Foreign Aid Paradox and Domestic Tax Revenue in Kenya: A Hindrance or a Catalyst for Revenue Mobilization?

Kenya’s tax-revenue-to-gross domestic product has failed to keep up with the relatively growing economy and has been fluctuating over the years. These constraints the ability of the government to meet its obligations and exerts more pressure to meet fiscal deficit targets. Despite measures adopted by the Kenya government towards enhancing revenue mobilization, tax revenue performance remains below the Kenya Vision 2030 targets of 25 percent. Foreign aid is often regarded as essential for financing development and therefore improving domestic revenue mobilization; however, concerns exist about its effect on tax revenue mobilization efforts in Kenya. However, this relationship remains unclear, given the contradictory empirical evidence available. The study therefore sought to examine the effect of foreign aid inflows on incentives for domestic tax revenue mobilization in Kenya. The study adopted correlational research design. The Heller Utility Maximization Model underpinned the study. Using the secondary data from the World Bank Development Indicators for the period 1980-2020 and vector error correction mechanism, the study established that foreign aid inflow has a negative and statistically significant relationship with tax revenue performance in Kenya. This suggests that a 1% inflow in foreign aid reduces tax revenue mobilization effort by 0.25% in the long run. The study concluded that foreign aid inflows reduce incentives for tax revenue mobilization in Kenya. The study recommends that foreign aid should be channelled towards stimulating domestic revenue mobilization activities such as capacity building, technical assistance programmes to revenue policy and administration and activities supporting small and medium sized enterprises in identifying regional market opportunities and anti-corruption reform measures to avoid embezzlement of foreign assistance received. Further, more proportion of foreign assistance should be channelled towards domestic revenue mobilization activities than to other sectors that do not promote revenue generation. Additionally, donor countries should monitor the aid flow and ensure that their assistance are channelled and properly used in appraised productive projects in the recipient economies, which would generate higher revenues in the future.