Why does real GDP change by a larger amount from changes in government expenditure than from tax changes?
Changes in government expenditure will affect GDP to a greater extent than taxation because it has a direct impact on GDP. GDP equals C+I+G+(X-M). An increase in government expenditure will send a direct increase to GDP based on this model. The full effect of tax changes almost never really takes place. If a government raises taxes by one percent, there is no guarantee that it will collect 1 percent from every person or item the tax is levied on. There are different methods used by firms and householders to evade taxes; some people just don’t pay their taxes. Therefore, since government expenditure is a much more controlled way of influencing GDP than taxes, it usually changes GDP by a larger amount than by raising taxes.
