Final answer:
The tax multiplier in the context of a typical Canadian with a 70% spending propensity is -2.33. This multiplier is used to estimate the effect of an $80 billion tax cut on the country's economic output, with the initial impact expected to be an increase in spending that could lead to a rise in overall economic output.
Step-by-step explanation:
Understanding the Tax Multiplier
The concept being addressed here is the tax multiplier effect in economics. The tax multiplier measures the impact of a change in taxes on a country's economic output. It is derived from the marginal propensity to consume (MPC), which is the proportion of additional income that a household consumes rather than saves. For the typical Canadian mentioned in the question, with a propensity to spend 70% of their income, the marginal propensity to save (MPS) would be 1 minus the MPC, so 0.3 or 30%.
An $80 billion tax cut would initially increase consumers' disposable income by this amount. Assuming no other changes, such as variations in government spending, the simple tax multiplier can be calculated using the formula -MPC/MPS. To see the effect of a tax cut, we also need to consider the initial tax rate, which is given as 8% in this case. However, to calculate the tax multiplier, the tax rate is not directly relevant; rather, it's the change in fiscal policy represented by the tax cut that will stimulate spending and thus affect the economy.
Considering an MPC of 0.7, the MPS will be 1 - 0.7 = 0.3. The tax multiplier is then calculated as -MPC/MPS = -0.7/0.3 which gives us -2.33. The negative sign indicates that an increase in taxes (which a tax cut essentially reverses) leads to a decrease in economic output. So an $80 billion tax cut could potentially lead to an increased economic output of 2.33 times $80 billion, assuming all other economic factors remain constant.
In the context of the question, while the $28.09 mentioned from other sources seems to relate to a different scenario involving different rates of taxes, savings, and imports, it does not directly apply to the calculation requested. Instead, we focus on the given MPC and tax change to determine the multiplier effect applicable to this situation.
Therefore, to answer the student’s question, the tax multiplier that the government would use to estimate the effect of an $80 billion tax cut is -2.33.