What would be the impact on the multipler effect given an increase in income tax?

The multipler effect is when an additional increase in aggregate demand can cause a greater final impact on national income (GDP) than the inital size of the injection, with the multipler being a coefficient showing the size of the final impact on national income. By increasing the income tax level this will increase the marginal propensity to tax which in turn will increase the marginal propensity to withdraw and hence reduce the size of the multipler. This is due to more money leaking out the circular flow of income (as taxed money can no longer be spent) hence reducing the flow of money within the economy and reducing the size of any multipler effect.

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Answered by Daud B. Economics tutor

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