Reference no: EM131625967

In February 2008, President Bush and Congress approved a $168 billion stimulus package that will provide tax rebates to all taxpayers, that is to those who file their tax returns. The tax stimulus was in addition to a tax rate cut, which was implemented earlier in 2002. The stimulus checks were mailed in May 2008. In February 2011, under President Obama administration, Congress voted to extend the Bush era tax rate cut to all levels of income.

Please analyze the stimulus package by using the income multiplier. (A tax rebate is a decrease in autonomous tax, the T_o in the total tax formula mentioned in class).

Using the derivation of the income multiplier, which we discussed in class, please show the effects of:

a) A tax rebate on the US GDP; and

b) A tax rate cut on the US GDP.

Which tax strategy has a stronger effect in the long term?