Quote In addition, they calculate the impact on the economy if the government funds the spending with taxes. They find that the tax multiplier—the effect on GDP of an increase in taxes—is -1.1. This means that if the government raises taxes by $1, the economy will shrink by $1.1. When this tax multiplier is combined with the effects of the spending multiplier, the overall effect is negative. Barro and Redlick write that, "Since the tax multiplier is larger in magnitude than the spending multipliers, our estimates imply that GDP declines in response to higher defense spending and correspondingly higher tax revenue."12 Thus, they conclude that greater government spending financed by tax increases hurts the economy.
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