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:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Ivestopedia Explanation of Tax-To-GDP Ratio:
http://www.investopedia.com/terms/t/tax-to-gdp-ratio.aspDEFINITION of 'Tax-To-GDP Ratio'
The ratio of tax collection against the national gross domestic product (GDP). Some states increase the tax-to-GDP ratio by a certain percentage in order to cover deficiencies in the state budget revenue. In states where the tax revenue has gone up significantly, the percentage of tax revenue that is applied towards state revenue and foreign debt is sometimes higher
BREAKING DOWN 'Tax-To-GDP Ratio'
This ratio is the total government tax collections divided by the country's GDP. Some countries, like Sweden, have a high tax-to-GDP ratio (as high as 54%). Other countries, like India, have a low ratio.
When tax revenues grow at a slower rate than the GDP of a country, the tax-to-GDP ratio drops. Taxes paid by individuals and corporations often account for the majority of tax receipts, especially in developed countries.Customs and duties paid by users of goods and services also make up a portion of tax receipts.
I am not well versed in economics. But from the above explanation, for me it is clear that decrease in tax-gdp ratio may not correlate with decrease in the growth rate of the economy. As the above statement clearly says
even when the economy grows if tax revenue decreases, tax to gdp ratio drops. Hence tax to gdp ration
may not indicate statement 1.Slowing economic growth rate.
If tax collected by government is less compared to the growth of GDP, obviously profits of the companies must be increasing. This in turn will lead to concentration of income with in the hands of few companies/people
(less equitable distribution of national income). Whereas had the Government increased the tax proportionate to the growth of GDP, Govt would have increased its revenue there by spent in social sector schemes or shared with states. This implies equitable distribution of national income.
Therefore option 2 only seems to be correct.
Is there any flaw in the above reasoning. Please reply.
Sorry for starting new discussion for every doubtful question. This would be the final one.
Comments
While the former always indicate less equitable distribution of income same may not be the case for the latter.
People who are giving link of Indian express are actually giving verification for low tax to gdp ratio
Decrease in tax revenue may be due to certain short term factors like tax evasion tax avoidance and inefficient methods of tax collection thereby reducing the ratio
Thx for replying.