Influential factors responsible for the effect of tax reduction on GDP

The factors responsible for the effect of a tax reduction on GDP are analyzed using both agent-based modeling, based on the authors’ previous study, and a derived set of equations for tax reduction multipliers, based on Morishima’s economic linkage table. The findings are that, under the condition of balanced government finance, the tax reduction multiplier is determined by the difference between the increase in demand by consumers or firms as a result of the tax reduction and the decrease in demand by the government. To increase the effect of a tax reduction, it is necessary that the increased disposable income of consumers or firms, as a result of the tax reduction, is more likely to be used for consumption and investment. The analyzed factors that are proved to be indispensable to reproduce positive influence of a tax reduction in ABM are consistent with this mechanism.