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Why tax multiplier is always be smaller than govt spending multiplier?
Wiki User
∙ 16y ago
If the full multiplier for G (i.e. ignoring crowding out effects) is = change in G/Multiplier
Then the tax multiplier is = change in T x marginal propensity to consume/multiplier since the mpc is between 0 and 1 the tax multiplier is less. Intuitively it is not difficult to see why, the change tax enters spending decisions through consumption and consumption is dependant on the mpc. Whereas as G affects spending decisions directly - it is a injection into the economy that does not have to work through some indirect source to have an effect on the economy.
Wiki User
∙ 16y ago
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