Table of Contents

Understanding the Optimal Tax-to-GDP Ratio for Economic Growth

By

Julia Kagan

Updated September 11, 2025

Reviewed by

Lea D. Uradu

Economist and reporters meet in small groups outside a conference room where the Bureau of Economic Analysis will release GDP data. — Maskot / Getty Images

What Is the Tax-to-GDP Ratio?

The tax-to-GDP ratio measures a country's tax revenue compared to the size of its economy, as shown 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.

Key Takeaways

The tax-to-GDP ratio is a critical metric for assessing a country's fiscal health, revealing tax revenue relative to economic output.
Developed countries often exhibit higher tax-to-GDP ratios, reflecting their governments' ability to fund infrastructure, health, and education.
The World Bank emphasizes that a tax-to-GDP ratio above 15% is vital for fostering economic growth and reducing poverty.
Comparing tax-to-GDP ratios among countries can highlight variations in tax policies and their potential impact on economic development.

Analyzing How the Tax-to-GDP Ratio Shapes Economies

Taxes are a crucial indicator of a country'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.

The Relationship Between Tax Policy and Economic Growth

Tax revenues above 15% of a country’s gross domestic product (GDP) are a key ingredient for economic growth and poverty reduction, according to the World Bank. 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.

Important

The tax-to-GDP ratio in the United States was 27.7% in 2022.

As economies develop and incomes rise, people tend to demand more government services. These demands often focus on healthcare, public transit, 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.

Trends in Tax Policy and Their Economic Impact

Policymakers use the tax-to-GDP ratio to track yearly tax revenue changes, as it’s more informative than raw amounts. Tax revenues rise with economic growth and fall 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, the ratio can change sharply with new tax laws 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.

Does GDP Include Tax Revenue?

Tax revenue includes revenues collected from taxes on income and profits, Social Security contributions, taxes levied on goods and services, payroll taxes, and taxes on the ownership and transfer of property. Total tax revenue is considered part of a country's GDP. As a percentage of GDP, total tax revenue indicates the share of a country's output that the government collects through taxes.

What Is a Good Tax-to-GDP Ratio?

A tax-to-GDP ratio of 15% or higher is believed to ensure economic growth and, thus, poverty reduction in the long term, according to the World Bank. The tax-to-GDP ratio in the United States was 27.7% in 2022.

How Do I Graph Tax Revenue As a Percentage of GDP?

The World Bank provides line graphs that reflect tax revenue as a percentage of GDP for selected countries and economies from 1972 to 2022. The values on the horizontal axis (x-axis) are years. The values on the vertical axis (y-axis) reflect the percentage of tax revenue compared to GDP. The plotted data points reveal the change over time in these values.

Where Does the United States Rank in Terms of Tax Revenue As a Percentage of GDP?

The United States ranked 31st out of 38 OECD countries regarding the 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—July 20, 2024: This article has been corrected to state that the tax-to-GDP ratio in the United States was 27.7% in 2022.

Article Sources

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The World Bank. "Taxes & Government Revenue."
Organisation for Economic Cooperation and Development. "Revenue Statistics 2023–the United States." Page 1.
CEIC Data. "European Union Tax Revenue: % of GDP."
Organisation for Economic Cooperation and Development. "Revenue Statistics in Asia and the Pacific 2023." Page 1.
Organisation for Economic Cooperation and Development Data. "Tax Revenue."
The World Bank. "Getting to 15 Percent: Addressing the Largest Tax Gaps."
The World Bank. "Tax Revenue (% of GDP)."

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