Question

In: Economics

Ramesh lives two periods. His earnings in the present are 100; in the future they are...

Ramesh lives two periods. His earnings in the present are 100; in the future they are 75.6. The interest rate is 8 percent.

(a) Suppose that Ramesh's earnings are subject to a 25 percent tax. Suppose also that interest earnings are taxed at the same rate and interest paid is tax deductible. Using our life-cycle model, show that this tax generates an excess burden.

(b) Suppose now that interest payments are not tax deductible. Does this tax generate an excess burden if Ramesh is a borrower?

(c) Now assume the tax in part a is scrapped in favor of a consumption tax. What consumption tax rate would yield the same tax revenue? Does this tax distort the choice between present and future consumption?

(d) Now assume the consumption tax in part c is instituted, but the deduction of interest payments remains. Does this tax distort the choice between present and future consumption?

Solutions

Expert Solution

Rahul Sunny answered 9 months ago
Next > < Previous

Related Solutions

Assume a consumer lives for two periods. His income and consumption in the two periods are...
Assume a consumer lives for two periods. His income and consumption in the two periods are Y1 and C1, and Y2 and C2 respectively. Ignore price level changes and further assume that this consumer saves income (S) in the first period and this saving earns interest. With consumption in two periods being constrained by income in the two periods derive the intertemporal budget constraint.
Tom lives two periods and receives both current and future income and is neither a net...
Tom lives two periods and receives both current and future income and is neither a net lender nor a net borrower. Suppose the real interest rate increases, other things constant. Describe the effect on his current period consumption and saving as a result of this increase in the real interest rate.   
Assume that a consumer lives for T periods, and in each future period, one of the...
Assume that a consumer lives for T periods, and in each future period, one of the s states may be realized. There are complete markets. Let the utility function of the agent be U = u(c1) + T X t=2X s∈S βt−1πt,su(ct,s) where the notation is the same as that used in class, with pt,s, denoting the price of Arrow-Debreu security paying off at state s on date t. a. What do complete markets mean in this context? b. Write...
Recall the basic model of consumption choice. There are two periods: present and future. Assume households...
Recall the basic model of consumption choice. There are two periods: present and future. Assume households have the following lifetime utility: u(c) + βu(c f ) where u(c) = √ c, the discount rate β < 1 (i.e., the rate at which households discount utility from future consumption). Assume also that households start with no initial wealth, a = 0, but receive income today, y, and income tomorrow, y f . The interest rate, r, is equal to 4%. Assume...
Assume the representative consumer lives in two periods and his preferences can be described by U(c,...
Assume the representative consumer lives in two periods and his preferences can be described by U(c, c')=c^(1/2)+β(c')^(1/2) where c is the current consumption, c' is next period consumption, and β = 0.95. Let’s assume that the consumer can borrow or lend at the interest rate r = 10%. The consumer receives an income y = 100 in the current period and y' = 110 in the next period. The government wants to spend G = 30 in the current period...
The present value of expected future earnings of a business in excess of the earnings normally...
The present value of expected future earnings of a business in excess of the earnings normally realized in the industry. Recorded when a business entity is purchased at a price in excess of the fair value of its net identifiable assets (excluding goodwill) less liabilities___
Present Value for Various Compounding Periods Find the present value of $575 due in the future...
Present Value for Various Compounding Periods Find the present value of $575 due in the future under each of the following conditions. Do not round intermediate calculations. Round your answers to the nearest cent. 9% nominal rate, semiannual compounding, discounted back 5 years. $   9% nominal rate, quarterly compounding, discounted back 5 years. $   9% nominal rate, monthly compounding, discounted back 1 year. $  
Consider an agent who lives two periods. He is unemployed at the beginning of the first...
Consider an agent who lives two periods. He is unemployed at the beginning of the first period and has a wage offer of w. If he accepts the wage offer w, he will work at that wage in both periods. If he rejects the o§er, he receives unemployment benefit of $4 this period and he gets to draw a new wage offer next period. There are only two possible offers with equal probability next period: one wage offer at $8,...
An Individual lives for two periods, 1 and 2. In the first he works and earn...
An Individual lives for two periods, 1 and 2. In the first he works and earn an income of M. In the second he is retired and has no income. His/her life time utility is a function of how much he consumes in the two periods. C1 denotes consumption in period 1 and C2 consumption in period 2. (Hint: If you want to, you can view and treat C1 and C2 as any pair of “goods”, e.g. good x and...
An Individual lives for two periods, 1 and 2. In the first he works and earn...
An Individual lives for two periods, 1 and 2. In the first he works and earn an income of M. In the second he is retired and has no income. His/her life time utility is a function of how much he consumes in the two periods. C1 denotes consumption in period 1 and C2 consumption in period 2. (Hint: If you want to, you can view and treat C1 and C2 as any pair of “goods”, e.g. good x and...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT