The Impact of tax changes on national debt - evidence from Kenya

Abstract

The study was to establish the influence of changes in tax policies with regard to the fiscal policies on Kenya's national debt in relevance to economic growth and development. Using regression analysis, this study explored relationships between tax policies and debt levels by using data for 44 years. It put forward fiscal challenges facing Kenya in terms of rising debt-to-GDP ratio, inefficiencies in tax collection, and expenditure allocation. The study further reviewed related theories and empirical studies, which helped to identify the gaps in understanding how tax reforms affect debt management. The research described the quantitative approach used, including descriptive analysis, correlation, and diagnostic tests. The results showed that the independent variables have a strong positive relation with the national debt, where the regression R-value is 0.816, and the R² is 0.665; thus, the independent variables explained 66.5% of the variation in national debt. Out of these, the tax-to-GDP and debt-to-GDP ratios proved to be substantial determinants. At the same time, VAT and income tax had a very insignificant direct effect but were strongly correlated with other fiscal variables. Diagnostic evaluations validated the model's dependability, revealing that both multicollinearity and heteroscedasticity remained within acceptable limits alongside a mild positive autocorrelation (Durbin-Watson = 1.223). The investigation concluded that judicious tax reforms, effective revenue collection methods, and equitable expenditure policies were essential for achieving sustainable debt management in Kenya. Recommendations included the equitable expansion of the tax base to avoid overburdening low-income earners, enhancing compliance through modernized systems, reducing recurrent expenditures to prioritize development projects, and fostering economic growth to bring the debt-to-GDP ratio in line with international benchmarks. These findings offered actionable insights for policymakers to address Kenya's fiscal challenges and achieve long-term economic stability.