Question 22 from UPSC CSE 2015 - Economy

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

IASCODEX · Accepted Answer

Correct Option: D. Neither 1 nor 2

Strategy: Evaluate the two statements based on the definition of a declining tax to GDP ratio. Identify the logical flaws in each statement to determine that neither is correct.

Key Info: The tax to GDP ratio is a fiscal indicator measuring the percentage of a country's gross domestic product (GDP) collected as taxes. It is used to assess the efficiency and breadth of tax collection relative to economic output.

**Tax to GDP Ratio:**
- A rising ratio generally shows improved tax compliance, a broader tax base, or better tax administration.
- A falling ratio could occur if GDP is growing rapidly but tax collections do not keep pace, or if there are tax cuts, systemic tax evasion, or inefficiencies in tax administration.

**Economic Growth:**
- Slower economic growth can affect tax revenues, but the tax to GDP ratio can still fall even with robust GDP growth if tax mobilization lags behind.
- Thus, a decrease in the tax to GDP ratio is not a definitive indicator of slowing growth; it reflects a relative change between tax collection and GDP, not their absolute levels.

**Equitable Distribution:**
- The equity of national income distribution is affected by the type of taxes (progressive vs. regressive), not just the overall tax to GDP ratio.
- For example, an increase in indirect taxes (regressive) can worsen income equity, while higher direct taxes (progressive) can improve it; the ratio alone doesn't capture this.

In summary, the tax to GDP ratio is a macroeconomic indicator for fiscal health and tax effectiveness, but does not, by itself, directly indicate either the absolute economic growth rate or the equity of income distribution.

IASCODEX · Answer

Option A: 1 only

IASCODEX · Answer

Option B: 2 only

IASCODEX · Answer

Option C: Both 1 and 2

A decrease in tax to GDP ratio of a country indicates which of the following? Slowing economic growth rate Less equitable distribution of national income

A decrease in tax to GDP ratio of a country indicates which of the following?

Slowing economic growth rate

Less equitable distribution of national income