Calculator
Tax Multiplier Calculator (Simple)
Tax Multiplier Calculator (Complex)
Definition – What is the tax multiplier?
The tax multiplier calculates the amount that a decrease in taxes will generate in the economy.
A higher tax multiplier means that more economic activity will be created, a lower tax multiplier means that less economic activity will be generated.
Formula – How to calculate the tax multiplier
Tax Multiplier (Simple) = Marginal Propensity to Consume / (1 -Marginal Propensity to Consume)
Tax Multiplier (Complex) = MPC / (1 – MPC x (1 – MPT) + MPI + MPG + MPM))
Where:
- MPC = Marginal Propensity to Consume
- MPT = Marginal Propensity to Tax
- MPI = Marginal Propensity to Invest
- MPG = Marginal Propensity of Government Expenditures
- MPM = Marginal Propensity to Import
Example
Simple – MPC is 55% = Tax Multiplier = 0.55 / (1 – 0.55) = 0.55 / 0.45 = 1.22
Complex – MPC is 55%, MPT is 26%, MPI is 21%, MPG is 48%, MPM is 32%
Tax Multiplier = 0.55 / (1 – (0.55 x (1 – 0.26) + 0.21 + 0.48 + 0.32))
Tax Multiplier = 0.55 / (1 – (0.55 x 0.74 + 0.21 + 0.48 + 0.32))
Tax Multiplier = 0.55 / (1 – (0.407 + 0.21 + 0.48 + 0.32))
Tax Multiplier = 0.55 / (1 – 1.417)
Tax Multiplier = 0.55 / -0.417
Tax Multiplier = -1.32
Sources and more resources
- Khan Academy – Tax Multiplier, MPC, and MPS – Part of an educational course on Macroeconomics. It demonstrates the tax multiplier as well as marginal propensity to consume and save.
- Wikipedia – Fiscal multiplier – A quick overview of fiscal multipliers (including the tax multiplier).
- BYU Idaho – Econ 151 – Economic Principles and Problems – Macro – Aggregate Expenditures Model – An overview of the aggregate expenditures model, including the tax multiplier.
- ACDC Leadership (YouTube) – Macro 3.12 – Multiplier and Taxes Practice – An overview video on the tax multiplier.
- XplainD – Tax Multiplier – A summary of the tax multiplier including formulas.