# 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.

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asked by Amy

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