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A tax increase reduces income, and thus, aggregate expenditure. If the tax increase is assumed to be a lump sum tax the aggregate expenditure will move downward in a parallel fashion. A tax increase may be warranted in the case of excessive demand causing inflation. In the leakage-injection analysis the tax increase is a leakage and is added to saving.
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In the late 1960's, a tax surcharge was enacted in the United States. Its purpose was to decrease the amount going to aggregate expenditure, i.e. create a negative multiplier effect, because the economy was experiencing an increasing inflation. |
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