What Is the Tax-to-GDP Ratio? What Is a Good One?

What Is the 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 as measured by gross domestic product (GDP). The ratio provides a useful look at a country's tax revenue because it reveals potential taxation relative to the economy. It also enables a view of the overall direction of a nation's tax policy and international comparisons between the tax revenues of different countries.

Understanding the Tax-to-GDP Ratio

Taxes are a critical measure of a nation's development and governance. The tax-to-GDP ratio determines how well a nation's government directs its economic resources. Higher tax revenues mean a country can spend more on improving infrastructure, health, and education, which are keys to the long-term prospects for a country's economy and people.

Tax Policy and Economic Development

According to the World Bank, tax revenues above 15% of a country’s gross domestic product (GDP) are a key ingredient for economic growth and poverty reduction. This level of taxation ensures that countries have the money necessary to invest in the future and achieve sustainable economic growth.

Developed countries generally have a far higher ratio. The average among members of the Organisation for Economic Cooperation and Development was 34.0% in 2022.

According to one theory, people generally begin to demand more services from the government as economies become more developed and incomes rise. Their demands might focus on healthcare, public transportation, or education.

This would explain why the European Union's tax-to-GDP ratio of 26.7% in 2022 was so much higher than most Asia-Pacific nations. Tax-to-GDP ratios in these countries ranged from 10.9% in Indonesia to 25.3% in Samoa. Only Japan, Korea, New Zealand, and Nauru were higher than the EU, and all but Nauru averaged less than the OECD average.

The Direction of Tax Policy

Policymakers use the tax-to-GDP ratio to compare tax receipts from year to year because it offers a better measure of the rise and fall in tax revenue than simple amounts. Tax revenues are closely related to economic activity, rising during times of faster economic growth and declining during recessions. As a percentage, tax revenues generally rise and fall faster than GDP but the ratio should stay relatively consistent barring extreme swings in growth.

The ratio can shift dramatically, however, in cases of significant shifts in tax law or during severe economic downturns.

The United States ranked 31st out of 38 OECD countries in terms of its tax-to-GDP ratio in 2022.

The Bottom Line

The tax-to-GDP ratio measures a nation's tax revenues to its gross domestic product. It indicates how much of a nation's gross domestic product goes into government funding.

Correction–April 25, 2024: This article has been updated to reference tax-to-GDP ratio data and percentages for 2022.