A Greater Multiplier with a Targeted Tax and Spend Strategy
25 Pages Posted: 27 Apr 2017
Date Written: April 26, 2017
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: Suggested Citation