject and use the study of the effects of taxation on economic growth
and to serve as a reference material will find a great deal of value in it.
The study offers precise and timely information on the impact of taxes on the economy, helping
our government create services and policies that are growth-responsive. Since the government,
taxing bodies like the Kenya Revenue Authority (KRA), and other organizations appreciate
knowledge regarding taxes and economic growth, the research offers the necessary details. Due to
the fact that economic growth is one of any government's primary goals, it is the subject of this
study. To assess the overall influence of fiscal policy on economic growth, it is crucial to
understand how indirect and direct taxes contribute to this goal.

1.7. Limitations of Study.

In spite of the fact that this study solely looked at how taxes affect economic growth, other factors
besides those mentioned above also have an impact on it in Kenya. The depth and scope of the
conversation may have been hampered at many levels due to my lack of research paper writing
experience in comparison to scholars with considerable research competence, but we overcame
the constraint with the help of my project supervisors' frequent consultation and direction. In
addition, the current study was conducted across a time span when several administrations, with
various individuals and policies, may not have used the same principles, leading to various
outcomes.

1.8. Conceptual Framework

The conceptual framework used for this study’s objectives analyses a variety of variables within a
contextual framework to distinguish the research concepts discussed here. The subsequent model
exemplifies the link between the predictor and response variables. The conceptual framework for
the investigation is displayed in Figure 1.1. Taxation broken into its component i.e., VAT, Income
tax, and import duty is the predictor variable, while economic growth is the research’s response
variable. According to the research's empirical findings, these two factors are directly associated.

Figure 1.1: Conceptual Framework

 14

Independent Variables Dependent Variable

TAXATION

Value Added Tax

16% of sale price of
commodities
ECONOMIC GROWTH

Income Tax
(Percentage of income) GDP

Import Duties
(25% of the CRSP)

Source: Researcher (2023)

 15

CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction.
The present chapter provides an overview of the literature linking recent empirical investigations
to current theories to taxation, and economic growth are evaluated critically which provides a basis
for this research. Additionally, the chapter includes a theoretical review, an empirical review, and
a knowledge gap.

2.1 Theoretical Review.

One of the most frequently debated topics is how taxes affect economic growth, and an explanation
is required, particularly during times of economic crisis. We already have opposing views about
what causes economic growth when we look at the goal of achieving economic growth itself.
Keynesians, according to Yakushev (2021), would think that the government's job is to stimulate
the economy by primarily affecting domestic final demand and fully utilizing. The endogenous
growth theory, neoclassical theory, optimal taxation theory, benefit theory, and Keynesian theory
are some of the theories that are examined in this section as they in relation to economic expansion
and taxation. These theories' premises all support the association between the research variables
of taxation and economic growth.

2.1.1. Endogenous Growth Theory.

It's crucial to become familiar with Barro's work If one is interested in learning more about growth
of the economic and the variables that affect it (1990). Endogenous growth models (EGMs),
according to Maganya (2020), are a collection of theories that explain economic growth using
advancements in technology that developed in the 1980s. Endogenous Theory, according to Omar
(2021), contends that long-term policy decisions have an impact on an economy's pace of growth.
The policy actions might either be monetary or fiscal in nature. Tax collection is an element of
fiscal policy in regard to our study's subject, and it also acts as an endogenous force. Neoclassical
growth models, sometimes called Solow-Swan growth models or exogenous growth models, assert
that exogenous variables like growth in populations and advances in technology contribute to
growth, and fiscal policy has a limited impact on the short time intervals between equilibrium
 16

states. Bellova (2014). By examining productivity, capital accumulation, population expansion,

and technical advancement, this growth models seek to interpret long-term economic growth.
Kotlan et al. (2011) claim that the neoclassical economic growth models, hold that technical
advancement determines economic growth, do not permit fiscal policy to control long-term
economic growth. Barro and Sala-i-Martin's work (1990), for instance, incorporated components
of the neoclassical growth model and those from the endogenous growth model and, most all, they
considered the function of taxation in determining economic growth. Although in this models’
exogenous forces are responsible for economic growth, in endogenous models the tax system
offers a method through which the government can affect both the outcome and the rate of
economic growth. As a result, endogenous growth models demonstrated how taxes might affect
long-term economic growth.

2.1.2. Neoclassical theory.

The Exogenous Growth Theory is another name for this theory. As stated by Maganya (2020), the
endogenous growth is sometimes referred to as the new growth theory. The concept is the antithesis
of the Robert Solow is the creator of the Solow model, one of the applications of exogenous theory
(1956). According to the neoclassical paradigm, taxes levied by the government may have an effect
on growth as an economy moves from one steady state to another if they have an impact on the
rate of savings and, as a result, the level of investment (Magana, 2020). The current analysis relies
heavily on neoclassical theory, which contends that income tax may affect real variable aggregate
levels in a steady condition, but not in terms of growth rates. The rate of growth in GDP tends to
be lower in countries with high and progressive taxes that discourage investment in those countries.

2.1.3. The Benefit Theory.

The service cost theory is another name for this hypothesis. The contractual arrangement between
taxpayers and the tax authority serves as the foundation for this approach. Taxes are portrayed to
taxpayers as a levy on goods and services provided by the state (Ayeni et al., 2017). This theory
is found on the notion that, despite taxpayers' expectations regarding the prudent and open use of
taxes paid for the establishment of infrastructure facilities, social programs, and health services,
the State still has the authority to determine the tax laws that apply to the entire nation. Many
people and organizations avoid taxes not just out of self-interest but also because the government
does not take similar measures to ensure exemplary leadership and transparency in the
establishment of infrastructure and social services for the populace. BBC (2019). Vosslamber
 17

(2010) argues that taxes should be high for people who receive the most assistance from the
government and cheap or nothing for those who do not. In other words, tax rates are highest for
those who benefit the most from government programs. When considering the utility method, the
Lindahl model and the Bowen model are covered. According to Lindahl's model, the supply curve
for public services indicates that Social good creation is linear and homogeneous. The state
increases its supply because it is not profit-driven till a voluntary and a trade balance are attained
at some point (Hammond, 2015). Because it highlights how the opportunity cost of purchasing
private goods is sacrificed when producing social goods at increasing costs, Bowen's approach is
more practical. If two taxpayers (A and B) share social services or goods, for example, the demand
for social goods is represented by a and b. Kimani (2021) claims that as a result, a Plus b represents
the whole demand for social goods. The supply curve shows that Products are made in a setting
where expenses are increasing. As the cost of creating social goods includes the value of lost
private goods, the demand curve for private goods is represented by the equation a + b. The cost
and demand curve intersection determines how national funds should be allocated between social
and private goods in accordance with the preferences of the taxpayers (Hammond, 2015). This
theory is pertinent to the current research study because it clarifies the various methods the
government can use to collect taxes when they fall disproportionately on a particular group of
citizens and the various effects this may have on various economic sectors.

2.1.4. Theory of Optimal Taxation

The inverse elasticity rule, which states that taxing goods with low demand elasticity at a higher
rate reduces efficiency loss, and the Corlett-Hauge Rule form the theoretical foundation of optimal
commodity taxation, an idea put forth by Ramsey in 1927 and whose theoretical framework has
changed through modern approaches (Aytaç 2018). Adam Smith developed this theory, which
states that tax systems should aim to increase a social welfare activity within a couple of
limitations. Kaguara (2022). The use of income taxes or commodity taxes by the government is a
topic covered by optimal tax theory. How should tax rates differ between commodities within
commodity taxes? What degree of taxation progression is appropriate? It looks at ways that a
government might use taxes and transfers to increase social welfare while minimizing sacrifices
from taxpayers. The theory's guiding ideas include efficiency, incentives, and the welfare-related
information that decisions reveal. In the literature on optimal taxes, the hypothetical decision
maker is frequently pragmatic, which means that the social services function is based on an
 18

individual's utility to the community. In most general assessments, this literature utilizes a person's
utility's nonlinear function in society wellness. Mwangi (2022). Optimal tax theory, according to
Gentry (1999), includes a variety of models that concentrate on different facets of the tax system.
Three characteristics unite these many models. Secondly, each model outlines the government's
revenue requirements as well as a list of practical levies, like commodities taxes. Lump-sum taxes,
which wouldn't produce any Economic disruption is frequently left out of the models. Second,
each model describes how people and businesses react to taxation. In other words, people have
preferences for certain types of goods and activities, businesses use certain production
technologies, and people and businesses engage under certain market structures. Finally, the
government's responsibility in evaluating various tax arrangements is to be objective. the most
fundamental models, it seeks to maximize revenue generation while minimizing the excess burden
brought on by the tax system. The more complex models strike a balance between equity issues
and efficiency issues. The benefit principle and/or horizontal equity are typically less important in
models that account for equity than vertical equity.

2.1.5. Keynesian Theory

Conventional Keynesian hypothesis claims that, changes in the rate of return and disposable
income result from government expenditure and have an impact on private savings and
consumption. In light of this, a tax decrease would boost disposable income, which in turn would
boost consumer expenditure. A temporary tax cut would, however, be expected to have little effect
on private consumption, according to the permanent income hypothesis. The Ricardian
equivalence theory states that If customers expected future tax hikes, they would be more likely to
preserve money rather than spend it hence tax reductions would have minimal effect on
consumption. Mohamed (2022). According to Keynes, in order to improve economic growth and
decrease unemployment, a country should implement an expansionary fiscal strategy, which
includes raising government spending and/or reducing taxes. to strengthen the economy and
increase economic activity Tendengu, (2022). Inflationary tendencies can be fueled by increased
government expenditure, which is detrimental to the growth of capital. Due to uncertainty
regarding both relative pricing of the future, which are essential for return on investments, as well
as the benefits of current savings. Extremely low real interest rates for savers are produced by high
inflation rates, which limits investment by reducing the flow of capital. When inflation is
anticipated to be strong, on the other hand, the Tobin-Mundell effect induces portfolios to shift
 19

real capital is moved away from real money balances and in the direction of investment, which
fosters growth in the economy.

2.2 Empirical Review

This study's empirical review explores phenomena investigated and observations made by past
researchers in their quest to address research problems and establish relationships between and
among variables as used in the conceptual framework. The impact of taxes on growth in the
economy in developed as well as emerging economies has been the subject of numerous academic
studies. The study's findings are below:

2.2.1 Income Tax and Economic Growth

Income tax is a direct tax that the government imposes on people and businesses as part of a law
that must be followed in order to pay for public expenditures Kadenge (2021). Typically,
companies and individual income are subject to a 30% income tax on gains realized. It is
determined from taxable income following the subtraction of exemptions (Kenya Revenue
Authority, 2019). The largest portion of the overall tax revenue is contributed by income tax and
is mostly collected by the KRA. For the most part, it is gathered monthly from people and yearly
from entities. Depending on the demands of the economy, government policies may increase or
decrease income tax.

In their study from 2021, Nguyen et al. look at the effects of corporation, individual, and
consumption taxes in the UK between 1973 and 2009. In their work, they define income taxes as
the whole of an individual's and a corporation's earnings, and they discover that these taxes have
substantial influence on the gross domestic product (GDP), private consumption, and investment.
GDP grows by 0.78 percentage points whenever the average income tax rate is lowered by 1%.
Although transitioning growth when shifting from an income tax base to a consumption tax base,
the results of consumption tax decrease are statistically insignificant and relatively tiny. As
consumption taxes does not significantly affect the incentives to work and invest that are necessary
to ensuring long-term economic growth, they are often viewed as being less distorting than other
taxation. In his research, Nguyen focused on the effects of various tax cuts and how they affected
the UK's GDP throughout the years 1973 to 2009. The current analysis examines the broad impacts
of income tax on Kenya's economic growth from 2019 to 2023.
 20

Studies by Neog and Gaur (2020) and Gashi et al. (2018) cast doubt on the existence of a beneficial
effect of either indirect or direct taxes on economic growth. Over the years 1991–2016, Neog and
Gaur (2020) looked at the long- and short-term relationships between the tax system and state-
level growth performance in India. The researchers discover that income tax and commodity-
service tax have a negative impact on state economic growth using panel pool mean group
estimation for 14 Indian states. When Gashi et al. (2018) used the Ordinary Least Square approach
to analyze the influence of the tax structure on Kosovo's economic growth from 2007 to 2015, they
discovered that both income taxes and consumption taxes have a detrimental effect on growth. The
latest study looks at how taxes affect economic growth in Kenya, a country with a slightly different
tax system from the one used in the prior study.

Zidar (2019) looks at the effects of federal tax burdens in the United States from 1950 to 2011 on
economic growth and labor supply across a range of income categories and states. Two years after
the policy change, In addition to learning that tax cuts boost economic growth, he also learns that
tax cuts for low- and moderate-income taxpayers have a bigger effect than those for high-income
taxpayers. The study discovers that a 1% reduction in state GDP taxes for the poorest 90% of
earnings boosts state GDP by 6.6%. He discovers that a 1 percent state GDP tax cut boosts hours
worked by 2 percent and labor force participation by 3.5 percentage points for the bottom 90
percent of earners when considering the effects on the labor supply. In contrast to the findings of
Mertens and Olea (2018) for top earners, who find considerable benefits of tax reduction on real
earnings as well, He finds that, for the top 10% of incomes, a similar-sized tax change has little
impact on labour force participation rates, hours worked, or GDP growth. According to Zidar, "the
rise in real wages implies that supply-side responses to tax reductions for the lowest 90% are
important and may exceed demand-side responses." Furthermore, some would claim that this study
proves tax cuts for the wealthiest Americans have little effect on economic expansion. The current
analysis, however, only examines how taxes generally affect GDP growth and does not take into
account the wider implications of tax policy for long-term growth, human capital, or innovation.

In 2019, Kithinji examined how taxes in Kenya impact governmental spending. The aim was to
find out the impact of taxes on Kenyan government spending. Secondary data was provided by the
National Bureau of Statistics, and it was examined using a regression model and descriptive
statistics. According to the findings, government spending is significantly influenced by tax
 21

revenue. It was suggested that the government reduce recurrent expenditures, increase tax receipts,
or borrow more in order to be able to pay for both ongoing and one-time costs. This is contrary to
the subject of the current study, which concentrates on the effects of taxes on growth of the
economy rather than government spending.

Maganya (2020) looked into tax income and economic growth in poor nations using an ADL
method. The main objective was to examine how taxes in Tanzania affected GDP from 1996 to
2019 using a freshly developed method called the ARDL bounds test. As a first step in the analysis,
stationary and the pair-wise Granger causality test were performed. Domestic service and goods
taxes have a positive relationship with GDP growth. On the other side, income taxes were inversely
associated to growth of GDP. The study spans the years 1996 through 2019. Since this time,
numerous rules as well as collection methods have evolved. The recent years up till 2020 are the
focus of the current investigation.

Ouma (2019) assessed the revenue effects of governance, tax reforms, and economic expansion in
Kenya. The study examined the effects of tax reforms, economic expansion, and political climate
on overall tax revenues using annual data from 1964 to 2016. It was discovered that all of the tax
revisions had a positive effect on taxes. The growth of the economy had a positive significant
impact on all tax categories, and the reforms also had an impact on tax changes because GDP was
increasing. Government effectiveness also favors direct taxes, and even though the impact of
government corruption control on tax collections is statistically small, revenue generation may be
more important than economic growth. The study looked at revenue implications of governance,
tax reforms and economic growth while the current study on effects taxation on economic growth.

2.2.2 Value-Added Tax (VAT) and Economic Growth

The goods and services tax are the common name for value-added tax. It is a consumption tax that
must be paid on the goods and services that any person, company, or individual consumes Clement,
et al. (2019). Value-added tax is levied on the importation of goods and services into Kenya
additionally on the provision of taxable goods or services made or rendered there by a taxable
person in the course of or in advancement of any business conducted by that person.

In Nigeria between the years of 2000 and 2020, Ordu and Omesi (2022) looked into the link
between Value Added Taxes and Revenue Allocation. Its precise goals were to identify the
relationships between the VAT and Federal Allocations, the VAT and State Allocations, and the
 22

relationships between the VAT and Local Government Allocations. For the study, an expo facto
design was used, and secondary data were employed. Data was taken from the Central Bank of
Nigeria's 2020 Annual Statistical Bulletin. The information gathered covered the years 2000
through 2020. For data analysis, descriptive statistics and trend analysis were employed, and
regression was performed to test the hypothesis. The study's findings indicate that VAT has a
positive and substantial association with Federal allocation in Nigeria, as well as positive and
significant relationships with State allocations and Local government allocations.

The impact of tax income on Nigeria's economic development was determined by Awa and Ibeanu
in 2020. The precise goals are to ascertain how the petroleum profit tax, corporate income tax, and
value added tax affect economic development as measured by the human development index
(HDI). Used are annual time series data from CBN and FIRS from 1997 and 2018. The study made
use of regression analysis. The outcome demonstrated that value added tax does not greatly affect
economic development, however petroleum profit tax and corporate income tax have a major
impact. The study implies that the level of economic progress attained by the economy is inversely
correlated with tax revenue earned. This suggests direct taxes, specifically those that boost
economic growth, have a bigger impact on Nigeria's economic development than indirect taxes
do. This anomaly was ascribed to ineffective tax administration, broken links in the tax system,
and legal loopholes. The quality of development will decline in direct proportion to the amount of
tax income collected. Governments will earn more money if they enhance the system of tax
administration and strengthen the legal and regulatory framework to prevent people from evading
and avoiding paying taxes. The current analysis focuses on the impact of taxes on economic growth
in Kenya rather than necessarily development and used data from 2009 to 2020.

Using the consumer price index as the cutoff, Monica and Kazeem (2020) examined the effects of
value added tax (VAT) on economic development in Nigeria between 1994 and 2020. Their
research shows the economy is threatened if the percentage rises above 10% of value added tax,
whereas a VAT below the 7.5% threshold value has no negative effects on the economy or on
people's quality of life. They suggested that the Nigerian economy maintain its lower value added
tax (VAT) level in order to lessen the effects of the population's steadily rising consumer price
index (CPI). With GDP as the benchmark, the current study assessed the impact of taxation on
economic expansion.
 23

The study by Omodero (2020) examined the impact of indirect taxes on Nigerian consumption.
Value Added Tax (VAT) and CED are both evaluated in this study to assess their impacts on
consumption using a number of econometric methods, such as unconstrained co-integration rank
test, paired Granger causality tests, trend analysis, and least squares approach, and data from 2005
to 2019. The findings show that CED has a significant beneficial impact on use whereas VAT has
a negligible however, a favourable effect on consumption. This finding demonstrates how the
implementation of VAT on goods and services is deterring the consumption of particular
foodstuffs and services and promoting the growth of the informal economy in Nigeria. The results
revealed that CED has a strong beneficial impact on use whereas VAT has a negligible yet
favorable impact on consumption. The outcome demonstrated that Nigeria's informal economy is
flourishing because the introduction of VAT on goods and services discourages consumers from
consuming certain commodities and services. The current study examines the effect of taxation on
economic growth.

Omondi (2022) analyzed Kenya's reform of the VAT and determined its impact on household
welfare and the effectiveness of Value Added Tax collection. The study also calculated the Value
Added Tax gap in Kenya and assessed the factors that influence it. The effects of Value Added
Tax reforms on household welfare were examined using the Quadratic Almost Ideal Demand
System model; Value Added Tax efficiency was assessed using the Collection-Efficiency model;
and Value Added Tax gap was calculated using the International Monetary Fund Revenue
Administration Gap. Statistical Abstracts, Economic Surveys, the Kenya income Authority, and
the World Bank Data Base provided the data on value added tax income, final consumption, and
gross domestic product, respectively. Secondary data came from the Kenya Integrated Household
Budget Survey for the 2015–16 fiscal year. The study discovered that the VAT reforms in Kenya
had resulted in a decline in household welfare because tea leaves, sugar, beans, salad, white-bread,
rice, cooking fat, spices, soda, and maize were all shown to have negative uncompensated pricing
elasticities. The same was true for the other eight food products that were picked. This finding
suggested People would cut back on their purchases of the items in response to a price hike.
Additionally, the coefficients for eight of the 10 food items—sugar, beans, salad, white bread, rice,
cooking fat, soda, and maize—exhibited positive spending elasticities. The findings showed that
households were under consuming these goods and needed either a price cut or income
compensation to consume more. This was another indicator of the decline in household welfare
 24

brought on by Kenya's VAT reforms, which had the overall effect of raising prices. The study was
unable to demonstrate a link between VAT and economic expansion.

2.2.3 Import Duty and Economic Growth

Customs duty and excise duty are governed by Kenya's Custom and Excise Act (Cap 472) Laws.
Therefore, the management of customs and excise duties falls within the purview of the Kenya
Revenue Authority's Customs and Excise Department. Customs duties may be owed when
importing or exporting specified goods and services. Kenya imposes excise taxes on a wide range
of goods and services, such as soft drinks, automobiles, mobile phone services, polythene bags (of
a certain type), beer and alcohol, cigars, and cigarettes. It was governed by the Customs & Excise
Act of 2010 until to December 1, 2015, however as of that date, it is governed by the Excise Duty
Act of 2015, Owino (2019).

Shah et al. (2020) used time series data from 1976 to 2015 to examine the link between capital
formation, growth of the economy, exports, and imports in the context of Pakistan. The links
between exports, imports, and economic growth have been examined using approaches including
the Augmented Dickey Fuller Test, Johansen Co-integration, Vector error correction model, and
Granger Causality. The study's findings demonstrate the long-term link and co-integration between
exports, imports, real GDP, and gross fixed capital formation. This study, which makes use of data
from Pakistan, comes to the conclusion that while short-term exports and imports have no effect
on GDP, long-term exports and imports do. The study's findings also show that GDP is unaffected
by the accumulation of physical capital. Exports, imports, and gross capital formation were all
independent variables used in Shah et al. (2020) analysis of GDP. The GDP is used as the response
variable in the current research, which concentrates on both direct and indirect taxes, such as
income tax, VAT, and import charges.

For 15 Asian nations between 1990 and 2017, Alam and Sumon (2020) examined the causal link
between trade openness and the growth of the economy. To demonstrate the existence of co-
integration between variables, they used panel co-integration and causality techniques.
Additionally, for the countries under examination, their findings show a bidirectional causal
relationship between economic growth and trade openness. It is discovered that trade openness
has a favorable effect on economic growth. The bidirectional correlation between economic
growth and trade openness is revealed by the panel vector error correction model Granger causality
 25

study. The current study only focuses on effects on taxation on economic growth in Kenya without
consideration of trade openness.

Twenty-six (26) South African countries' imports and economic growth were examined between
1990 and 2015 by Aluko and Obalade (2020) using a neoclassical production function paradigm.
By applying the Granger non-causality test, which was first developed by Toda and Yamamoto in
1995, their experimental results demonstrate that, for the bulk of the model's economies, there is
no causal link between imports and economic growth, thereby disproving the notion that imports
cause economic development. This study failed to capture East African countries which brings out
the gap in the current study.

John (2018) conducted a study in Kenya to ascertain the impact of customs duties on the country's
economic performance. The study's methodology was correlation research. A sample size of all 86
registered EPZ enterprises was chosen in his study because it primarily focusing on the
performance of EPZ companies in Kenya. To get primary data, questionnaires were employed.
Secondary information on ROA, the number and value of jobs, and the length of stay of the firms
was gathered from the registered businesses. Data analysis for the study was done by use of both
descriptive and inferential statistics. According to the study's findings, custom duty incentives
significantly impacted EPZ enterprises' ROA-based performance at a 5% level of significance.
Additionally, the results revealed that, at a 5% level of significance, custom duty incentives were
shown to have a substantial link with EPZ enterprises' performance as judged by the number of
workers in Kenya as a whole. At a 5% level of significance, the data likewise showed a positive
34 and significant link between custom duty incentives and the performance of EPZ enterprises as
evaluated by the number of years in business. The study's findings suggest that the government
should increase excise duty incentives in order to decrease imports and, consequently, boost the
expansion of domestic product demand in the nation. The government could employ this tactic to
stop smuggling and to encourage the expansion of the tourism sector. The report suggests that
policymakers establish strategic incentive programs, tailored incentive schemes that focus on
particular industries, or strategic tax incentives that add value or have a beneficial economic impact
and are consistent with the nation's 2030 vision. The study failed to establish a relationship
between custom duty and economic growth.
 26

According to Owino (2019), the Kenyan government changed its tax policy to rely more heavily
on indirect taxes due to the budgetary crisis brought on by the international oil shock in the early
1970s. As a result, customs and excise tax collection increased consistently between 1973 and
2010; nevertheless, this was accompanied by a consistent slowdown in economic development.
The impact of such notable increases in customs and excise tax collections on economic growth is
an important issue. In order to examine the impact of customs duty on economic growth in Kenya
from 1973 to 2010, Owino (2019) conducted a study. Two breakthroughs serve as the inspiration
for this investigation. First, by the discrepancies in the empirical research that has already been
done, and second, by the vast knowledge gap caused by the dearth of empirical research on Kenya.
Therefore, in order to bridge the knowledge gap and bring the various viewpoints into harmony,
this study. Based on its capacity to ascertain the strength and direction of correlations between
variables, the study adopted a correlation research design, and it was theoretically grounded in an
endogenous growth model. According to the empirical findings, Kenya's economic expansion is
favorably connected with customs duty.

2.3 Research Gap

Numerous research has been conducted on the topic of taxation and economic growth, as
evidenced by the empirical review incorporated in this literature review. Numerous geographical
regions and historical periods have been covered by studies in this area of focus. The various
research relating to the present topic of study such Nguyen et al. (2021, Neog and Gaur (2020) and
Gashi et al. (2018), Zidar (2019), Kithinji (2019), Ouma (2019), Ordu and Omesi (2022), Awa and
Ibeanu, (2020), Monica and Kazeem (2020), Omodero's (2020), Omondi (2022), Shah et al.
(2020), Alam and Sumon (2020), Aluko and Obalade (2020), and John (2018). From the literature
reviewed, fewer are studies in Kenya and the majority are outside Kenya which mainly focused on
the general implications of Taxes on economic performance. Some researchers have tried to bring
out the positive side of taxation on economic growth while others propagated the opposite. Due to
this, this study will conduct an empirical inquiry into the effect of taxes on economic growth in
general but also to narrow down the direct and indirect taxes into Income tax, VAT, and
import/customs duty and their impact on economic growth.
 27

Table 2.1 Summary of Literature Review and Research Gaps.

The summary of the literature review and research gaps is shown in Table 2.1. This section details
the subject matter of earlier studies, the gaps in the literature that were found, and how these gaps
were filled in the current study.

Author(s) and Purpose of the Findings Research Focus of the current study
Context. Study
Gap

Nguyen et al. The They discover that income tax reductions, Nguyen in his study focused on the The current study examines the
(2021) Macroeconomic which they define in their article as the impact of different tax cuts and their effects of taxation i.e., VAT,
Effects of Income sum of individual and corporation income, effect on GDP from a period ranging income, tax, and import duty on
and Consumption have significant effects on the GDP, from 1973-2009 in England. The economic growth.
United Kingdom Tax Changes private consumption, and investment. current study looks at the general
GDP increases by 0.78 percentage points effects of income tax on economic
for every percentage point drop in the growth from 2019-2023 in Kenya.
average income tax rate. The research
indicates that shifting from an income to a
consumption tax basis has favourable
impacts on growth even while the effects
of consumption tax reductions are
statistically insignificant and relatively
tiny.

Neog and Gaur Tax structure and They discover that state economic Difference in the Tax Structure. The current study examines
(2020) and economic growth growth is negatively impacted by the effects of taxation on
Gashi et al. income tax and commodity-service economic growth in Kenya
(2018) taxes. with income tax, import
duty, and VAT and GDP as
India When Gashi et al. (2018) examined
the only variable.
the influence of the tax system on
Kosovo's economic growth from 2007
to 2015, they discovered that both
income taxes and consumption taxes
have a detrimental effect on growth.
 28

Zidar (2019) analyses the that tax cuts for lower-income groups are The study dwells on the The current study focuses on
impact of tax primarily responsible for the positive consequence of tax change to the impact of income tax and its
United States
changes on association between tax cuts and different income categories on relationship to the economic
overall economic employment growth, and that the impact employment rather than income tax growth
activity for of tax cuts for the top 10% on employment effect on economic growth
various income growth is minimal.
categories.

Maganya (2020) This study looked The results of this study demonstrate that The study covers a period from 1996 The current study examines the
experimentally at domestic taxes on goods and services have to 2019. A lot of policies have effects of taxation on economic
Tanzania
how taxes a sizable positive impact on GDP. The changed since this period and growth in Kenya with income
impacted results are in line with Ibn Khaldun's collection mode. The current study tax, import duty, and VAT and
Tanzania's theory of taxation, which supports the focuses on recent years until 2020. GDP as the only variable The
economic growth beneficial effects of reduced tax rates on current study focuses on recent
from 1996–1997 the health of the economy. Contrarily, it years until 2020.
through 2019– was discovered that income taxes had a
2020. negative correlation with GDP growth and
were statistically significant at the 5%
level.

Ouma (2019) The Revenue The government must work towards This study focused more on The current study examines the
effects of Tax designing and implementing measures governance in order to increase the effects of taxation i.e., VAT,
Kenya
Reforms, that strengthen the tax system and connect payment of taxes, decrease evasion income, tax, and Import/custom
Economic it more closely to economic expansion. and avoidance, and lessen duty on the growth of the
growth, and unsavoury collaboration between economy.
political taxpayers and tax collectors that can
environment. deprive the government of necessary
funds. It does not explicitly reveal
how this is going to affect economic
growth

Ordu and Omosi VAT and revenue The study's findings indicate that VAT The study ascertains the relationship The current research examines
(2022) allocation in and federal allocation in Nigeria have a between VAT and Federal the effects of taxation i.e.,
Nigeria favourable and significant link.; VAT has Allocations; ascertains the VAT, income, tax, and
Nigeria
a favourable and significant association relationship between VAT and State Import/custom duty on
with State allocations; VAT has a positive allocations; and determines the economic growth.
and significant relationship with Local relationship between VAT and
government Allocations in Nigeria Allocations to local governments.
The study does not show the
 29

relationship between VAT and

economic growth.

Awa and influence of tax The results demonstrated that, while The study relates taxation to The current study focuses on

Ibeanu, (2020). revenue on value added tax has a minimal impact economic development while the economic growth.

economic on economic development, petroleum current study relates Income tax,

VAT, and Import duty on economic
development profit tax and corporate income tax
growth.
Nigeria. had large effects.

Monica and impact of According to their findings, a value The study used Consumer Price Effects of taxation on economic

Kazeem value added added tax A VAT below the 7.5% Index as measure of economic growth.
(2020). tax (VAT) on threshold value neither harms the growth. The current study
economy nor lowers people's quality measured the effect of taxation
Nigeria economic
of life, while one beyond the 10% on economic growth with GDP
growth
threshold value puts the economy in as the measure
danger.

Omodero's The The results revealed that CED has a The study related indirect current study looks at the
Consequences significant favorable impact on use, taxation on consumption while effects of taxation on
(2020)
of Indirect whereas VAT has a negligible yet the current study looks at the economic growth.
Nigeria Taxation on positive impact on consumption. effects of taxation on economic
Consumption growth.

Omondi The household Tax reforms were shown to have greatly The study failed to show the Correlates VAT, Income Tax,

(2022), welfare, increased the effectiveness of VAT correlation between VAT and and Import Duties to GDP.
collection collection while simultaneously
economic growth.
Kenya. effectiveness, and expanding Kenya's VAT compliance gap.
the factors
influencing the
value added tax's
compliance gap
are all affected by
modifications to
the VAT.
 30

Shah et al. the connection The results demonstrate that there is a The study related imports and The current study focuses
between capital long-term relationship and co-integration exports to capital formation and both on direct and indirect
(2020),
formation, between real GDP, gross fixed capital GDP. taxes i.e., income tax, VAT,
Pakistan. economic growth, formation, imports, and exports. The
and import duties with GDP
exports, and study's findings also show that GDP is
as the dependent variable.
imports unaffected by physical capital formation.

Alam and studied how For the countries under examination, their The study failed to link VAT to The current study only
Sumon (2020) trade openness findings show a bidirectional causal economic growth. focuses on effects on
and economic relationship between economic growth taxation on economic
15 Asian and trade openness. It is discovered that
growth are growth in Kenya without
countries trade openness has a favorable effect on
related. consideration of trade
economic growth.
openness

Aluko and VAT and revenue In majority of the economies in the model, This study failed to capture East The current study will
Obalade (2020) allocation in their experimental results reveal that there African country which makes brings investigate the extent to which
Nigeria is no causal connection between imports out the gap in the current study economic growth is affected by
Nigeria
and economic growth, proving that there the different types of taxes.
is no link between imports and economic
development.

John (2018) This study According to the study's findings, custom The study was unable to prove a The current study focuses on
determined the duty incentives significantly impacted connection between customs duties both the direct and indirect
Kenya.
effects of custom EPZ enterprises' ROA-based performance and economic expansion. taxes
duty on economic at a 5% level of significance. Additionally,
performance in the results revealed that, at a 5% level of
Kenya significance, custom duty incentives were
shown to have a substantial link with EPZ
enterprises' performance as judged by the
number of workers in Kenya as a whole.
 31

CHAPTER THREE

RESEARCH METHODOLOGY

3.0 Introduction
The science of researching how research is conducted scientifically is known as research
methodology. a method for logically adopting several steps to answer the research topic in a
methodical manner, Patel et al. (2019). This chapter covers the research design, study population,
sample size and procedure, data collection method, data analysis method, privacy and ethics, and
validity and reliability of the research.

3.1 Research Design

In order to ensure you will successfully solve the research problem, Thakur (2021) describes
research design as the general strategy you select to incorporate the numerous study sections in a
consistent and logical method. It also acts as a manual for the procedures involved in gathering,
measuring, and analyzing data. When it is necessary to investigate the connections between
variables in a study, correlational research is typically used ("Correlational Research Overview,"
2019). According to the 2019 article "Correlational Research Overview," correlational research is
an effective a technique for figuring out how strong a relationship between two variables. Based
on the relationships that the studies uncover; the researcher can then produce a well-informed
outcome. The aim of a descriptive correlational research strategy is to report the relationships
among the variables under consideration. In order to ascertain whether there is a link between
taxation and economic growth in Kenya as well as the effect that taxes have on that growth, this
research design will examine these issues. A descriptive correlational research strategy was used
by the researcher to describe and characterize the type of functional correlation that exists between
two or more variables. The study's design was also appropriate because it allowed the researcher
to analyze some of the causes behind these growth shifts and look at how the phenomenon under
study changed at different stages of life. This study determined how taxes affect Kenya's economic
growth.
 32

3.2 Research Site

Kenya was the subject of the study's case study. According to the National Treasury and Planning
(2021), Article 209 of the Constitution serves as the cornerstone of Kenyan taxation and grants the
National Government the power to impose various taxes, including income tax, value-added tax,
excise tax, customs duty, additional tariffs on imports and exports, and any additional taxes that
may be enacted by a law passed by the national legislature or a county assembly.

3.4 Sampling Design

According to Bhardwaj (2023), sampling consists of choosing a selected sample from a population
so as to do a specific type of research. Various techniques, such as systematic and straightforward
random sampling, may be used to choose a sample from a wider population depending on the type
of study being conducted. The census sampling approach was used by the researcher. The census
sampling method is a statistical list-based procedure where every person in a population is
examined. This method allowed the researcher to get full information and data from almost all the
workers since they are not many, there is the capacity to collect data from all of them. The GDP
and taxes collected by the Kenyan National Government between 2009 and 2020 were counted in
this study. KRA, Central Bank of Kenya (CBK), and Organization for Economic Co-operation and
Development (OECD) served as the sample frame for the study from which secondary data was
collected.

3.5 Data Collection Methods.

Secondary data, which has formerly been compiled from primary sources and made easily
accessible for academics to use for their research requirements, was used for this study. These data
were gathered using a method known as document analysis, which involves systematically
reviewing documentary evidence. This documentation evidence was gathered from a number of
sources, including KRA, Central Bank of Kenya (CBK), and OECD. Data was gathered in order
to compare the GDP of various years and the various types of tax.
 33

3.6. Diagnostic Tests

Diagnostic tests in this study is done to confirm that the outcome from the regression analysis is
reliable and also ensure that there is no biasness in the results and are consistent and efficient.
The tests conducted include, multicollinearity Test, Auto-correlation test and Normality test.

3.6.1. Normality Test

In order for the results of statistical tests used to examine data to be legitimate, assumptions must
be made (Tsagris and Pandis 2021). The normality assumption states that the random variables
follow a normal or nearly normal distribution (Mwangi 2021). The residuals from a linear
regression model are one situation where normality tests are applied. The residuals should not be
utilized in Z tests or any other tests derived from the normal distribution, such as t tests, F tests,
and chi-squared tests, if they are not normally distributed, (Khatun, 2021) Khatun. Identifying
the absence of outlines in the data is necessary. Both previously collected via primary sources
and made easily available for scholars to use for their research needs can be used in a normality
test. The error term must be regularly distributed according to the regression model's
presumption for it to be reliable. Shapiro-Wilk and Kolmogorov-Smirnov test statistics are used
in this study to conduct a normality test on the data to ascertain its normalcy. The data is normal
if its P-value is higher than the threshold for significance.

3.6.2. Auto-correlation test

The basis for the autocorrelation test is The Durbin-Watson test autocorrelation. According to
Asthana (2020), the value of d statistic lies between 0 and 4. A value near 0 shows the presence
of positive autocorrelation, value near 4 shows presence of negative autocorrelation whereas
value near two shows absence of autocorrelation. It is assumed in linear regression analysis for
time-dependent phenomena that the error term is independent of its past (previous) value(s).
Autocorrelation is deemed to be existent if this premise is not true. Even if there is
autocorrelation, the estimate is still fair and linear but does not have the lowest variance possible
(Akash 2020).

3.6.3. Multicollinearity Test.

In regression analysis, multicollinearity tests the linear intercorrelation between variables.
According to Young (2017) as cited by Shrestha (2020), Collinearity indicates two variables
that are close perfect linear combinations of one another. Multicollinearity occurs when the
regression model includes several variables that are significantly correlated not only with the
 34

dependent variable but also to each other. The SPSS regression outcomes show the correlation
level amid predictor variables and the correlation coefficient between variables. Multicollinearity
raises the coefficient’ standard errors, making some variables statistically insignificant despite
the fact that they should be. To test this, variance inflation factor was used. If VIF is greater than
5 but less than 10, there is considerable multicollinearity present. If VIF obtained is less than 10,
then there is a lot of multicollinearities.

3.7. Data Analysis.

Software called SPSS is used for data analysis to reveal whether there is any meaningful
correlation between Kenya's import duty, value-added tax, income tax, and economic growth, the
study used a multiple regression analysis technique. A correlational analysis was run to find out
the link between the predictor and dependent variables. Tables were used for data presentation to
facilitate easy understanding. Predictor variable including income tax, value-added tax, and import
duties and GDP as the response variable are used to make the regression model below.

The regression model, Y= α+B1x1+B2x2+B3x3, where; Y represents Economic Growth in GDP

and x1, x2, and x3 represents the independent variables and B1, B2, and B3 are the regression
coefficients of correlation between the predictor and response variable. In the model Y=
α+B1x1+B2x2+B3x3,

Y= Economic growth (measured as GDP in percentage), x1=income tax, x2=value added tax, x3=
import duty (all measured in Ksh), B1, B2, and B3 are regression coefficients. And therefore,
Economic growth (GDP) =α+income taxB1+VAT B2+importdutyB3.

3.8. Privacy and Ethics.

The study made use of actual, real data that had been developed and gathered by reputable
organizations in Kenya, including KRA, OECD World Bank, and CBK. If the results do not match
the broad, general observations that have been drawn from previous in-depth research, there won't
be any falsification of results or adjusting of the findings. In the unlikely event that our findings
differ from theirs, our findings will stand.
 35

3.9. Validity and Reliability.

The degree to which conclusions drawn from numerical scores are reasonable, understandable, and
valuable is known as the validity of the data. Omar (2021). Kothari (2004) asserts that the most
helpful factor for determining how well a survey meets the information requirements for the
research response is its validity. Our sources of data included the World Bank, OECD, C.B.K.,
and K.R.A. These organizations are justifiable and well-known and offer a sizable database of
high-quality data that has been assembled by professionals and may not be practical for any
individual to gather.
 36

CHAPTER FOUR

DATA ANALYSIS, PRESENTATION, AND INTERPRETATION

4.1. Introduction

This chapter involves a discussion on data analysis, presentation, and interpretation. It discusses
the data analysis and discussion of the results. It is divided into two main parts, the first of which
includes a descriptive analysis that highlights the salient features of the research data through
summary statistics and trend analysis. The chapter then gives the results of the SPSS analysis. The
purpose of this study is to determine how taxes affect Kenya's economic growth. The results are
provided in keeping with the objectives of the study. Three distinct goals, namely: to ascertain the
impact of income tax on the Kenya’s economic growth; to ascertain the impact of import duty on
economic growth in Kenya; and to ascertain the impact of value-added tax on the Kenya’s
economic growth, served as the driving forces behind the study.

4.2. Response Rate.

This research sampled data for details of public revenue for Kenya from World Bank, OECD,
CBK, and KRA for a period of 2009 to 2020. The study sampled data on income tax and Capital
gains, which consists of taxes on income, profits and capital gains of individuals i.e., Pay as You
Earn (PAYE), Individual Income Tax, and tax on rental income and taxes on income, profits and
capital gains of corporates i.e., corporation tax, withholding tax and capital gain tax; Taxes from
Value Added Taxes which consists of VAT-ordinary imports, VAT- oil imports, and VAT-
Domestic(refunds); and Import duty.

4.3. Descriptive Statistics

The following concerns are described and analyzed in this section: trend analysis for VAT, Income
tax, Import duties and GDP. Descriptive statistics of the data series is shown in table 4.1.
Descriptive statistics of GDP, Income tax, VAT, and Import duties, employed to summarize the
quantitative data includes mean, standard deviation, minimum and maximum. The mean is used
 37

to determine where the relative frequency distribution's centre is, whereas the standard deviation
measures the spread of a set of observations and is of great importance for evaluation purposes.

The descriptive statistics in Table 4.1 indicates that, the predictor variables had means above the
standard deviations, thus reducing the likelihood of outliers or random errors in the data set. The
findings in Table 4.1 reveal that the average annual GDP growth in Kenya for the period 2009 to
2020 was 4.392% with a standard deviation of 1.9681. The minimum value was -0.30 while the
maximum value was 8.1. This implies that, for the period from 2009-2029, Kenya’s economic
growth measured in terms of GDP fluctuated over the study period and averagely remained below
5%. The findings further show that the mean of VAT tax generated in Kenya for the period 2009
to 2020 was Ksh 247,674.5303(Millions) annually with a standard deviation of Ksh
107,746.05854(Millions). The minimum value was Ksh 26,877.71 (Millions), while the maximum
value was Ksh 395,126.89(Millions) This is an indication of higher fluctuation rate of VAT for
the period of the study. Results also indicate that the mean of income tax generated in Kenya for
the period 2009 to 2020 was Ksh 459,525.5433(Millions) annually with a standard deviation of
Ksh 201,783.53733(Millions). The minimum value was Ksh 937,44.65 (millions), while the
maximum value was Ksh 721,164.08 (Million), an indication of higher fluctuations in the Income
Tax. In addition, results indicate that the mean of import duty generated in Kenya for the period
2009 to 2020 was Ksh 68,969.4318(Million) annually with a standard deviation of Ksh
22,681.93424(millions). The minimum value was Ksh 35,325.09(Millions), while the maximum
value was Ksh 103,511.01(Millions), an indication of higher fluctuations in Import Duties.

Table 4.1: Descriptive Statistics

N Minimum Maximum Mean Std. Deviation Variance Skewness Kurtosis

Statistic Statistic Statistic Statistic Statistic Statistic Statistic Std. Error Statistic Std. Error

Economic
12 -.3 8.1 4.392 1.9681 3.874 -.781 .637 3.160 1.232
growth
Income Tax 201783.5373 40716595938
12 93744.65 721164.08 459525.5433 -.383 .637 -.941 1.232
3 .932
VAT 107746.0585 11609213130
12 26877.71 395126.89 247674.5303 -.466 .637 -.098 1.232
4 .338
Import Duty 514470140.6
12 35325.09 103511.01 68969.4318 22681.93424 .059 .637 -1.381 1.232
93
 38

Valid N (listwise) 12

4.4. Diagnostic Tests

Diagnostic tests in this study were done to confirm that the results from the regression analysis are
reliable and also ensure that there is no biasness in the results and are consistent and efficient. The
tests conducted include Normality test, Auto Correlation Test and multicollinearity test.

4.4.1. Normality Test

Table 4.2 Tests of Normality

Kolmogorov-Smirnova Shapiro-Wilk
Statistic df Sig. Statistic df Sig.
Economic growth (GDP) .215 12 .131 .891 12 .120
Income Tax .132 12 .200* .954 12 .702
VAT .157 12 .200* .939 12 .484
Import Duty .122 12 .200* .951 12 .653
*. This is a lower bound of the true significance.
a. Lilliefors Significance Correction

Both the P-value for Kolmogorov-Smirnov test (0.131) and the Shapiro-Wilk test (0.120) for
GDP data are greater than our significance level of 0.05 implying that GDP data is normal. The
same applies for Income Tax, VAT, and Import duty, with a similar Kolmogorov-Smirnov test
with a P-value of (0.200) and Shapiro-Wilk significance level of 0.702, 0.484, and 0.653
respectively. Hence our whole data is normal and can be modeled by a multiple linear regression
model.

4.4.2 Auto Correlation Test

Table 4.3: Model Summaryb

 39

Adjusted R Std. Error of

Model R R Square Square the Estimate Durbin-Watson
1 a
.792 .627 .487 1.4092 1.992
a. Predictors: (Constant), Import Duty, VAT, Income Tax
b. Dependent Variable: Economic growth

The autocorrelation was determined using the Durbin-Watson test. In this test, the d value is a
number that spans from 0 to 4; if it is determined to be 2, it indicates that there is no auto
correlation. If the d values are between 0 and 2 it indicates that there is positive autocorrelation.
If the d values are greater than 2, the data has negative autocorrelation. The outcomes were as
per the table 4.2 below. The results show that the d value was 1.992 which is approximately 2.
This implies that the data has no autocorrelation hence it can be used for regression analysis.

4.4.3. Multicollinearity Test.

Table 4.4: Coefficientsa

Unstandardized Standardized Collinearity
Coefficients Coefficients Statistics
Model B Std. Error Beta t Sig. Tolerance VIF
1 (Constant) 6.198 2.126 2.915 .019
Income
-3.004E-5 .000 -3.080 -2.355 .046 .027 3.700
Tax
VAT 6.333E-5 .000 3.467 3.347 .010 .043 4.923
Import
-5.344E-5 .000 -.616 -.516 .620 .033 6.577
Duty
a. Dependent Variable: Economic growth

The VIF was used in testing for Multicollinearity. If VIF is greater than 5 there is considerable
Multicollinearity present. The variables VIF values were below 5 except for Import Duty. This
indicates that the variable data for Income Tax and VAT had no Multicollinearity issues.
However, Import Duty had some considerable Multicollinearity.
 40

4.4. Trend Analysis

The goal of trend analysis is to look in the behavior and trend patterns of the variables over the
chosen years (Omar 2021). Trend analysis for the various research variables is shown in this
section. Following that, are offered the discussions for each of the factors. To describe the
variables' behaviors, trends, and patterns throughout time in this study, line graphs were employed.

4.4.1. Gross Domestic Product

Trends in GDP shown in a line graph from 2009 to 2020 is shown in Figure 4.1. The line graph
demonstrates that GDP growth rose from 2.7% to 8.1%. It slightly fell and has been somehow
stabile until 2019. The GDP fell in 2020 to a rate of -0.3. This might be connected to the global
corona virus pandemic-induced recession that plunged the economy into freefall. With the
exception of 2020, which was negatively impacted by the epidemic, we can infer from the rise in
GDP that Kenya's economy has grown significantly since 2014.

GDP
10.00
8.00
6.00
4.00
2.00
0.00
-2.00 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Figure 4.1: Trend in GDP growth rate.

4.4.2 Income Tax

Trend in the amount of income tax collected over time is depicted in a line graph in Figure 4.2.
The income tax has progressively rose during the periods, even in the recessionary year of 2020.
Over the years, income tax has contributed the most to overall tax revenue.
 41

Income Tax
800,000.000
600,000.000
400,000.000
200,000.000
0.000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Figure 4.2 Trend in income tax

4.4.3. Value Added Tax

A line graph showing the trend in VAT from 2009 to 2020 is shown in Figure 4.3. The graph
demonstrates that from the year 2009 to 2020, there was an increasing positive trend, which then
peaked in 2020. Due to fewer sales as a result of falling production and consumption, which were
both significantly attributed to the pandemic-induced 2020 recession, it is possible that the amount
of VAT collected in 2020 fell significantly. After income tax, VAT is the source of the second-
highest share of total tax revenue.

VAT
500,000.000
400,000.000
300,000.000
200,000.000
100,000.000
0.000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Figure 4.3 Trend in VAT

4.4.4 Import Duty.

Figure 4.4 uses a line graph to depict import tariff trends. The graph demonstrates how import duty
revenue rose from 2009 to 2020 before declining in 2020 as a result of import limitations put in
place by the government to combat the corona virus outbreak.
 42

Import Duties
150,000.000

100,000.000

50,000.000

0.000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Figure 4.4 trend in import duty.

4.5. Regression Analysis

The findings of the regression model are presented in this section. This study used a multiple
regression model to model the data and find the relationship between the predictor and response
variables.

Table 4.2: Model Summary

Std. Error Change Statistics
R Adjusted of the R Square F Sig. F
Model R Square R Square Estimate Change Change df1 df2 Change
1 .792a .627 .487 1.4092 .627 4.486 3 8 .040
a. Predictors: (Constant), Import Duty, VAT, Income Tax

The results shows that value of adjusted R square is 0.487 meaning, 48.7% of the variance of the
economic growth (GDP) is explained by Income Tax, Value Added Tax, and Import Duties. This
theorize that the remaining percentage (51.3) that affect economic growth in Kenya is not
contained in this study.

Table 4.3. ANOVAa

Model Sum of Squares df Mean Square F Sig.

Regression 26.723 3 8.908 4.486 .040b
Residual 15.886 8 1.986
1
Total 42.609 11
 43

a. Dependent Variable: Economic growth

b. Predictors: (Constant), Import Duty, VAT, Income Tax

Table 4.4 Coefficientsa

Standardize
Unstandardized d 95.0% Confidence Interval
Coefficients Coefficients for B
Lower Upper
Model B Std. Error Beta t Sig. Bound Bound
1 (Constant) 6.198 2.126 2.915 .019 1.295 11.100
Income
-3.004E-5 .000 -3.080 -2.355 .046 .000 .000
Tax
VAT 6.333E-5 .000 3.467 3.347 .010 .000 .000
Import
-5.344E-5 .000 -.616 -.516 .620 .000 .000
Duty
a. Dependent Variable: Economic growth

In this SPSS regression analysis model, the study used Income Tax, Value Added Tax, and Import
Duties as the independent variable to predict Economic growth rate as the independent variable.
The ANOVA outcome shows that the F-statistic is 4.486. The P-value is 0.40 and is less than 0.05
an indication that predicting variable i.e., income tax, VAT, and Import Duties had a significant
effect on the economic growth in Kenya.

The regression model was in the form of; Y= α+β1x1+β2x2+β3x3 and was fitted to;

Y= 6.198 - 3.004E-5Xi + 6.333E-5x2 – 5.344E-5.x3

4.5.1 Income Tax and Economic Growth.

The results in table 4.4 show that holding all the predicting variable (i.e., Income Tax, VAT, and
Import Duties) constant, the economic growth would be 6.198. Additionally, Income Tax ha a
negative and significant effect on growth of the economy, that is B= -3004E-5, P= 0.046 at a
significance level of 5%. This means that a one-unit rise in Income Tax led to a -3.00E-5 decrease
in economic growth (GDP).

4.5.2. Value Added Tax and Economic Growth.

 44

From table 4.4, the result show that VAT had a positive and a significant effect on the economic
growth (B=6.333E-5, P= 0.010) at a significance level of 5%. This means that a one-unit rise in
VAT led to a 6.333E-5 increase in the economic growth.

4.5.3. Import Duties and Economic Growth.

The results in the table 4.4 show that Import Duties had a negative and an insignificant effect on
economic growth (B=-5.344E-5, P=.620), at a significance level of 5%. This means that a one-unit
rise in Import Duties led to a -5.344E-5 decrease in economic growth.

4.6. Correlation Analysis

under this study, Spearman Correlation analysis is used to examine the extent of the correlation of
different pairs of variables. The correlation analysis was done to determine the association between
economic growth (GDP), and other variables i.e., Income Tax, VAT, and Import Duty in Kenya.
The correlation analysis was done at 0.05 significance level assess whether the correlation between
research variables is significant or not. The p-value therefore indicates whether the correlation
coefficient is significantly different from 0 or not. In the case where the p-value is less than or
equal to 0.05, the correlation is therefore significant. However, in the scenario where the p-value
is greater than 0.05, then correlation is not significant.

Table 4.5: Correlations

Economic growth Income Tax VAT Import Duty

Spearman's rho Economic growth Correlation Coefficient 1.000 -.109 -.049 -.049
Sig. (2-tailed) . .736 .879 .879
N 12 12 12 12
**
Income Tax Correlation Coefficient -.109 1.000 .993 .993**
Sig. (2-tailed) .736 . .000 .000
N 12 12 12 12
VAT Correlation Coefficient -.049 .993** 1.000 1.000**
Sig. (2-tailed) .879 .000 . .
N 12 12 12 12
** **
Import Duty Correlation Coefficient -.049 .993 1.000 1.000
Sig. (2-tailed) .879 .000 . .
 45

N 12 12 12 12
**. Correlation is significant at the 0.05 level (2-tailed).

From the findings, Income Tax had a negative insignificant correlation with the economic growth
as shown by (r=-0.109, p= 0. 736) Nguyen (2021) also found insignificant effect of Income Tax
on GDP. Value Added Tax had a negative insignificant correlation with economic growth as
shown by (r=-0.049, p=0.879). This is unlike Omodero’s (2020), whose results indicate that VAT
insignificantly but positively influences consumption. Import Duties had a negative insignificant
correlation with economic growth (r=-0.049, p=0.879), Unlike John (2018) who had a significant
relationship of customs and import duty with performance of EPZ firms measured using the total
number of workers in Kenya.
 46

CHAPTER FIVE

DISCUSSION, SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1. Introduction.

This chapter contains discussion of findings, the summary and conclusion of the study,
recommendations, and areas for further studies. The summary of the study was based on the
specific objectives of the study.

5.2. Discussion of Findings.

In the regression analysis, the study revealed that Income Tax had a negative and significant effect
on growth of the economy. This implies that as level Income Tax Increases, this would lead to a
significant decrease in economic growth (GDP). Neog and Gaur (2020) also found that the impacts
of income tax and the goods-and-services tax on state economic growth are negative. Additionally,
Gashi et al. (2018), who examined the influence of the tax system on Kosovo's economic growth
from 2007 to 2015, they also discovered that both income taxes and consumption taxes have a
negative effect on growth. These differs to Maganya (2020) who established that the growth of
GDP is favoured by taxes on goods and services produced domestically.

It that VAT had a positive and a significant effect on the economic growth. This implies that
increased Value Added Tax would lead to improved economic growth in terms of GDP. These
findings concur with Ordu and Omosi (2022) who found that VAT has a positive and significant
relationship with Federal allocation in Nigeria; VAT has a positive and significant relationship
with State allocations; VAT has a positive and significant relationship with Local government
Allocations in Nigeria. Omondi (2022), also in his findings revealed that CED has a significant
favorable impact on use, whereas VAT has a negligible yet positive impact on consumption. They
differ with Omodero's (2020), Awa and Ibeanu, (2020). whose results indicated that VAT
insignificantly but positively influences consumption. Monica and Kazeem (2020), fails to find a
relation between VAT and economic growth. In their findings, a value added tax A VAT below
the 7.5% threshold value neither harms the economy nor lowers people's quality of life, while one
beyond the 10% threshold value puts the economy in danger.
 47

The outcome further shows that Import Duties had a negative and an insignificant effect on
economic growth. This implies that an increase in Import Duty would lead to insignificant decrease
in economic growth. These findings differ with Aluko and Obalade (2020) whose experimental
results demonstrate that there is no causal link between imports and economic development of the
economies in their model of study, consequently demonstrating that there is no causality between
imports and economic development. John (2018), found a positive correlation between custom
duty and EPZ performance.

Significance i.e., p-value of 0.040 in the ANOVA table is found from the regression model. The
model explained 48.7% of the variability in response variable (GDP) caused by the predictor
variables. In the trend analysis, the line graph of GDP increased until 2019 and relatively dropped
in 2020. The taxes i.e., Income tax, VAT, and Import Duty have been on a steady rise up to 2019.
A drop was witnessed in 2020 except for Income Tax.

5.3. Summary and Conclusions of Main Findings.

Any nation needs revenue from taxation because it facilitates its governments to provide for the
needs of its citizens. A nation that collects enough tax income also minimises its budget deficit,
which results in a decrease in borrowing from outside. Minimised borrowing from other
countries is beneficial for economic growth because it allows the nation to invest more of its
income in other productive areas of the economy rather than paying down its foreign debt. This
will help the nation's economy by lowering the unemployment rate and luring in foreign direct
investment. Kenya has adopted numerous reforms for indirect tax, such as the switch from sales
tax to VAT. These revisions, however, are not supported by a thorough examination of the
impact of each type of tax on Kenya's growth in the economy. This is due to the fact that
knowing the impact each tax head has on a nation's economic growth will help tax authorities
determine where to place a high priority. In conjunction with this, research was conducted to
look into how Kenya's growth in GDP would have been affected by each tax head from 2009 to
2020. The data was acquired from KRA, CBK, and OECD published publications, as well as
other officially published Kenyan Government documents and other published reports accessible
online. This data was analysed with SPSS using standard deviation, mean, descriptive statistics,
frequencies, and percentage. Correlation analysis was also performed to determine the
 48

relationship between the study variables. The data was presented in the form of tables.
Regression analysis was also performed to determine the level of relationship of the variables in
the study.

Based on empirical research in this field, this study chose the control variables to include alongside
income tax, VAT, and import duties. Running a regression with economic growth (GDP) as the
response variable and income tax, VAT, and import duties as the predictor variables allowed us to
achieve our goal. Taxes are measured as a ratio of GDP, but economic growth (GDP) was
calculated as a percentage change in GDP. According to the findings, income tax has a negative
impact on economic expansion. From the findings, the results shows that value of adjusted R
square is 0.487 meaning, 48.7% of the variance of the economic growth (GDP) is explained by
Income Tax, Value Added Tax, and Import Duties. This theorize that the remaining percentage
(51.3) that affect economic growth in Kenya is not contained in this study. The p value according
to the ANOVA outcome was 0.04 less than 0.05 an indication that predicting variables (Income
tax, VAT, and Import duties) had a significant impact on economic growth in Kenya. The results
from the regression coefficients indicates that Income Tax has a negative and significant effect on
growth of the economy, this means that a rise in Income Tax led to a decrease in economic growth
(GDP). VAT had a positive and a significant effect on the economic growth. This means that a rise
in VAT led to an increase in the economic growth, and that Import Duties had a negative and an
insignificant effect on economic growth, this means that a rise in Import Duties led to a decrease
in economic growth.

5.4. Recommendations

The study's conclusions have substantial policy implications for Kenya's economic growth. The
study found a link between income tax, VAT, import duties, and Kenya's economic growth as
measured by GDP. Based on the study findings, the Kenyan government, will considering a tax
adjustment. Income tax and import taxes have a negative but small influence on economic growth.
This report suggests that the government reassess some of the country's tax regulations in order to
reduce taxation as much as possible. In order to secure long-term tax policy, the government must
constantly balance the requirement to offer a competitive tax environment.
 49

The study found that Income Tax has a negative and significant effect on growth of the economy.
This could be because the mobility of higher-skilled and higher-income earners in an open
economy works against progressive state and municipal tax regimes' efforts to achieve long-term
income redistribution. Furthermore, when the progressivity of a tax system is reduced, the
likelihood of an employed head of household obtaining a better job within a year increases. A
decrease in the progressivity of a tax system is connected with an increase in the real growth rate
of wages. And therefore, this study proposes that the government should implement policies
measures that encourages employment so as to have a larger basket for revenue collection which
in turn reduces external borrowing. Value Added Tax had a positive and a significant effect on the
economic growth. The government should implement policies to expand VAT collection in order
to collect more revenue for funding its expenditure instead of borrowing because it has a positive
impact on economic growth. Because large debts can signal the possibility of a fiscal crisis and
future economic policy reversals, discouraging foreign direct investment inflows, a combination
of fiscal and monetary policies aimed at increasing aggregate demand, such as narrowing the tax
base or increasing government spending, should be pursued. Additionally, import duties had a
negative and an insignificant effect on economic growth and therefore this study suggests that the
government develop initiatives to promote investment inflows into Kenya. This can be
accomplished by providing political and legal stability, which will entice investors to invest in the
country. The government can potentially enhance import duty collections by relaxing investment
restrictions for multinational corporations, allowing them to simply set up shop in Kenya. The
government should also lift constraints such as high tariffs while maintaining control over resource
mobility. The government should aggressively participate in regional economic blocs such as the
East African Community.

5.5. Limitations of the Study.

The problem of data reliability is a major limitation of the study. For the same variable, different
data sources provide different results. This analysis used on secondary data gathered from the
KRA, CBK, Treasury and OECD websites. This type of data is likely to have flaws such as
manipulation and recording errors. As a result, the researcher has no control over the quality and
accuracy of the data. As a result, the results made in this study were based on the data collected.
The researcher double-checked the data from several sources to ensure its accuracy. This research
 50

solely looked at macroeconomic variables like taxation, such as income tax, VAT, and import
charges. Other factors that may have an impact on economic growth, such as microeconomic
variables and corruption, were eliminated because they were outside the scope of the study. As a
result, the conclusions are limited to the macroeconomic variables specified in the study. In spite
of the fact that this study solely looked at how taxes affect economic growth, other factors besides
those mentioned above also have an impact on it in Kenya. The depth and scope of the conversation
may have been hampered at many levels due to my lack of research paper writing experience in
comparison to scholars with considerable research competence, but we overcame the constraint
with the help of my project supervisors' frequent consultation and direction. In addition, the current
study was conducted across a time span when several administrations, with various individuals
and policies, may not have used the same principles, leading to various outcomes.

5.6. Areas of Further Research.

The study has established the effects of taxation on economic growth focusing on few variables
including income tax, value added tax and import duties. From the study, 48.7% variation of
economic growth could be accounted for by the predictor variables used in this study. Therefore,
a study should be conducted using other factors to cover the remaining 51.3% of change in the
economic growth. Generally, further research should be conducted on the variables that were left
out that affect the growth of the economy, for example, the impact of tax avoidance and evasion
on economic growth in Kenya, as well as the effect of non-tax revenues such as sales of real assets,
privatization proceeds, seigniorage, and investment incomes.
 51

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APPENDICES
Appendix Ⅰ: Research Data.
Year GDP growth Income Tax VAT(Millions) Import Duty
(%) (Millions) (Millions)
2009 2.7 93,744.650 26,877.710 35,325.090
2010 8.1 219,226.606 141,140.946 40,381.803
2011 5.1 271,603.370 171,679.063 44,859.788
2012 4.6 327,902.720 174,787.553 50,943.835
2013 3.8 392,395.250 183,218.510 56,733.523
2014 5.0 451,793.337 233,557.527 65,580.143
2015 5.0 504,076.654 264,871.669 72,346.472
2016 4.2 561,792.185 290,843.417 79,371.816
2017 3.8 628,372.747 336,572.343 85,532.139
2018 5.6 654,674.980 356,777.311 92,075.746
2019 5.1 687,183.174 395,126.886 103,511.014
2020 -0.3 721,164.082 366,103.314 96,493.835

Source: KRA and OECD (2009-2020)