ECN 741: Public EconomicsFall 2008DefineW(c1, c2, l1, l2, λ1, λ2) =U1(c1, l1) +λi(Uicci+Uilli)First order conditionsλβtU2cctc2t+U2ct+φt= 0φt=φt+1(1-δ+Fkt+1)in steady stateφt+1=βφtand therefore1 =β(1-δ+Fkt+1)and again, tax of capital is zero in the steady state.Exercise:In the above set up we have implicitly assumed that government can levy differenttaxes on different consumer types.How would you add the following restrictions to theproblem1. Tax on capital income has to be uniform across different types. Does the result holdwith this restriction? Under what assumptions?2. Tax on labor income has to be uniform across different types. Does the result hold?Under what assumptions?
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