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.
-
A.
1 only
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B.
2 only
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C.
Both 1and 2
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D.
Neither 1 nor 2
Correct Answer:
D. Neither 1 nor 2
Explanation:
The correct answer is (d) Neither 1 nor 2.
Explanation
A decrease in the tax to GDP ratio means that the country’s tax revenues as a percentage of its overall economic output (GDP) have declined.
Statement 1: Slowing economic growth rate
This is NOT necessarily true.
The tax to GDP ratio can decrease either because tax revenues have declined, economic growth has accelerated faster than tax collection, or due to changes in tax policies, evasion, or compliance issues.
For example, if GDP grows faster than tax revenues (due to tax exemptions, evasion, etc.), the ratio drops, even if overall economic growth is high.
Statement 2: Less equitable distribution of national income
This is NOT inherently correct.
A lower tax to GDP ratio does not directly measure income inequality or how fairly income is distributed. It only measures the government’s ability to collect taxes relative to its economy.
The equity of income distribution depends on the structure of the tax system (progressive vs. regressive) and public policy, not simply the ratio itself.
Conclusion:
A lower tax to GDP ratio does not by itself indicate slowing economic growth or less equitable income distribution. Multiple other policy and structural factors determine these outcomes, so the answer is (d) Neither 1 nor 2.
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