Blinder and Zandi estimated multipliers for different kinds of tax cuts. They estimate that the multiplier...

Blinder and Zandi estimated multipliers for different kinds of tax cuts. They estimate that the multiplier for the Earned Income Tax Credit, a program for low-wage workers, is 1.24, while the multiplier for an across-the-board tax cut for all tax payers is 1.02. Why do you think the across-the-board tax cut has a lower multiplier?

Expert Solution

The value of the multiplier depends on the value of the marginal propensity to consume.

Greater the value of the marginal propensity to consume, higher would be the value of the multiplier.

As we know that low income individuals tends to spent greater proportion of their income on consumption relative to higher income individuals.

So, the marginal propensity to consume of low income individuals is greater than the marginal propensity to consume of higher income individuals.

The Earned Income Tax Credit program is for the low-wage workers. As this program is for low wage workers, any increase in disposable income due to this program relects in greater consumption because low wage workers consume greater proportion of their income. So, the marginal propensity to consume of low wage workers in greater than the marginal propensity to consume of all tax payers.

Due to this reason, the across-the-board tax cut has lower multiplier relative to the multiplier for the Earned Income Tax Credit, a program for low wage workers.

Rahul Sunny answered 2 years ago

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