Last week in economics, we covered a multitude
of topics but today I want to focus in on the tax multiplies and how changes in
taxes impact GDP. We learned that a decrease in taxes would lead to an increase
in spending but it wouldn’t equal what the reduction in taxes was because
people would save some of that money instead. On the other hand, when there is
an increase in taxes, money may come out of people’s savings. From that we concluded, that an increase in
taxes usually leads to a decrease in GDP, and a decrease in taxes leads to an
increase in GDP.
There were two formulas we also learned
last week, which were the tax multiplier and the expenditure multiplier. The
tax multiplier tells how a change in taxes affects GDP while the expenditure
multiplier tells us how aggregate expenditure affects GDP. Using these two
formulas we learned that a $20 million increase in government spending
increases the GDP more than a $20 million decrease in taxes. This is assuming
that the MPC(Marginal Propensity to
Consume) was the same. One of largest streams of revenue the government has is
taxes.
This lesson corresponded with the
preliminary budget from the city of Winnipeg. In it city officials stated that
the cities revenues don’t cover expenditures. So they plan to raise taxes to
cover their costs. Property tax is planned to rise by 2.3% where 2% is planned
to go into our roads and sidewalks. For the average Winnipegger this means an
additional $37 per house worth over $250 000. Frontage levy fees are also going
up by an average of $30, water bills are going to increase by $10 starting in
2016, and bus fare is going to increase by five cents to deal with the
additional costs of rapid transit.
Winnipeg is predicted to have a deficit of
73 million for 2016 and this number is only looking to grow as in 2017 there is
a projected deficit of $217 million. With the additional revenue the city is
planning to open a new 1 million dollar innovation capital fund to finance “new
ideas” for efficiencies, service delivery improvements, and accountability in
the city. The city is also lowering a
business tax from 5.7% to 5.6% with a small rebate for small businesses. There
are also upping the arts funding over the next two years raising it from $5 per
capita to $7. Also in the plans is a 300 million dollar downtown dog park,
which was promised by Bowman in his campaign. Most of the property tax increase
is going towards roads.
Even though, I wouldn't know how, the tax
multiplier would be useful in determining how these changes in taxes will
affect our GDP in the future. Even though at first it will lower GDP, hopefully
the changes the mayor plans to make will lead to an overall improvement to the
city leading to an increase in GDP.
Beudette, Tegan. "Winnipeggers to pay more:taxes, garbage fees, and transit."CBC. 2 March, 2015. <http://www.cbc.ca/news/canada/manitoba/winnipeggers-to-pay-more-taxes-garbage-fees-and-transit-1.2979195> . 9 March, 2015.
Bonneville, Ruth. "Brian Bowman."Photograph. 17 October, 2014. Bowman: The tough nice guy. Winnipeg Free Press. 9 March, 2015.
Scaller, Tom. "Total Tax Revenue as % of GDP"Chart. n.d. Jonah Goldberg, Quarter Slave. FiveThirtyEight. 9 March, 2015.
