The Balanced‐Budget Multiplier By The Back Door In A Tax‐Revolt Context

In the first portion of this paper, marginal‐balance theorems are introduced for linear Keynesian models. The Haavelmo balanced‐budget multiplier is the best‐known example of such theorems. We also introduce the concept of ‘impact differential’ between the initial expenditure‐taxation (or investment‐saving, or export‐import) increments required for the marginal balance to hold. (In the balanced‐budget multiplier case with dY = dG = dT in the usual symbols, the impact differential is |MdY/|MdG0—dY/|MdT0, where G0, G0, T0 are constants.) In the second part of the paper, the American tax revolt of the 1970s is introduced in its macro‐economic aspect, i.e. as assuming inter‐relations between G and T in both directions. (The expansive effects of higher public expenditures are reduced by consequent or anticipated increases in taxation; the contractive effects of higher taxes are reduced by consequent or anticipated increases in expenditures.) In both these cases the balanced‐budget multiplier theorem continues to hold, but its impact differential may move in either direction. It will fall (as one might expect) if the dominant relationship (G, T) is from dG to dT, but it will rise if the dominant relationship is in the opposite direction.