NAIROBI, Kenya – Kenya’s efforts to raise additional revenue through higher taxes may be in vain, according to the latest Public Finance Review by the World Bank.
The report paints a sobering picture of the country’s tax system, highlighting inefficiencies, a narrow tax base, and rampant tax evasion and avoidance.
The review asserts that Kenya’s tax productivity, the ability of the tax system to generate more revenue with each percentage point increase in tax rates, is among the lowest in the region.
This means that simply increasing tax rates will not result in significant gains for the national treasury.
“Kenya’s current tax structure is constrained by low productivity and poor compliance,” the report states.
“High levels of tax avoidance and evasion, coupled with a weak taxpaying culture, mean that raising taxes may not yield substantial additional revenue.”
The Bretton Woods institution estimates that Kenya’s tax revenue potential is around 18 percent of GDP, yet the country is currently collecting about 3.6 percentage points less than that.
This widening tax gap signals that Kenya is falling short in its domestic revenue mobilization efforts, even as public service demands grow.
While Kenya’s tax revenue collection is on par with regional and structural peers, it has been declining over time, weakening its tax effort, the ratio of actual to potential tax revenue.
According to the World Bank, Corporate Income Tax (CIT) and Value Added Tax (VAT), two key pillars of the tax system, are severely underperforming.
Kenya’s CIT productivity and VAT C-efficiency are the lowest among its regional, structural, and aspirational peers.
VAT alone accounts for over 50 percent of total tax revenues, placing a disproportionate burden on lower-income households while failing to adequately tax wealthier individuals and corporations.
The report also notes that Personal Income Tax (PIT) productivity remains low, partly due to wage rigidity and patterns of consumption smoothing, which reduce revenue responsiveness to economic growth.
Adding to the challenge is the uncertainty around Kenya’s tax policy environment.
The World Bank warns that policy inconsistency undermines business confidence and delays critical investment decisions.
This hesitation stifles economic growth, which in turn slows down revenue generation and limits the government’s capacity to fund essential services.
World Bank recommends rationalizing tax expenditures by minimizing unnecessary exemptions and incentives, broadening the tax base to include hard-to-tax sectors such as the informal economy, and improving tax compliance and enforcement, especially among high-income earners and corporations.
Likewise, it urges Kenya to enhance the progressivity of its tax system.
At present, the reliance on VAT points to a regressive model, where poorer citizens shoulder a greater relative burden.
Fiscal incidence analysis reveals that most of the population is net cash contributors to the system, with only the lowest income decile receiving net fiscal benefits.
