A decrease in tax to GDP ratio of a country indicates which of the following?

1. Slowing economic growth rate
2. Less equitable distribution of national income

Select the correct answer using the code given below:

1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2

Explanation

Statement 1 is correct

• The tax-to-GDP ratio is a gauge of a nation’s tax revenue relative to the size of its economy as measured by gross domestic product (GDP). The ratio provides a useful look at a country’s tax revenue because it reveals potential taxation relative to the economy. It also enables a view of the overall direction of a nation’s tax policy and international comparisons between the tax revenues of different countries.
• A decrease in the tax-to-GDP ratio can indicate slowing economic growth, as tax revenue is often linked to economic activity. When the economy slows down, there is usually less income, consumption, and business activity, which reduces tax collections relative to GDP.

Statement 2 is incorrect

• The tax-to-GDP ratio measures overall tax revenue as a percentage of GDP but does not directly indicate income distribution.

Answer: (a) 1 only; Difficulty Level: Easy