An Empirical Analysis of Tax Ratios and Tax Efforts for Kenya and Malawi

The study intended to analyse the trends in tax ratio and tax effort differentials between Kenya and Malawi using secondary annual data for the period 1980 to 2015. The data were obtained from both the International Monetary Fund and World Bank data bases. The study was carried out to analyze tax ratios for Kenya and Malawi, estimate the tax effort for each, and identify the factors that accounted for the differences in the tax ratios and tax effort indices in the two countries. The regression models for the two countries were estimated using the ordinary least squares (OLS) method. The results reveal that GDP per capita was explaining changes in tax revenue in Kenya both in the long run and the short run, share of agriculture to GDP, and the share of industry were influencing the tax revenue in Kenya, in the long run. However, the coefficient for the dummy variable for political reform in Kenya has been insignificant. In Malawi, GDP per capita, share of agriculture in GDP, share of industry in GDP, and the dummy variable for political reform were all explaining changes in tax revenue in the long run but not in the short run. In regards to the tax efforts, the study reviles that Malawi was undertaxing while Kenya was overtaxing given the structure of their respective economies. The study recommends the two countries have to work towards optimal level of taxation.