Q: 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:
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
The correct answer is 1 only.
A tax-to-GDP ratio
- It is a gauge of a nation’s tax revenue relative to the size of its economy as measured by gross domestic product (GDP).
- It is a measure of a nation’s tax revenue relative to the size of its economy.
- A tax-to-GDP ratio determines how well a nation’s government use its economic resources via taxation.
- Developed nations typically have higher tax-to-GDP ratios than developing nations.
- If the tax-to-GDP ratio is low it shows a slow economic growth rate. Hence, Statement 1 is correct.
- The ratio shows that government spending can be financed.
- A greater tax-to-GDP ratio indicates a robust tax buoyancy in an economy.
- The government is under pressure to adhere to its fiscal deficit targets if the tax-to-GDP ratio is lower.
- It only shows growth in the economy not the distribution of national income. Hence statement 2 is incorrect.
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