Question

how would an increase in the income tax affect the Keynesian government expenditure multiplier?

Answer 1

Answer) multiplier = 1/(1-MPC+MPC(tax))

An increase in income tax means that people keep lower % of their gross income. Therefore the multiplier effect will be higher. A increase in income tax leading to less spending and therefore it increases the size of the multiplier. It varies from high income and low income individuals. It depends on which rate of income tax is increase. For example, high-income earners have a lower marginal propensity to consume – they find it harder to find things they need to buy. If you higher the top rate of income tax, a lower % of the tax increase will be saved. Therefore, the multiplier effect will be higher.

If the income tax rate for low-income earners is increase. This will have a lower impact on increasing spending because low-income earners have a lower marginal propensity to spend.

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