What Is the Tax-to-GDP Ratio?

A 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 is used to determine 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—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 34.1% in 2021 (the latest available data).

According to one theory, as economies become more developed and incomes rise, people generally begin to demand more services from the government, whether in healthcare, public transportation, or education. This would explain, for example, why the tax-to-GDP ratio in 2021 in the European Union, at an average of 25.9%, was so much higher than most Asia-Pacific nations, where tax-to-GDP ratios 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 34.1% 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 periods 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.

However, in cases of significant shifts in tax law or during severe economic downturns, the ratio can shift dramatically. For example, according to the OECD, the U.S.'s tax-to-GDP ratio fell more than many other OECD members in 2018, and Mexico's ratio decreased by 11 basis points in 2021.

The United States ranked 32nd out of 38 OECD countries in terms of how low its tax-to-GDP ratio was in 2021.

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.