A Greater Multiplier with a Targeted Tax and Spend Strategy

25 Pages Posted: 27 Apr 2017

See all articles by Michael S. Long

Michael S. Long

Rutgers University at Newark

Daniela Osterrieder

Rutgers Business School; CREATES

Reza Farhadi

Scheller College of Business, Georgia Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: April 26, 2017

Abstract

Traditional macroeconomics finds a multiplier of 1.0 when taxes and expenditures are increased by the same amount. It results from uniform tax increases and a constant marginal propensity to consume. We 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. Data is presented from the United States that is very consistent with this model working as proposed with a balanced budget multiplier of 1.18 using a 15% marginal tax rate. It is useful in two situations: 1) It decreases the income imbalance, pushing more workers into the middle class. 2) It increases productivity in a “sluggish” economy.

Keywords: Fiscal Multiplier, Varying MPC, Income Imbalance, Tax and Spend Policy

JEL Classification: E11, E21, D12, H23

Suggested Citation

Long, Michael S. and Osterrieder, Daniela and Farhadi, Reza, A Greater Multiplier with a Targeted Tax and Spend Strategy (April 26, 2017). Available at SSRN: https://ssrn.com/abstract=2959051 or http://dx.doi.org/10.2139/ssrn.2959051

Michael S. Long (Contact Author)

Rutgers University at Newark ( email )

111 Washington Avenue
Newark, NJ 07102
United States
973-353-5471 (Phone)

Daniela Osterrieder

Rutgers Business School ( email )

Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States

CREATES ( email )

Aarhus University
Fuglesangs Alle 4
DK-8210 Aarhus C
Denmark

Reza Farhadi

Scheller College of Business, Georgia Institute of Technology ( email )

Atlanta, GA 30332
United States

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