Tax-to-GDP Ratio
Candlefocus EditorTax-to-GDP ratios vary greatly between countries. Developed economies, such as those in Europe, tend to have higher ratios, often ranging from 20% to 40%. Developing economies on the other hand have lower ratios, usually ranging from 5% to 15%. This is due to the higher levels of poverty in developing economies, which can result in inadequate government revenues from taxation and low capacity to collect taxes from the informal sector.
Developed countries, however, also have an advantage when it comes to taxation as most have progressed beyond basic reliance on taxes. They have more sophisticated and complex systems of taxation, allowing them to harvest more revenue and support large government budgets. The World Bank estimates that OECD countries generate around 30% of their GDP in taxes compared to 19.2 percent in emerging markets.
Taxes are essential for governments to invest in essential public services and infrastructure that can support economic growth and job creation. Therefore the Tax-to-GDP ratio provides a measurement of how well a country’s government is directing its economic resources. By looking at a country’s Tax-to-GDP ratio, economists and policy makers can get an understanding of whether a country’s government is efficiently and effectively leveraging taxes to support economic growth. As a result, a higher tax-to-GDP ratio is often seen as an indicator of fiscal health.