The Impact of progressive taxation on income inequality in Kenya

Abstract

The study focused on the analysis of Kenya's tax system and its impacts on income inequality, tracing various structural and policy-driven factors that have contributed to the heightening income disparities within the country in historical perspective. While the progressive tax system was to reduce the inequalities through the heavy burden of taxation for high-income earners, the research findings showed that this had largely been defeated by massive tax evasion among the well-endowed individuals and companies. Secondly, VAT and excise duties fell heavier on poorer households, who had less disposable income and thus had their economic inequality exacerbated as a result. Another contributory factor to income inequality was noted to be within the formal and informal sectors. Whereas the formal sector is only 20% of Kenya's workforce, it contributed the biggest share of the country's tax revenue, while the informal sector, which employs an estimated 80%, is mostly untaxed. This imbalance limits revenue collection making economic vulnerability heightened. Even though there are some government policies to reduce poverty and assist vulnerable groups, these are of limited effectiveness since the funding levels are not sufficient. This is further exacerbated by cash transfers and some relief efforts, the reach of which is constrained because of inadequate budgets. It is also indicated that investments in infrastructure are not being uniformly distributed; the urban areas get predominant shares compared to the rural regions and, are therefore likely to increase regional income disparities. Inequality in education is another important determining factor in the increase in income inequality due to students in rural areas being unable to compete with other students in the urban areas; hence, the educational divide is responsible for a low economic cycle of mobility where less educated are perpetually locked into low-paying jobs. The conclusion of the research was that based on the regression and correlation analyses run for a period of 40 years, a strong positive relationship existed between income inequality and the determinants of tax system issues, formal and informal sectors issues, government policy, and inequality in education. This study indicated that education inequality is the most significant determinant of income inequality. The findings suggested broad reforms are needed to reduce income inequality in Kenya, from more equitable tax policies, formalizing the informal sector to broaden the tax base, increasing social spending, and investing in rural education. Such measures are projected to foster a more inclusive and equitable economic landscape for the country.