Discussion Paper No. 45 of 2004 on Fiscal Architecture and Revenue Capacity in Kenya

Abstract

The objective of this study is to assess the impact of economic, demographic, institutional and technological changes on fiscal policy in Kenya. The study concentrates on the side of public finances of fiscal policies and identifies, on a revenue type by revenue type basis, Kenya's revenue generating capacity and effort. It then analyses the country's economic base in terms of potential tax handles. This study makes use of the representative tax system methodology developed by Vazquez and Boex (1997) to measure fiscal capacity and effort. Research findings show that these changes have been experienced in Kenya. Their impact and implication on the tax base are analysed in a policy matrix form adopted from Wallace (2001). Further, the government has been undercollecting revenue with tax efforts for VAT and import duty being quite low. Likewise, the tax effort for cigarettes, beer and petroleum are fairly low with the exception of beer nearing 100%. The study recommends that strong administrative measures be put in place to enhance revenue collection. Revenue from import duties should not be relied upon due to emerging globalisation and growing importance of regional integration. The government should also put in place policies towards taxing the fast growing informal and service sectors. Finally, it can be concluded that the taxes for the future revenue generation are PAYE, excise tax and VAT.