UPSC Prelims 2015 Question:

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 codes given below.

Explanation:

• The tax to GDP ratio is a measure of a nation's tax revenue relative to the size of its economy. It is used to determine how well a nation's government directs its economic resources via taxation. Developed nations typically have higher tax-to-GDP ratios than developing nations.
  
  
• Higher tax revenues mean a country is able to spend more on improving infrastructure, health, and education. According to the World Bank, tax revenues above 15% of a country’s GDP are a key ingredient for economic growth and, ultimately, poverty reduction. A decrease in the tax to GDP ratio is a probable indication of slowing down economic growth rate. So, statement 1 is correct.
  
  
• A decrease in tax revenue can occur due to a decrease in direct tax or indirect indirect tax collection. A decrease in Indirect tax revenue may indicate less equitable distribution of national income, but the same cannot be said for a decrease in direct tax collection. Hence a decrease in tax to GDP ratio of a country does not necessarily indicateless equitable distribution of national income. So, statement 2 is not correct.
  
  

Therefore, option (1) is the correct answer.

Subject: Economics | Taxation