authors
Wycliffe Kiame Ombasa, Agasa lameck Ondieki and John Kimutai Langat

abstract
This research paper provides an eleven -year analysis of historical direct tax revenue performance and productivity in Kenya. The paper aims to give insights and inform budget making processes, planning and monitoring in Kenya by ensuring a balanced budget through productive tax yields. This paper is grounded on the basis that a good fiscal policy structures and system ensures stable government revenues through fair and sound taxation over time, improves efficiency and equity of taxes while promoting investment towards accumulation of wealth/national income and economic growth. Government of Kenya has continuously pursued tax reform agenda to increase its domestic’s tax revenues mobilization. This study examined the elasticity of direct income taxes as a measure of tax productivity in Kenya. Specifically, the paper examined the elasticity of Corporation tax, Property taxes (rental taxes) and personal income taxes as components of direct government tax revenues with respect to the changes in national income/ GDP at factor income as a proxy base. The study population for the research was the years from 2007 to 2017 financial year spanning for a period of 11 years. The study relied on secondary data and employed a time series approach and techniques to estimate tax elasticity for various component of direct income taxes in Kenya for a period ranging from 2006/2007 to 2016/2017. Proportional Adjustment Method (PAM) model and Error Correction Mechanism (ECM) were adopted for data analysing. To check stationarity of the time series data, Phillips Perron (PP) test and Augmented-Fuller (ADF) test for unit root test techniques were adopted. The results revealed that direct taxes in Kenya are inelastic with elasticity value of 0.592 less than unit with an error correction coefficient of 0.7778. The study established that the direct tax revenue in Kenya is actually not responsive enough to changes in income growth since the coefficient of elasticity was less than a unity. Thus the system of direct taxes is not productive in general. Based on the findings of this paper, we strongly recommend that the government of Kenya should strengthen tax reforms in order to increase the productivity of income tax revenue by broadening and expanding the tax base in Kenya.