The Moderating Role of Inflation on the Effect of Tax Rate Reforms on Tax Revenue Collection in Kenya

Abstract

Tax revenue is essential for financing public services and economic development. However, developing countries continue to face gaps between actual tax collections and revenue potential despite successive tax policy reforms. In Kenya, inflation may influence the effectiveness of tax rate reforms by affecting the real value of taxable incomes and transactions. Understanding this moderating effect is crucial for developing effective tax policies and strengthening domestic revenue mobilization. To better understand this issue, the study investigated the moderating role of inflation (INFL) in the relationship between tax rate reforms (TRR) and tax revenue collection (TRC) in Kenya. Specifically, the study examined the effects of tax rate reforms on tax revenue collection and assessed whether inflation moderates the relationship between tax rate reforms and tax revenue collection. The study was guided by Optimal Taxation Theory and the Olivera–Tanzi Effect Theory and employed an explanatory research design using a time-series approach. The study adopted a census approach, covering all 31 annual observations on tax rate reforms, inflation, GDP, and tax revenue collection for the financial years 1994/95–2024/25. Secondary data were obtained from reports published by the Kenya Revenue Authority (KRA), Kenya National Bureau of Statistics (KNBS), and the National Treasury. The data was analyzed using descriptive and inferential statistical techniques. The findings revealed that inflation significantly moderated the relationship between tax rate reforms and tax revenue collection in Kenya. The results indicated that tax rate reforms had a positive and statistically significant effect on tax revenue collection (β = 5.180, p < 0.05). Furthermore, inflation significantly moderates the relationship between tax rate reforms and tax revenue collection (β = −1.008, p < 0.05), indicating that higher inflation weakens the positive effect of tax rate reforms on tax revenue collection. The findings support the Optimal Taxation Theory and Olivera–Tanzi Effect Theory, demonstrating that effective tax rate reforms enhance revenue collection, while inflation can weaken their effectiveness.

Key words: Tax Revenue Collection, tax rate reforms, Inflation

DOI: 10.7176/RJFA/17-4-04

Publication date: October 30^th 2026