Tax Reforms in Kenya: Reforming Value Added Tax

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    A Comprehensive Analysis of the Kenyan VAT System
    (AERC, 2025) Kiringai, Jane; Mutuku,Cyrus; Muchiri, Benjamin; Basescu, Simon; Remcho,Nathan
    Value-Added Tax (VAT) is a cornerstone of Kenya’s Medium-Term Revenue Strategy (MTRS) and the Government of Kenya’s (GoK) domestic revenue goals. It plays a pivotal role, not only in raising domestic revenues, but also in developing a broader economic landscape that stimulates growth and diversification (The National Treasury and Economic Planning, 2023). However, despite a growing Gross Domestic Product (GDP) and broadening of the VAT base, the performance of the tax has not reached its potential. This paper provides a comprehensive analysis of the VAT architecture, identifies the VAT gap, and provides detailed policy recommendations to close the existing VAT gap.
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    Assessing the Impact of Personal Income Tax Reform in Kenya with Administrative Data: Behavioral Responses and Distributional Implications
    (AERC, 2025) Kanina, Jane; Mugure, Josephine; Nato, Jacob; Urzainqui, David Garce’s; Fisker, Peter
    This paper leverages administrative tax data from Kenya to make several contributions to our understanding of personal income taxation in developing countries. First, we exploit recent tax reforms to credibly estimate the elasticity of income to changes in marginal tax rates from a taxpayer panel with state-of-the-art methods, a novelty in the context of Sub-Saharan Africa. We find a value of 0.3 for our sample of individuals in the upper half but not at the top of the income distribution, which conceals large disparities between inelastic public workers and a rather elastic private sector. Second, we combine administrative tax data with household survey data to address the shortcomings of each of these data sources in measuring income inequality and assess the success of income taxes and potential modifications to them in reducing post-tax income inequality. We also triangulate these data sources to quantify the compliance gap due to compliance at 23% of potential revenue, mainly attributable to self-employed workers. Finally, we rely on these tools to investigate the possibilities Kenyan policymakers have and the trade-offs they face when aiming to collect further revenue in an efficient and progressive manner.
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    Economic Complexity and Industrial Policy in Kenya
    (AERC, 2025) Malot, Kenneth; Mutuku, Cyrus; Otindo, Clement; Rand, John; Shibia, Adan; Sørensen, Bjørn Bo
    Kenya Vision 2030 aims to transform Kenya into a globally competitive economy, but its current export performance constitutes a significant impediment to realizing this objective. By systematically accounting for supply- and demand-side factors, this study identifies new products that can help to diversify and upgrade Kenya’s economy. In a supply-side analysis, we first use economic complexity methods to identify 70 complex target products - primarily in the Machinery & Electronics and Metals sectors - that Kenya can learn to export competitively given the current structure of its economy. In a demand-side analysis, we then use gravity models to predict a high export potential among target products in sectors like Vehicles & Transport Equipment, Machinery & Electronics, Chemicals, and Metals. We predict that many of Kenya's current trade partners could be key importers of the target products, but we also find a high demand in several underexploited markets such as Australia, Canada, Italy, Japan, Nigeria, South Africa, Spain, and Zambia.
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    Reforming Excise Taxation on Alcohol Products in Kenya
    (AERC, 2025) Oguso, Alex; Ochieng', James; Remcho, Nathan; Eldrup, Magnus; Chemnyongoi, Hellen
    This paper explores the excise taxation systems for alcohol products in Kenya, focusing on optimizing tax policy to enhance revenue generation and further mitigate negative externalities. Utilizing a proprietary elasticity estimation nuanced by a literature review to generate joint Laffer curves, we identify potential adjustments that could increase government revenue without causing significant market disruptions. Our findings suggest that there is a scope to raise taxes on alcohol products, which could not only boost fiscal income but also improve public health outcomes by discouraging excessive consumption. The paper proposes practical mechanisms that include a move to alcohol content-based excise system for taxation of alcoholic products in Kenya. The recommendations in the paper highlight the potential for excise taxes to contribute to economic growth and public welfare in Kenya while emphasizing the importance of stakeholder engagement and data-driven policy making.
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    Reforming Excise Taxation on Tobacco Products in Kenya
    (AERC, 2025) Oguso, Alex; Ochieng’, James; Remcho, Nathan; Eldrup, Magnus; Chemnyongo, Hellen
    This paper explores the excise taxation systems for tobacco products in Kenya, focusing on reform of the tobacco taxation system to achieve equity in taxation by changing the tax structure to be based on optimal tax rates and reviewing the considerations for filter and non-filter cigarettes. Utilizing a proprietary elasticity estimation nuanced by a literature review to generate joint Laffer curves, we identify potential adjustments that could increase government revenue without causing significant market disruptions. From the comprehensive review of the excise tax system on tobacco products, there are strong arguments in favor of equal treatment of cigarette brands and a uniform tax structure for filter and non-filter cigarettes. The empirical analysis suggests that there is a scope to raise taxes on tobacco, which could not only boost fiscal income but also improve public health outcomes by discouraging excessive consumption. However, it is worth considering that the policy considerations and the resulting revenue projections will change depending on the enforcement policies accompanying them. Therefore, it is important for the government to strengthen enforcement measures to curb illicit tobacco trade and protect the legal market.
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    Understanding the Public Revenue System in Kenya: An Overview of the Tax System
    (AERC, 2025) Kiriga, Benson; Nato, Jacob; Remcho, Nathan; Eldrup, Magnus
    This paper provides a high-level analysis of Kenya’s tax system, examining structures, performance, and potential reforms to enhance domestic revenue mobilization for economic development. Synthesizing data from national agencies, we identify the central challenges facing the tax systems in Kenya including compliance levels, a significant informal sector, and economic shocks. Our analysis underscores the need for data-driven policymaking, emphasizing Kenya’s Medium-Term Revenue Strategy (MTRS) 2024-2027, aimed at reversing declining tax-to-Gross Domestic Product (GDP) ratios through a comprehensive modernization of the public revenue system. Our study further highlights major revenue streams such as income taxes and value added tax to show how a few taxes make up a large portion of domestic revenues and the urgency for optimization within these taxes. The stagnant or declining performance of many tax structures in Kenya reveal a need for comprehensive reviews and updates that enhance progressivity, encourage compliance, and raise revenues relative to GDP.