Abstract:
Over the years, the Kenyan government has continued to experience budget deficit. This has been partly attributed to the inability of the tax system to generate sufficient revenue to finance public expenditure. Inadequacy of tax revenue to finance public expenditure has largely been attributed to lack of responsiveness of tax revenue to changes in national income. To reverse the trend, the Kenyan government has continued to initiate and implement tax reforms over years. The purpose of this study was to analyze the responsiveness of tax revenue to changes in national income using tax elasticity and buoyancy given the various tax reform measures that have been mooted over years. This was guided by various specific objectives namely i) to determine the income-elasticity of tax revenue; ii) to determine buoyancy of tax revenue; iii) to examine tax-to-base elasticity of tax revenue; and iv) to determine base to income elasticity of tax revenue. By adopting a causal research design, a multiplicative model of estimating elasticity and buoyancy was used. In terms of data, the study relied primarily on secondary data obtained from various Kenya Statistical Abstracts, Economic Surveys and International Financial Statistics Browser. ADF test was done to detect non stationarity and differencing done to make data stationary. The study found that the tax revenue was neither buoyant nor income-elastic despite reforms undertaken over period since 1986. On the basis of this, it was recommended that there is need re-evaluate the tax policy measures that have been implemented over the years to make tax responsive to national income while enhancing tax collection measures.
