Assessing the Impact of Personal Income Tax Reform in Kenya with Administrative Data: Behavioral Responses and Distributional Implications

This paper leverages administrative tax data from Kenya to make several contributions to our understanding of personal income taxation in developing countries. First, we exploit recent tax reforms to credibly estimate the elasticity of income to changes in marginal tax rates from a taxpayer panel with state-of-the-art methods, a novelty in the context of Sub-Saharan Africa. We find a value of 0.3 for our sample of individuals in the upper half but not at the top of the income distribution, which conceals large disparities between inelastic public workers and a rather elastic private sector. Second, we combine administrative tax data with household survey data to address the shortcomings of each of these data sources in measuring income inequality and assess the success of income taxes and potential modifications to them in reducing post-tax income inequality. We also triangulate these data sources to quantify the compliance gap due to compliance at 23% of potential revenue, mainly attributable to self-employed workers. Finally, we rely on these tools to investigate the possibilities Kenyan policymakers have and the trade-offs they face when aiming to collect further revenue in an efficient and progressive manner.