Working Paper No. 13 of 2005 on Tax Reform Experience in Kenya

Abstract

Counties all over the world have reformed or are attempting to reform their tax systems, with the main impetus being the increasing complexity of tax codes, narrow tax bases, and concerns with horizontal equity. Kenya's attempts to reform the tax system were initiated under the Tax Modernization Programme in 1980's with an aim of raising more revenue, redistributing wealth and achieving a sustainable tax system. Major income tax reforms have mainly involved widening of tax brackets, lowering of top marginal rates and also increasing of tax relief in order to protect low-income earners from the inflation-induced creep. Rationalization of tax rates for easier administrative ease, lowering of top rates and widening of tax bases characterized indirect tax reforms. There was a deliberate policy shift towards indirect taxes given that they are more favourable to investment and growth. Trade taxes have declined in importance over time due to adherence to trade regulations under WTO and regional integration blocks. Kenya's tax reform, experience poses some challenges. Firstly, tax reforms have mainly been aimed at achieving greater simplicity and ensuring uniform tax burden across individuals with equal income, but do not consider distribution of tax burdens across the income categories. Secondly, taxation of the informal sector and agriculture still remains a major challenge. Lastly, the government's objective of achieving zero deficit still remains a challenge as evidenced by the growing level of deficit, which is a two-fold issue- revenue adequacy and public expenditure management.