A Greater Multiplier with a Targeted Tax and Spend Strategy
22 Pages Posted: 14 Sep 2014
Date Written: September 12, 2014
Traditional macroeconomics finds a multiplier of 1.0 when taxes and expenditures are increased the same amount. It results from uniform tax increases and a similar constant marginal propensity to consume. I show that a greater multiplier results when the tax rate increases on those with a lower marginal propensity to consume and the money spent goes to those with a higher marginal propensity to consume. This allows an economy to both grow and maintain a balanced budget. It would be most useful to increase a “sluggish” economy as opposed to a severe recession. I argue that the assumptions used are quite realistic. The overall model and its assumptions present a testable exercise.
Keywords: economic growth, multiplier
JEL Classification: E12,E21
Suggested Citation: Suggested Citation