If taxes depend on income, then the absolute value of the tax multiplier ________ it would be if taxes were a lump-sum amount.

Question

Quizplus · Accepted Answer

The tax multiplier measures the change in equilibrium output resulting from a change in taxes. If taxes depend on income, then the tax multiplier will be smaller than it would be if taxes were a lump-sum amount. This is because if taxes depend on income, an increase in income leads to an increase in taxes, which reduces disposable income and decreases consumption. As a result, the overall effect on output is dampened, leading to a smaller tax multiplier.

If Taxes Depend on Income, Then the Absolute Value of the Tax