# Tax Multiplier Calculator

LAST UPDATE: September 24th, 2020

## 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