A decrease in tax to GDP ratio of a country indicates which of the following?
1. Slowing economic growth rates
2. Less equitable distribution of national income
Select the correct Answer using the code given below:

The correct option is 1 only.

Let us understand the logical reasoning behind why a decrease in the tax-to-GDP ratio indicates slowing economic growth rates but does not necessarily indicate a less equitable distribution of national income:

1. Understanding Tax-to-GDP Ratio:
The tax-to-GDP ratio is a gauge of a nation's tax revenue relative to the size of its economy, measured by the Gross Domestic Product (GDP). It is calculated as:
$$\text{Tax-to-GDP Ratio}=\frac{\text{Total Tax Revenue}}{\text{Gross Domestic Product (GDP)}}$$

2. Analysis of Statement 1 (Slowing economic growth rates):
During periods of slowing economic growth rates, economic activities such as corporate profits, individual incomes, consumer spending, and business investments decline or grow at a much slower pace. Since tax revenues (direct taxes like income and corporate tax, and indirect taxes like GST or excise duties) are directly tied to these economic activities, a slowdown causes tax collection to drop or grow slower than the overall GDP. Consequently, the tax-to-GDP ratio decreases. Therefore, a decrease in this ratio is a strong indicator of slowing economic growth rates. Thus, Statement 1 is correct.

3. Analysis of Statement 2 (Less equitable distribution of national income):
The tax-to-GDP ratio measures the overall quantum of tax collected relative to the GDP, but it does not reflect how national income is distributed among different sections of society. The equity of income distribution depends heavily on the nature of the tax structure (progressive vs. regressive taxation) and the redistribution policies of the government (such as social welfare spending, subsidies, and public goods), rather than the aggregate tax ratio itself. A country could have a low tax-to-GDP ratio and still have equitable distribution, or a high ratio with poor distribution. Therefore, a decrease in the ratio does not directly indicate a less equitable distribution of national income. Thus, Statement 2 is incorrect.

Hence, only Statement 1 is correct.