TAXES & THE MULTIPLIER

# TAXES & THE MULTIPLIER - SECTION 20 HOW INCOME TAXES...

This preview shows pages 1–4. Sign up to view the full content.

SECTION 20: HOW INCOME TAXES AFFECT THE MULTIPLIER

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
HOW DO INCOME TAXES INFLUENCE THE MAGNITUDE OF THE MULTIPLIER? Suppose the mpc = .75 Suppose we consider an economy without taxes. Suppose autonomous spending increases by \$100. The successive increases in output will be Round 1: \$100 Round 2: \$100 x .75 = \$75 Round 3: \$100 x .75 x .75 = \$75 x .75 = \$56.25 Round 4: \$100 x (.75) 3 = \$42.19 Round 5: \$100 x (.75) 4 = \$31.64 And so forth
Now consider the same economy with an income tax of, say, 20%. Suppose autonomous spending increases by \$100. The successive increases in output will be as follows: Round 1: \$100 Because there is a 20% tax, in round 2, the worker who earned \$100 only has \$80 of disposable income. Given an mpc of .75, the worker spends 75% of the \$80. This yields new spending, and new output of \$60. Round 2: \$100 x (1 - .20) x .75 = \$100 x .60 = \$60 Round 3: \$100 x (1 - .20) x .75 x (1 - .20) x .75 = \$100 x (.60) 2 = \$36 Round 4: \$100 x (.60) 3 = \$21.60 Round 5: \$100 x (.60) 4 = \$12.96

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 11

TAXES & THE MULTIPLIER - SECTION 20 HOW INCOME TAXES...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online