Institutional and Structural Determinants of Tax Revenue Mobilization in Kenya

Abstract

Kenya cannot generate sufficient revenue from taxation because it faces several institutional and structural obstacles in revenue generation. However, there is very scant consolidated analytical research on both institutional and structural elements of tax revenue in Kenya, despite various extensive research studies on tax revenue in developed states. This study uses time series data to examine how institutional and structural factors affect tax mobilization efforts in Kenya. The main determinants were institutional governance indicators such as control of corruption and political stability index, taken from World Bank surveys. The study used economic growth, agriculture sector share, trade openness, and inflation rate taken from World Development Indicators (WDI) as structural variables. The study estimated the study regression model using data over the period 1984–2023 and the generalized method of moments (GMM) technique to control for endogeneity problems. The generalized method of moments (GMM) regres- sion results indicated that economic growth, trade openness, and political stability help to improve tax collection performance in Kenya. In contrast, inflation, corruption, and high agriculture share were found to lower tax revenue in Kenya. These findings align with the Theory of Tax Structure Development, which suggests that the structure of a country’s tax system develops according to its economic environment, including the level of trade openness and inflation. To enhance tax revenue mobilization and plug-in tax leakages in Kenya, an advance and execution of tax administration and tax system reform are needed to increase efficiency by combining good governance, reducing corruption, and employing the best macroeconomic policies. More investments should be directed to reforms in governance structures that will build institutional capacity, eliminate inefficiencies, and curtail corruption. Sound governance translates to better tax compliance and a more reliable and transparent revenue collection scheme.