Tax-To-GDP Ratio

A country’s tax-to-GDP ratio is...well...it’s tax-to-GDP ratio. You take a country’s tax revenue (that’s income taxes, sales taxes, payroll taxes, and more) and compare it to the country’s gross domestic product: the total value of goods and services produced in a country. The more value a country produces (GDP), the more taxes the nation will have, assuming a constant tax rate. As the economic pie grows, so does the tax revenue...but the tax-to-GDP ratio remains the same.

Countries that have higher tax-to-GDP ratios have governments with more control over how wealth is spent and transferred. Countries with lower tax-to-GDP ratios imply less government intervention and wealth transfers.

Typically, less developed countries have lower tax revenue, making it difficult to pay off state bills. More developed countries with more wealth to throw around have an easier job with a higher tax-to-GDP ratio. Although...the ratio is also largely cultural, as institutions (many of which are funded by taxes) are historically slow to change over time.

Often, the tax-to-GDP ratio is useful for comparing different years of one country. For instance, policymakers can compare last year’s tax-to-GDP ratio to this one, in tandem with other economic factors, like inflation and unemployment. This gives them a sense of what’s going on in the grand scheme of things...especially when there’s a recession, and policymakers are trying to figure out what to do.