Correct Option (a):
A decrease in the tax-to-GDP ratio indicates that the growth rate of tax revenue is slower than the growth rate of the Gross Domestic Product. This situation often arises during periods of slowing economic growth, where reduced economic activity (such as lower consumption, investment, or income generation) leads to a proportional decrease in tax collection. It can also reflect inefficiencies in the tax collection system or a shrinking tax base. Therefore, a declining tax-to-GDP ratio can be an indicator of a slowing economic growth rate, making statement 1 correct.
Incorrect Options:
The tax-to-GDP ratio is primarily a measure of the government's revenue-generating capacity relative to the size of its economy. It does not directly reflect the distribution of national income or the level of economic inequality. Income distribution and equity are typically assessed using specific indicators such as the Gini coefficient, income share of different population quintiles, or poverty rates. A country might have a low tax-to-GDP ratio but still implement progressive expenditure policies or social welfare programs that promote equitable distribution, or conversely, a high tax-to-GDP ratio might coexist with significant income disparities. Therefore, a decrease in the tax-to-GDP ratio does not necessarily indicate a less equitable distribution of national income, making statement 2 incorrect.