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We know that a tax increase results in a decline in income. In other words, it is contractionary in effect. An increase in tax (∆T) leads to a decrease in income (∆Y). The ratio of ∆Y/∆T, called the tax multiplier, is designated by K_{T }Thus,

K_{T }= ∆Y/∆T, and ∆Y = K_{T}. ∆T

Again, how much national income would decline following an increase in tax receipt depends on the value of MPC. The formula for K_{T} is

Thus, tax multiplier is negative and, in absolute terms, one less than government spending multiplier. If MPC = 3/4 then the value of K_{T} = (-3/4)/(1-3/4)= -3.an increase in taxes of Rs. 20 crore results in a decline of income of Rs. 60 crore. That is to

-60 = (-3/4)/(1-3/4)

In contrast, with an MPC = 3/4, the value of K_{G} = 4. Assume an increase in government expenditure of Rs. 20 crore. Applying the formula for K_{G}, we obtain

Thus, K_{T} is negative and its value is one short of K, or K_{G}.

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Graphically, tax multiplier has been shown in Fig. 3.18. Pre-tax consumption line and aggregate demand schedule are represented by C_{1} and C, + I + G, respectively. The corresponding equilibrium level of income is OYI. An increase in taxes shifts the consumption line to C_{2}. Consequently, aggregate demand schedule also shifts downwards to C, + I + G. Consequently, income declines to OY_{2}. Thus, the effect of an increase in taxes on income is contractionary.

One must know the distinction between K_{I }or K_{G }and K_{T}.This is demonstrated in terms to Table 3.4.

Thus, K_{T} is negative and one less than KI or K_{G}.

The G-multiplier and T-multiplier are also called fiscal multipliers as these multipliers are associated with the fiscal activities of the government (i.e., changes in expenditure and taxation plans).