Quora Answer: How is Tax Buoyancy Different from Tax to GDP Ratio?

The following is my answer to a Quora question: “How is tax buoyancy different from tax to GDP ratio?” 

Tax buoyancy indicates how responsive the taxation system is to changes in the gross domestic product, whether there is an increase in revenue, or decrease.  As a general rule, the tax system is considered buoyant if there is a greater increase in the tax than the output.  This is a rough indicator, and is not very useful in formulating government revenue policy. 

Tax to GDP ratio, on the other hand, is merely the size of the tax revenue relative to that GDP ratio.  The tax to GDP ratio determines the efficiency of government in managing economic output to develop infrastructure, build a reserve, and manage the strategic potential of the economy and the populace. 

Tax buoyancy is a rough indicator of a single aspect of the revenue or potential revenue.  The tax to GDP ratio is more of a helicopter view of the entire tax policy, and gives us a better idea of whether to create or raise taxes, or cut expenditure.  The former measures the responsiveness of the policy, whereas the latter gives us a guide on whether revenue needs to be increased or decreased overall.