THE US FISCAL MULTIPLIER AND INCOME-DRIVEN TAXES AND IMPORTS

Year 2021, , 148 - 156, 31.12.2021

Samih Antoine Azar

https://doi.org/10.17261/Pressacademia.2021.1460

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.

Keywords

Fiscal multiplier, balanced budget multiplier, marginal propensity to import, marginal income tax rate, USA

References

• Arize, A. C., & Walker, J. (1992). A reexamination of Japan's aggregate import demand function: an application of the Engle and Granger twostep procedure. International Economic Journal, 6(2), 41-55.
• Azar, S. A. (2021a). A simple and indirect approach to estimating the government spending multiplier for Lebanon, Lebanon Briefs, Blominvest, 1-6.
• Azar, S. A. (2021b). Measuring the US marginal propensity to consume. Economics Bulletin, 41(2), 283-292.
• Bernardini, M., De Schryder, S., & Peersman, G. (2020). Heterogeneous government spending multipliers in the era surrounding the great recession. Review of Economics and Statistics, 102(2), 304-322.
• Bernardini, M., & Peersman, G. (2018). Private debt overhang and the government spending multiplier: Evidence for the United States. Journal of Applied Econometrics, 33(4), 485-508.
• Chang, T., Ho, Y. H., & Huang, C. J. (2005). A reexamination of South Korea's aggregate import demand function: The bounds test analysis. Journal of Economic Development, 30(1), 119.
• Chani, M. I., Pervaiz, Z., & Chaudhary, A. R. (2011). Determination of Import Demand in Pakistan: The Role of Expenditure Components. Theoretical & applied economics, 18(8), 345-366.
• Christiano, L., Eichenbaum, M., & Rebelo, S. (2011). When is the government spending multiplier large? Journal of Political Economy, 119(1), 78- 121.
• Doroodian, K., Koshal, R. K., & Al-Muhanna, S. (1994). An examination of the traditional aggregate import demand function for Saudi Arabia. Applied Economics, 26(9), 909-915.
• Doroodian, K., Koshal, R. K., & Al-Durmaz, N., & Lee, J. (2015). An empirical analysis of import demand function for Turkey: An ARDL bounds testing approach. The Journal of Developing Areas, 49, 4, 215-226,
• Dutta, D., & Ahmed, N. (1999). An aggregate import demand function for Bangladesh: a cointegration approach. Applied Economics, 31(4), 465- 472.
• Emran, M. S., & Shilpi, F. (2010). Estimating an import demand function in developing countries: A structural econometric approach with applications to India and Sri Lanka. Review of International Economics, 18(2), 307-319.
• Fritsche, J. P., Klein, M., & Rieth, M. (2021). Government spending multipliers in (un) certain times. Journal of Public Economics, 203, 104513. Available at https://doi.org/10.1016/j.jpubeco.2021.104513.
• Gabriel, R., Klein, M. and Pessoa, A. (2020) : The effects of government spending in the Eurozone, Sveriges Riksbank Working Paper Series, No. 400, Sveriges Riksbank, Stockholm.
• Hibbert, K., Thaver, R. L., & Hutchinson, M. C. (2012). An econometric analysis of Jamaica’s import demand function with the US and UK. The International Journal of Business and Finance Research, 6(1), 109-120.
• Hor, C., Keo, K., & Suttiprapa, C. (2018). An empirical analysis of Cambodia's import demand function. Journal of Management, Economics, and Industrial Organization, 2(1), 1-12.
• Islam, A. M., & Kabir Hassan, M. (2004). An econometric estimation of the aggregate import demand function for Bangladesh: Some further results. Applied Economics Letters, 11(9), 575-580.
• Kalyoncu, H. (2006). An aggregate import demand function for Turkey: a cointegration analysis. Available at https://mpra.ub.uni-muenchen.de /4260/.
• Kathuria, K., & Kumar, N. (2021). An Empirical Investigation of the Disaggregated Import Demand Function: Non-linear ARDL Framework. Foreign Trade Review, 56(2), 197-205.
• Katsimi, M., and Moutos, T. (2006). Inequality and the US import demand function, CESifo Working Paper, No. 1827, Center for Economic Studies and ifo Institute (CESifo), Munich.
• Matsubayashi, Y., & Hamori, S. (2003). Some international evidence on the stability of aggregate import demand function. Applied Economics, 35(13), 1497-1504.
• Narayan, P. K., & Narayan, S. (2005). Estimating income and price elasticities of imports for Fiji in a cointegration framework. Economic Modelling, 22(3), 423-438.
• Owyang, M. T., Ramey, V. A., & Zubairy, S. (2013). Are government spending multipliers greater during periods of slack? Evidence from twentieth-century historical data. American Economic Review, 103(3), 129-34.
• Ozturk, I., & Acaravci, A. (2009). An aggregate import demand function: An empirical investigation by panel data for Latin American and Caribbean countries. IUP Journal of Applied Economics, 8, 5 & 6, 65-72
• Qazizada, W., & Stockhammer, E. (2015). Government spending multipliers in contraction and expansion. International Review of Applied Economics, 29(2), 238-258.
• Tang, T. (2004). A reassessment of aggregate import demand function in the ASEAN-5: a cointegration analysis. The International Trade Journal, 18(3), 239-268.
• Tang, T. C., & Nair, M. (2002). A cointegration analysis of Malaysian import demand function: reassessment from the bounds test. Applied Economics Letters, 9(5), 293-296.
• Tsionas, E. G., & Christopoulos, D. K. (2004). International evidence on import demand. Empirica, 31(1), 43-53.
• Yin, F., & Hamori, S. (2011). Estimating the import demand function in the autoregressive distributed lag framework: the case of China. Economics bulletin, 31(2), 1576-1591.
• Yoon, I. H., & Kim, Y. M. (2019). Estimating Import Demand Function for the United States. Asia-Pacific Journal of Business, 10(2), 13-26.