Goodsmarket: By how much should taxes decrease to reach full employment
Channel: econom
Date: 24/11/2015

By how much taxes must decrease depends on the output gap, the multiplier and the marginal propensity to consume. If the output gap is 1000 and the multiplier is 5 then autonomous spending must increase by 1000/5 = 200. To get this increase through a decrease in taxes c(T) must be equal to 200. Given that c = 0.8 it follows that the decrease in T must be 200/0.8 = 250.

The impact of a change in taxation on output and income is indirect via the consumption function.