Tax Multiplier and Govenment Spending Multiplier
Govenment Spending Multiplier
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spending\ multiplier = 1 +MPC+MPC^2+\dots
spending multiplier=1+MPC+MPC2+…
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spending\ multiplier = \Sigma_{i=0}^{\inf}MPC^{i}
spending multiplier=Σi=0infMPCi
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spending\ multiplier = 1·\frac{1-MPC^{inf}}{1-MPC} = \frac{1}{1-MPC}
spending multiplier=1⋅1−MPC1−MPCinf=1−MPC1
Government spending directly becomes part of GDP so the first term is
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Tax Multiplier
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tax\ multiplier = MPC+MPC^2+\dots
tax multiplier=MPC+MPC2+…
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tax\ multiplier = \Sigma_{i=0}^{\inf}MPC^{i}
tax multiplier=Σi=0infMPCi
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tax\ multiplier = MPC·\frac{1-MPC^{inf}}{1-MPC} = \frac{MPC}{1-MPC}
tax multiplier=MPC⋅1−MPC1−MPCinf=1−MPCMPC
Decreased tax becomes a part of individuals’ source of income so the first term of the geometric series is
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MPC
MPC.
All in all, tax multiplier is smaller than spending multiplier, ceteris paribus.
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