An empirical analysis of the dynamics of tax revenue determinants in kenya: A longitudinal approach

Abstract

The volatility of tax income poses a significant challenge for Sub-Saharan African countries, contributing to erratic public spending and hindering sustainable economic progress. Recent global economic crises have underscored the urgency for these nations to bolster local revenue sources and overcome structural barriers to economic development. This paper examines the factors influencing tax revenue in Kenya over 39 years, from 1984 to 2022. Utilizing data from various sources, including the World Bank's World Development Indicators (WDI), the Kenya Revenue Authority (KRA), the Central Bank of Kenya (CBK), and the Organization for Economic Co-operation and Development (OECD), the study employs an autoregressive distributed lag (ARDL) model to distinguish long-run relationships from short-run dynamics due to the mixed order of integration among variables. The empirical model includes real GDP, agricultural gross value added, general government expenditure, inflation, consumer price, official development assistance, and industrial gross value added as key determinants. The ARDL bounds test confirms a long-term equilibrium. The connection between the variables and the error correction model indicates a relatively quick adjustment process, with around 25% of disequilibrium corrected within a single period. Results from the long-run ARDL estimation suggest that agricultural value added significantly increases tax revenue. In contrast, variables such as GDP and government expenditure do not show a significant long-term effect. In the short run, the lagged tax-to-GDP ratio and GDP significantly impact tax revenue. These findings underscore the importance of agricultural productivity and provide valuable insights for policymakers seeking to enhance tax revenue in Kenya.