UPSC Prelims 2015 · Question 4 of 98
UPSC Prelims 2015 question on Tax GDP Ratio Decline
- ExamUPSC CSE
- Year2015
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicTaxation
- DifficultyHard
- TypeStatement
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.
Show answer
Answer: D. Neither 1 nor 2
Verdict
The answer is neither 1 nor 2. A falling tax to GDP ratio does not reliably indicate either slowing growth or less equitable income distribution.
Analysis
Statement 1 is INCORRECT. The ratio falls when tax collection grows more slowly than GDP. That can happen during rapid growth if the growth is concentrated in lightly taxed sectors, and collections can also fall for reasons of compliance or rate changes that have nothing to do with the growth rate. Statement 2 is INCORRECT. Distributional impact depends on the composition of taxes, not on the total. A fall driven by lower indirect taxes could improve equity, while a fall in direct taxes could worsen it, so the direction cannot be inferred from the ratio alone.
Source
OECD economics material on tax structures and growth.
How to crack it
This is applied reasoning, so write the ratio out and ask what can move each side independently. Tax over GDP falls if the numerator slows or the denominator accelerates, and there are several unrelated causes for each. Whenever a question asks what a ratio indicates, test whether more than one story produces the same movement. If it does, the statement claiming a single cause is false, and neither 1 nor 2 becomes the likely landing point.