EFFECT OF TRADE TAXES ON TRADE DEFICIT IN KENYA

Abstract

Kenya has been recording trade deficits over years. However, studies to establish determinants of trade deficit in Kenya have fell short of analyzing the effect of trade taxes on trade deficit. This makes the effect of trade taxes on trade deficit in Kenya unknown. Therefore, this study investigated the effect of trade taxes on trade deficit in Kenya with the specific objectives of determining the composition of total tax in Kenya and determining the effect of trade taxes on trade deficit in Kenya. The study employed correlation research design based on monthly time series data spanning 36 months from January 2015 to December 2017. Data was obtained from the Central Bank of Kenya. The Johansen co integration test was used to analyze the long run effect of trade taxes on trade deficit in Kenya while Granger causality test analyzed the direction of causality between trade taxes and trade deficit in Kenya. The findings indicated that VAT constituted the largest proportion of total tax but had no effect on trade deficit while excise duty and import duty had significant positive and negative effects on trade deficit in Kenya respectively. There was also unidirectional causality from trade deficit to VAT, excise duty and import duty in Kenya. The study recommended that the government of Kenya should adopt a fiscal policy geared towards reducing excise duty and increasing import duty to increase exports and decrease imports that will lead to a reduction in trade deficit.