Tax Policies and Growth of Micro and Small Enterprises in Siaya County, Kenya

Abstract

Micro and Small Enterprises (MSEs) are foundational to Kenya's economy, contributing over 30% to the Gross Domestic Product (GDP) and employing the majority of the working population. However, the MSEs’ sector in Siaya County has recently faced significant headwinds, characterised by a sharp decline in reported operating profit margins from an average of 13.4% in 2018 to 5.6% in 2022, leading to numerous business closures. This study investigated the quantitative impact of various tax policies on the sustained growth of MSEs in Siaya County, Kenya. Specifically, the research evaluated the role of tax policy complexity, analysed the effectiveness of available tax incentives, and assessed the influence of the overall taxation structure on business expansion. The study adopted a descriptive research design anchored on the Ability to Pay Theory, Tax Incentive Theory, and Cost-of-Service Theory. A target population of 450 registered MSEs was sampled to a size of 207, and primary data were collected using structured questionnaires. Data analysis utilised Descriptive, Correlation, and Multiple Linear Regression techniques via SPSS. The findings, derived from the regression model (R2=0.585), indicate that Tax Policy Complexity has a statistically significant and strong negative effect on business growth (B=−1.432, p<.001). Conversely, Tax Incentives exhibited a significant positive influence on growth (B=0.369, p<.001), supporting their efficacy as a stimulative tool. The Taxation Structure did not register a significant independent effect on growth (B=0.044, p=.387). The study recommends the urgent simplification and consolidation of tax filing and payment procedures to alleviate administrative burden and the implementation of targeted, progressive tax incentives to foster sustained capital reinvestment and employment creation within the sector.