Taxes on level of income

The effect of a decline in taxes on the level of income will differ somewhat from an increase in government expenditures of the same amount because:
a. tax declines tend to be more expansionary
b. households may not spend all of an increase in disposable income
c. the MPC which applies to the incomes of households always exceeds the MPC which applies to business incomes
d. the multiplier is high when the MPS is low

I assume that the MPC means Margnal propensity to Consume. I am not sure what you mean by "level of income". Answer #c. makes sense to me, if it is an income tax reduction to individuals. Answer #a also makes sense, but is not an explanation.

Money given directly to individuals as a tax reduction is more likely to be spent than government expenditure to industry.


I think the answer is b.

Total income for an economy is measured by GNP (or GDP); and GNP=C+I+G.
When government raises spending by x, GNP immediately goes up by x. However, a multipler kicks in, where the multiplier is 1/MPS. So, total spending increased spending becomes m*x, where m is the multiplier.

Now then, when taxes decrease by x dollars, disposable income goes up by x. However, households do not spend the full amount, the spend some and save some according to thier MPS. Total income goes up by x*MPC. Then the multiplier kicks in. In the end, Macroeconomics teaches that the taxation multiplier is (1/MPS)-1.

So, a is not true, tax declines tend to be less expansionary (than government spending)

c is not true, the possible differences in MPC between households and business is irrelevant.

while the statement in d is true, it does not explain the question. The multiplier of gvt is 1/MPS, for tax it is (1/MPS) -1

Now then, AMY, when you expand past 1st term macro, the world becomes more complicated. My simplistic explanation will not suffice. But do not worry about this now.

  1. 👍 0
  2. 👎 0
  3. 👁 165
asked by Amy

Respond to this Question

First Name

Your Response

Similar Questions

  1. math

    income 1000 2000 3000 taxes 200 350 450 what percentage of income is paid in taxes at each level?

    asked by karen on January 21, 2013
  2. Social studies-Unit 6 :building on Economics Basic

    2. What is one source of revenue for the federal government to pay for public goods and services? A - property taxes B- sales taxes C- income taxes D- excise taxes I think it's c ! 3. What is one the things the federal reserve

    asked by Waves wit da hoodie on May 25, 2017
  3. social studies

    what is the most likely effect on a person's income if he or she has little education and few skills? A. the person's income will vary greatly. B. the person's will earn a high income. C. the person's income will decline over

    asked by megan on May 4, 2016
  4. Accounting

    The Bayside Company uses the LIFO cost flow method to value inventory. In the current year, profit at Bayside is running unusually high. The corporate tax rate is also high this year but it is scheduled to decline significantly

    asked by Mia on May 6, 2014
  5. Economics

    Some people would prefer a single income tax rate because it? A) would increase the government’s revenue. B) is easier to calculate. C) would reduce the percent of income poorer families pay in income taxes. D)means everyone

    asked by Bailey on May 22, 2014
  6. investing 3-4

    4. Which of the following is the best conclusion, given only the following information: ZYX Corporation’s earnings after taxes have declined by 3.13% from the year earlier. During the past three months, ZYX purchased from

    asked by Johnny on February 22, 2009
  7. finance

    Assuming a tax rate of 35%, depreciation expenses of $1,000,000 will reduce income by 350,000 reduce taxes by 350,000 reduce taxes by 650,000 have no effect on income or taxes, since depreciation is not a cash expense

    asked by lashay on July 24, 2008
  8. Everest

    Jamie is thinking about investing in some residential income producing property that she can purchase for $200,000. Jamie can either pay cash for the full amount of the property or put up %50,000 of her own money and borrow the

    asked by Brittany Thomas on January 10, 2014
  9. math

    please check my answers below and correct me if i am wrong please 1. At Lexi Corp., sales revenue is $20 million, the cost of goods sold is $14 million, operating expenses are $3 million, and income taxes are $1 million. What is

    asked by polly on November 25, 2016
  10. math

    Jamie Thompson is thinking about investing in some residential income-producing property that she can purchase for $200,000. Jamie can either pay cash for the full amount of the property or put up $50,000 of her own money and

    asked by zeenat on September 24, 2013

More Similar Questions