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.
Answer & explanation
Answer: (a) 1 only
The tax-to-GDP ratio falls when tax collections grow more slowly than the economy. That typically happens in a slowdown: industrial output, corporate profits and incomes weaken, so tax collections weaken too. The ratio is one aggregate figure, total tax over total output. It does not show how national income is shared among people.
- ✓ 1. When growth slows, firms and households earn less and so pay less tax. The Economic Survey 2013-14 linked India's slower tax collection to weaker industrial output and lower corporate profits. The OECD average tax-to-GDP ratio also fell during the 2008–09 global financial crisis.
- ✗ 2. The ratio only compares total tax revenue with total GDP. It does not show who earns the income, so it cannot measure equity. Inequality is measured with separate tools, such as the share of income going to each group.
Remember · Tax-to-GDP ratio = total tax revenue ÷ GDP. It falls when collections lag behind the economy, as they do in a slowdown. It says nothing about income distribution.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 5 (practise this chapter)
Sources
- NCERT Class 12 · Introductory Macroeconomics, Chapter 5 “if an economy experiences a recession and GDP falls, tax revenues fall because firms and households pay lower taxes when they earn less.”
- Economic Survey 2013-14, Chapter 3: Public Finance (Ministry of Finance) ↗ “A major concern in recent years has been a slow down in tax collection which is a combined effect of slowdown in industrial output and reduced corporate profits.”
- OECD Revenue Statistics 2022: Tax revenue trends (average OECD tax-to-GDP ratio) ↗ “It fell back slightly between 2001 and 2004, but then rose again between 2005 and 2007 before falling back during the global financial crisis in 2008 and 2009.”
Question: UPSC Civil Services (Preliminary) 2015, General Studies Paper I. Explanation: Minimalist IAS, checked 25 Oct 2026 (how we verify). ·
