If the marginal propensity to consume is 0.6. Then what will be the value of tax multiplier?

The Marginal Propensity to Consume (MPC) is just a fancy way of saying: out of every extra ₹1 you earn, how much do you spend?

Here, MPC = 0.6 means for every extra ₹1 earned, a person spends ₹0.60 and saves ₹0.40.

The Tax Multiplier tells us: if the government increases taxes by ₹1, by how much does the total income in the economy change?

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The formula for the Tax Multiplier is:

$\text{Tax Multiplier} = \dfrac{-MPC}{1 - MPC}$

The negative sign is there because when taxes go up, people have less money to spend, so the economy shrinks.

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Plugging in the values:

$\text{Tax Multiplier} = \dfrac{-0.6}{1 - 0.6}$

$= \dfrac{-0.6}{0.4}$

$= -1.5$

This means for every ₹1 increase in taxes, total income in the economy falls by ₹1.50.

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You might wonder: why is the tax multiplier smaller (in absolute value) than the spending multiplier?

The spending multiplier $= \dfrac{1}{1 - MPC} = \dfrac{1}{0.4} = 2.5$

When the government spends ₹1, that full ₹1 enters the economy directly. But when taxes are cut by ₹1, people only spend ₹0.60 of it (the MPC portion) and save the rest. So the initial push to the economy is weaker with tax changes, making the tax multiplier always one unit less in absolute terms than the spending multiplier.