A decrease in tax to GDP ratio of a country indicates which of the following?
- Slowing economic growth rate
- Less equitable distribution of national income
Select the correct answer using the code given below.
[UPSC Civil Services Exam – 2015 Prelims]
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither1 nor 2
Answer: (a)
Explanation:
- The tax-to-GDP ratio is an indicator that compares a nation’s tax revenue to the size of its economy, as measured by gross domestic product (GDP).
- It serves as a measure of how effectively a nation’s government utilizes taxation to manage its economic resources.
- Generally, developed nations have higher tax-to-GDP ratios compared to developing nations.
- A low tax-to-GDP ratio indicates a slower economic growth rate, while a higher ratio suggests a stronger tax buoyancy in the economy.
- This ratio also signifies the government’s ability to finance its expenditures. Conversely, a lower tax-to-GDP ratio creates pressure on the government to meet its fiscal deficit targets.
