Effects of Tax and Expenditure Multiplier in U.S from 1930-2010 on Economic Growth
The topic of the thesis is: What are the effects of tax multiplier and expenditure multiplier in the United States from 1930-2010 on economic growth? This topic is important because tax multiplier defines the relationship between Gross Domestic Product (GDP) and the taxes charged by the government of the United States while expenditure multiplier shows how aggregate expenditure affects only the consumption component of GDP. Policymakers should consider initiating aggregate changes in demand and creating a short-run equilibrium.
i. The government of the United States increased government expenditure from 1930-2010 in order to increase aggregate demand. Increasing government expenditures on investment is more effective than decreasing taxes (Fishback 73).
ii. The United States provided $10 billion to producing companies for them to hire more workers and buy more capital equipment and inputs in the bid to increase output(Favero 17). Further, it manipulated the level of government expenditure so as to obtain a short-run equilibrium value.
iii. Between 1930-2010, the government of the United States increased tax rates so as to increase the disposable income hence an increasein the marginal propensity to consume.According to Solow Model, a behavior change of consumer consumption expenditure is due to change in disposable income (Perotti 44). This step triggered a subsequent increase in levels of consumption hence the final increase in the Growth Domestic Product (GDP).
Again, increase in GDP can be achieved by increasing government expenditure on investment. The United States government should emphasize on increasing government expenditures on investment because it is more effective than decreasing taxes. This is prompted by the fact that spending multiplier is higher compared to the tax multiplier. However, tax reduction would be needed if the government decides to achieve the target growth in GDP by decreasing the effect of taxes.
Favero, Carlo A., and Francesco Giavazzi. Effects of Taxes on Changes. Cambridge, Mass.: National Bureau of Economic Research, 2009. Print.
Fishback, Price Van Meter, and Valentina Kachanovskaya. Multiplier in Federal Spending in the U.S during the New Deal. Cambridge, Mass.: National Bureau of Economic Research, 2010. Print.
Nabhi’s Guide to New Unit Area System of House Tax in Delhi. New Delhi: Nabhi Publications, 2004. Print.
Perotti, Roberto. Tax Output on Large and Small Economies. London: Centre for Economic Policy Research, 2011. Print.
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