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What is the tax multiplier

What is the tax multiplier

Tax multiplier - a negative factor, which shows the change in national income, depending on the tax changes.

The increase in taxes leads to lower incomes.

The essence of the tax multiplier

In economics, there are the so-called multiplier effects. It occurs in cases where the change in spending leads to greater change in equilibrium GDP.
The most famous is the Keynesian multiplier. It reflects how increased income as a result of the growth of government and other expenses.
The tax multiplier has lessthe impact of a decrease in demand than the multiplier of government spending on its increase. It has the following effect - reduced the gross national product at tax increases, with a decrease - it grows. It is worth noting that between the change in tax rates and national income is always a time period ranging from several months to a year.

Stronger impact government spending on domestic consumption due to their direct entry into aggregate demand.

How does the tax multiplier? Thus, while reducing taxes for the population it is possible for consumers to spend more, thus they increase their spending on consumer goods. Reducing the tax burden for businesses stimulates the growth of investments.
The impact of government spending and the amount of taxincome and consumption is a major tool in choosing the state fiscal (fiscal) policy. When the priority expansion of the public sector and increased costs. This leads to an increase in income of the population, production of goods, and to reduce unemployment. However, these positive effects are achieved only if government spending growth is due not only to an increase in the tax burden.

Stronger impact government spending on domestic consumption due to the fact that they are directly included in the aggregate demand and the changes are reflected in its value.

If you want to contain inflationaryLift increasing taxes. Today, the budget and fiscal policy is an essential means of achieving sustainable economic development forward.
If government spending and taxes at the same timeincreased by the same amount, the equilibrium production also increase by the same amount. With a balanced budget multiplier is always equal to one.

Calculation of tax multipikatora

Changing the tax policy usually hasthe ability to have an impact on the economy multidirectional impact. It allows you to transfer the tax multiplier effects of the measures in a quantitative amount. It is the ratio of marginal capacity to consume to limit the ability to save a minus value.
For example, the ability to limit the value ofconsumption is 0.9, and to save - 0.3. Then the tax multiplier is equal to -3. Accordingly, the increase in taxes on $ 1. Reduces national income of $ 3.
As the multiplier of government spending, tax multiplier can operate in both directions.

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