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Explain why a tax rebate increases output less than increasing government spending by the same amount....

Explain why a tax rebate increases output less than increasing government spending by the same amount. Give an example of both for comparison.

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Answer #1

A tax cut will increase the disposable income in the market that will also increase the savings of the household along with the consumption, on the other hand, the government spending will only increase the consumption of the people directly , hence the government spending will increase the output more than the tax rebates.

For example John pays $100 as taxes and government buys $100 worth of goods from John, if there is a tax rebate the taxes fall to $50 and he spend the extra 30 as consumption and saves 20, so the actual output increased by only 30, but when the government increases the purchases to 150 it increases the consumption directly.

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