| Sumario: | This paper modifies the standard IS-LM curve model by making the demand for money a function of taxes as well as of national income and the rate of interest. If finds that as a result, the tax multiplier may be positive and a progressive income tax may be less of a built-in stabilizer than a proportional income tax. These curious analytical results have as yet unknown empirical content, but cannot be rejected a priori. The standard procedure in an IS-LM curve model is to make the demand for money a function of national income and the rate of interest. National income is taken as a measure for the transactions of either households or firms. Given the importance of income tax deductions at source, the flow of receipts relevant to households' money-holding decisions is surely income after tax, (personal disposable income) rather than national income.
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