National Income

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

Answer

The tax-GDP ratio is calculated on nominal size of the economy. So, if the economy grows by around 8% and inflation by 10%, nominal GDP would be 18%, making it difficult to raise the tax-GDP ratio. A low tax to GDP ratio indicates lower economic development and less equitable distribution of wealth.

The tax-to-GDP ratio is an economic measurement that compares the amount of taxes collected by a government to the amount of income that country receives for its products. The income is measured in terms of the gross domestic product, or GDP, which is the sum of all products and goods sold, personal and government investment, and net exports. By comparing this amount to the amount that is collected in tax revenue, economists can get a rough idea of how much the economy of a specific government is fueled by its tax collection.

The correct option is B.