Abstract:
Taxes remain a major source of revenue for a country and can have several impacts on the economy. Studies examining the influence of taxation on inflation have reported mixed results and did not break down taxation into its components. This creates uncertainty with regard to the influence of taxation components like excise duty (ED), import duty (ID), income tax (IT) and Value Added Tax (VAT) on inflation. This study’s objective was to establish the influence of taxation on inflation in Kenya to bridge the knowledge gap. Monthly time series data from Central Bank of Kenya spanning 132 months from 2005 to 2015 was used for analysis based on variance decomposition and
impulse response analysis. Results indicated that total tax had a positive influence on inflation. However, influence was highly due to indirect taxes. In view of this, the study recommends adoption of fiscal policy that target reduction in taxation that are likely to lower production costs leading to a reduction in inflation in Kenya.
