The essence of the tax multiplier
In the economy are the so-called multiplier effects. It occur in cases where the change in costs leads to a larger change in equilibrium GDP.
The most famous is the multiplier of Keynes. It reflects how a growing level of income as a result of growth of the state and other expenses.
The tax multiplier has less impact on reducing demand than the multiplier of public expenditure increase. It has the following effect - when tax increases reduces the gross national product, while decreasing - it is growing. It should be noted that between changes in tax rates and national income is always present with the period from several months to a year.
A stronger impact of public expenditures on domestic consumption due to their direct occurrence in the aggregate demand.
How does the tax multiplier? So, if you reduce taxes for the population of consumers you receive the opportunity to spend more, they increase their spending on consumer goods. Reducing the tax burden for entrepreneurs stimulates growth of investments.
The impact of government spending and taxes on income and consumption is mainly in the choice of government instruments of fiscal (budgetary-tax) policy. If the priority extension of public sector of economy and increase costs. This leads to an increase of income, production of goods and to lower unemployment. However, these positive effects are achieved only if the growth of government spending due not only to the increase in the tax burden.
A stronger impact of public expenditures on domestic consumption due to the fact that they are directly included in the aggregate demand and their changes affect its value.
If necessary, containment of inflation rise increase taxes. Today the budgetary-fiscal policy is one of the main means of achieving sustainable and sustained economic development.
If government spending and taxes simultaneously increased by the same amount, the equilibrium production will also increase by the same amount. When the balanced budget multiplier is always equal to one.
Calculation of tax multiplicator
Changes in tax policy usually has the ability to influence the economy multidirectional impact. It is the tax multiplier allows you to translate interventions into a quantitative value. It is equal to the ratio of marginal ability to consume to the limit of the ability to save negative value.
For example, the value of the maximum ability to consume is 0.9, and saving - 0.3. Then the tax multiplier is -3. Consequently, the increase in taxes on the $ 1. reduces national income by $ 3.
As the government spending multiplier, the tax multiplier can operate in both directions.