Answer: It decreases the government purchases multiplier.
Explanation: The Government purchases multiplier is the factor by which the income in an economy increases due to government spending. For example if the government introduces $2 miilion into the economy through projects, the total effect on the economy is more than $2 million, it is multiplied through the contractors, their employees, the businesses the employees patronize and so on.
However, an increase in tax rate has the opposite effect on income, it reduces both the Marginal Propensity to Save and Marginal Propensity to consume. An increase in tax rate will reduce the multiplier.
A tax rate increase is a contractionary measure, that it, it reduces the aggregate demand while increased government spending is an expansionary measure, it increases the aggregate demand.
All else equal an increase in the tax rate would cause a decrease of the government purchases multiplier.
A practical approach to this question can be seen in this example below.
[tex]GovernmentSpending Multiplier=\frac{1}{1-MPC(1-t)}[/tex]
where t is the tax rate.
Lets assume that
MPC = 0.4
t = 0.5
[tex]multiplier=\frac{1}{1-0.4(1-0.5)} \\\frac{1}{1-0.4(0.5)} \\\\\frac{1}{1-0.20}[/tex]
= 1.25
Lets assume that the tax rate rises from 0.5 to 0.6
[tex]Multiplier = \frac{1}{1-0.4(1-0.6)} \\\\\frac{1}{0.84} \\\\= 1.19[/tex]
From the calculations in the example above we can see that as the tax rate increased from 5 to 6, the multiplier decreased from 1.25 to 1.19.
This corroborates with the answer in option c.
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