The analysis of Kenya's tax collection performance within the broader context of developing country taxation patterns demonstrates that the tax-to-GDP ratio of about 17.2 per cent exemplifies the systemic challenges facing developing countries, which typically collect 10-20 per cent of GDP in tax revenue compared to 30-40 per cent in developed nations.
The difference arises mainly from three critical dimensions: economic structure, tax morale and social contract and information and enforcement capacity.
In the current financial year 2024-25, the government sought to raise total revenue of Sh3,343.2 billion (18.5 per cent of GDP) inclusive of Appropriations-in-Aid to finance a budget of Sh3,992.0 billion (22.1 per cent of GDP).
This ambitious target reflects the government's determination to bridge the resource gap, but the sustainability of this approach warrants closer examination.
The government through Kenya Revenue Authority has demonstrated that it can extract revenue effectively from its existing tax base.
Revenue mobilisation for the financial year 2023-24 grew by a notable 11.1 per cent, up from 6.4 per cent in the previous financial year, after KRA collected Sh2.407 trillion compared to Sh2.166 trillion in the previous financial year.
This translates to a performance rate of 95.5 per cent against the target. Additionally, KRA's recent milestone of collecting Sh2.112 trillion in the first 10 months of financial year 2023-24 represents impressive administrative efficiency, with a 96.5 per cent achievement rate against targets and 6.1 per cent year-on-year growth.
But impressive collection rates mask a more troubling issue: who exactly is paying, and how long can this continue?
In 2024, formal employment accounted for only 16.4 per cent of the workforce, representing 3.4 million people, while informal employment made up 83.6 per cent, with about 17.4 million individuals (Economic Survey 2025).
The private sector wage bill of Sh2.117 trillion and public sector wages of Sh881.4 billion represent the core of Kenya's taxable income base.
The largest contributor to revenue in financial year 2023-24 was Pay As You Earn, followed closely by Domestic VAT and Corporation Tax.
PAYE contributed Sh543.186 billion of the total collections, growing by 9.7 per cent. It was the single largest tax head, driven by wage growth in both the private (13.4 per cent) and public (3.7 per cent) sectors, and it made up more than 33 per cent of domestic taxes alone.
This narrow base means that Kenya is largely funding its government operations from less than one-sixth of its working population.
The revenue base is heavily concentrated in the formal sector — particularly formal employment and registered firms — leaving the bulk of informal economic activity untaxed.
The answer reveals Kenya's fundamental taxation challenge: the bulk of KRA's collections come from a remarkably narrow base—formal sector businesses and employees who cannot evade the tax net.
Even aggressive taxation of these formal wages cannot generate the revenue needed for the government's ambitious Sh4.2 trillion budget without risking economic distortion.
This small formal segment bears a disproportionate share of the tax burden while the majority of economic activity remains outside the tax net.
The Service Delivery Gap
Here lies the crux of Kenya's taxation challenge. The government aims to collect taxes akin to those in developed countries (targeting 25 per cent of GDP by 2030) while providing limited services.
OECD countries with similar tax burdens offer comprehensive healthcare systems, robust social security networks, quality education infrastructure and efficient public services. Kenya's citizens, paying increasingly high taxes on their formal sector incomes, receive far less in return.
Consider the daily reality: formal sector employees contribute substantial PAYE while navigating pothole-ridden roads, seeking private healthcare due to inadequate public facilities and supplementing their children's education with private tutoring because public schools lack resources.
This disconnect between taxation and service delivery creates a legitimacy crisis.
Why should Kenya's 3.4 million formal sector workers fund Sh4.2 trillion budget when public services remain inadequate? This question becomes more pressing as the government targets even higher collection rates, essentially asking a shrinking formal sector to shoulder an ever-increasing burden.
Kenya's challenge mirrors that of many developing countries caught between ambitious development goals and structural economic realities. Countries like Ghana and Nigeria face similar pressures, with large informal sectors and narrow formal tax bases.
However, successful examples exist: Rwanda has gradually expanded its formal sector while improving service delivery, creating a virtuous cycle of compliance and legitimacy.
The key difference lies in sequencing: successful countries have typically focused on economic transformation first, allowing tax collection to follow naturally, rather than forcing higher collection rates on existing structures.
The real challenge
Kenya's taxation challenge isn't about collecting "too little" in absolute terms—it's about the sustainability and equity of its revenue model. The country is already extracting substantial revenue from a small formal base, while the majority of economic activity remains outside the tax net.
There are options:
1. Expand the formal sector: Dramatically expand the formal sector by bringing millions from informal to formal employment. Instead of higher rates, Kenya needs policies that bring the 17.4 million informal workers into the formal economy.
Each successful transition multiplies the tax base and distributes the burden more equitably. This requires sustained economic growth and job creation—something Kenya has struggled to achieve consistently.
2. Raise tax rates on the existing base: Substantially increasing tax rates would push the formal sector beyond economically viable levels.
This risks capital flight, reduced investment and further informalisation as businesses and individuals seek to escape punitive taxation. This approach risks killing the goose that lays the golden eggs.
3. Find new revenue sources: Identify new revenue streams—currently undefined in policy frameworks beyond digital taxation and expanding the tax base. This remains wishful thinking without concrete policy frameworks and credible implementation strategies.
As the government targets a 25 per cent tax-to-GDP ratio by 2030, the target should follow, not precede, economic transformation. Putting the cart before the horse risks stifling the growth needed to achieve sustainable revenue increases.
The path forward
The path forward requires an honest acknowledgment of these constraints and alternative approaches:
Economic formalisation strategy: Rather than pursuing aggressive collection from existing taxpayers, policy should focus on creating incentives for informal sector participants to join the formal economy.
This includes reducing regulatory barriers, improving business registration processes, and providing clear benefits for formal sector participation.
Service delivery legitimacy: Higher taxes require better services. The government cannot continue extracting more from the formal sector without delivering corresponding improvements in public services. Citizens need to see tangible returns on their tax contributions.
KRA's administrative success demonstrates that Kenya can collect taxes efficiently from its existing base.
The real question is whether this model can support the government's ambitious spending plans without undermining economic growth and social cohesion.
The taxation challenge isn't about collecting too little—it's about building an economy that can sustain the tax levels the government desires while delivering services that justify those tax burdens.
That's a much harder but more important task than simply raising rates on an already-strained formal sector.
The path forward requires patience, strategic thinking and a commitment to economic transformation that creates the conditions for sustainable revenue growth.
Only then can Kenya achieve its revenue targets without sacrificing economic dynamism or social equity.
