The tax multiplier is a negative coefficient that shows the change in national income depending on the change in taxes. An increase in taxes leads to a decrease in household income.
The essence of the tax multiplier
The so-called multiplier effects operate in the economy. They arise when a change in spending leads to a larger change in the equilibrium GDP.
The most famous is the Keynes multiplier. It reflects how much the level of income increases as a result of the growth of government and other expenditures.
The tax multiplier has a smaller impact on reducing demand than the government spending multiplier to increase it. It has the following effect - with an increase in taxes, the gross national product decreases, with a decrease, it grows. It should be noted that there is always a time interval between the change in the tax rate and the national income, from several months to a year.
The stronger influence of government spending on domestic consumption is due to their direct entry into aggregate demand.
How does the tax multiplier work? So, when taxes for the population are reduced, consumers have the opportunity to spend more, and accordingly, they increase their spending on consumer goods. Reducing the tax burden for entrepreneurs stimulates the growth of investment investments.
The impact of government spending and taxes on the amount of income and consumption is the main one when the government chooses fiscal (fiscal) policy instruments. With the priority expansion of the public sector of the economy, expenditures also increase. This leads to an increase in the income of the population, the production of goods, as well as to a decrease in unemployment. However, such positive effects are achieved only if the increase in government spending is due not only to an increase in the tax burden.
A stronger influence of government spending on domestic consumption is due to the fact that they directly enter into aggregate demand and their changes are reflected in its value.
If it is necessary to curb the inflationary rise, taxes are increased. Today, fiscal policy is one of the main means of achieving sustainable progressive economic development.
If government spending and taxes simultaneously increase by the same amount, then equilibrium production will also increase by the same amount. With a balanced budget, the multiplier is always one.
Tax multiplier calculation
Changes in tax policy usually have the potential to have a multidirectional impact on the economy. It is the tax multiplier that makes it possible to translate measures of influence into a quantitative value. It is equal to the ratio of the marginal capacity to consume to the marginal capacity to save with a minus value.
For example, the value of the marginal capacity to consume is 0.9, and to save - 0.3. The tax multiplier would then be -3. Accordingly, a $ 1 increase in taxes reduces the national income by $ 3.
Like the government spending multiplier, the tax multiplier can work in both directions.
