Effects Of Macroeconomic Variables On Tax Revenue Performance In Kenya

ABSTRACT

For any government to effectively carry out its primary function and other subsidiary

functions, it requires adequate funding. Taxation generates public funds to governments

through structured approaches. The amount of tax revenue realized or expected by any

state is determined and influenced by various economic factors ranging from micro to

macro-economic. In Kenya, tax revenues have, for quite some time, remained low

relative to the effort and tax policies in place. This study examined the effects of

macroeconomic variables on tax revenue performance in Kenya using annual time series

data of ten years for the period 2008 to 2018, to estimate a linear model of tax revenue

performance and the selected macro-economic factors. The period is extensive enough to

give accurate results. The study adopted a correlation research design which is a nonexperimental

research design technique that helps researchers establish a relationship

between two closely connected variables. Secondary data from the Central Bank of

Kenya, Kenya National Bureau of Statistics (KNBS), Kenya Revenue Authority (KRA)

and World Bank were Collected and presented using tables and figures. The study

carried out pre-estimation tests so as to validate the results. Unit Root Tests was done to

detect for stationarity using Augmented Dickey Fuller (ADF) test, Cointegration was

done to test for long run relationship between the dependent variable and the independent

or predictor variables was done using Engle-Granger test. Multicollinearity test was done

to find out if the predictor variables are highly correlated using Vector Integrating Factor

(VIF), heteroscedasticity test was done to find out if residuals are equally distributed

using Breusch-Pagan-Godfrey test. The data was collected using documentary analysis

and analyzed using E-views. Time series data rules out the option of collecting biased

data from primary sources, it also provides larger and higher-quality databases that

would be unfeasible for any individual researcher to collect on their own. The study

established that there is a link between the macroeconomic variables and tax revenue

performance. It indicated that the coefficient of foreign direct investment (0.311568) and

GDP per capita (0.8128243) from the model exhibited a statistically significant positive

relationship with tax revenue performance, whereas the inflation (-0.183015) and

unemployment rates (-0.343756) negatively influenced tax revenue performance in

Kenya for the period of time under the study. The results also revealed that the model

was good in terms of goodness of fit and overall significance with R2value of (0.7371)

and a probability value of 0.0000. These means that 73.71% of the variation in tax

revenue is explained by the explanatory variables in the model while the other proportion

26.29% is explained by other factors not considered by this study. These findings inform

the government and its tax administration on the initiatives and measures to adopt in

improving revenue growth and performance. Initiatives to improve business

environment, attracting foreign direct investments and enhancing GDP growth. To adopt

appropriate measures to curb inflation and unemployment which are a deterrence tax

revenue growth. The government should also develop strong mechanism to mobilize

more resources for its revenue.