Abstract:

Purpose – This paper aims to develop an equation for the government budget multiplier that does not require the input of the marginal propensity to consume. In parallel, the paper computes from this equation the actual value of the budget multiplier for the US. Methodology – The paper starts from the premise that taxes and imports are income-driven, and that the level of investment is equal to the level of saving. This leads to a theoretical model that is characterized solely by two parameters: the marginal income tax rate, and the marginal propensity to import. Noteworthy the marginal propensity to consume does not appear in the equation. Subsequently, the paper estimates the empirical marginal income tax rate by regression analysis, and the marginal propensity to import by relying on general import demand functions, the latter in order to avoid having an omitted variable bias with a simple linear regression. Findings – The paper finds that the theoretical balanced budget multiplier is nil while the straight multiplier is demonstrated to be equal to the ratio of the sum of the marginal income tax rate to the marginal propensity to consume. The analysis shows that the US multiplier is estimated to be between 2.27 and 3.20, depending upon the empirical results. Conclusion – The paper concludes that the marginal propensity to consume is not needed for identifying the government multiplier. Only the marginal tax rate and the marginal propensity to import are needed. And although the balanced budget multiplier is demonstrated theoretically to be zero, the straight fiscal multiplier is found to be higher than the usual in classic models, but more in line with the recent empirical findings. Governments have therefore a powerful policy tool, and investment in infrastructure and in scientific research are forecast to be unequivocally effective. At the very least, this is true unmistakably in theory.

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