Download Unit 6 - B1 - WusslersClassroom

Ch 29
Kevin and Steve
Income Taxes and the Expenditure
Schedule
•Fixed Taxes & Variable Taxes
•Increase in taxes shifts the expenditure
schedule downward (Decrease shifts up)
•Variable tax changes also change slope
•Fixed
•Do not vary with level of GDP (ex: property
tax)
•Variable
•Do vary with level of GDP (ex: personal
income tax)
Shifts in AS
Variable
Fixed
TE
TE
10%
15%
20%
GDP
GDP
Multiplier
•OSM- tells us the multiplier when taxes are fixed
•1/(1-MPC)
•Slope- Actual multiplier formula
•1/(1-slope of expenditure schedule)
Supply Side Economics
•Tax Cuts = an increase in AS
•Income tax cuts make people feel as though they are getting
more for they’re work, and therefore increases incentive to
work (added productivity, decreased costs, increases
proficiency, and thus increases supply)
•Less taxes= more money= greater savings= more money in
banks which can be leant out to business= greater investment
in capital.
•providing tax credits for research and development
•incentive to put dollar into improvements in technology
and efficiency
•Loss of tax revenues, even though tax rates were lowered,
expected to recoup tax revenue b/c of increased production.
But people didn’t work more and there was little increase in
production
Criticisms
•Income tax cuts have limited effect in making people want to
work more
•Small increase in labor supply and savings
•Underestimated the effect of tax cuts on spending (AD)
•People do not work more with the tax cuts, instead they
just spend more
•Most promoting of tax cuts are with those targeting R & D
•Long time to see benefits
•In short run supply side, tax cuts have primary effect on AD
not AS as intended
•Effects distribution of income- income inequality
•Tax cuts go to capital owning class and trickle down- not
all trickle down.