hw2.pdf - EC 12 INTERMEDIATE MACROECONOMIC THEORY SPRING 2019 HOMEWORK 2 Due Date 1 Interaction of Consumption Tax and Wage Tax(3 Points One basic idea

hw2.pdf - EC 12 INTERMEDIATE MACROECONOMIC THEORY SPRING...

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EC 12: INTERMEDIATE MACROECONOMIC THEORY SPRING 2019 HOMEWORK 2 Due Date: February 27, 2019 1 Interaction of Consumption Tax and Wage Tax (3 Points) One basic idea of President Bush°s economic advisers throughout his adminis- tration had been to move the U.S. further away from a system of investment taxes and more towards a system of consumption taxes. Discussion of a federal consumption tax, which would essentially be a national sales tax, has again emerged in recent policy discussions. Here, you will modify the basic consumption-leisure framework to include both a proportional wage tax (which we will now denote by t n , where, as before, 0 ° t n < 1 ) as well as a proportional consumption tax (which we will denote by t c , where 0 ° t c < 1 ). A proportional consumption tax means that for every dollar on the price tags of items the consumer buys, the consumer must pay (1 + t c ) dollars. Throughout the following, suppose that economic policy has no e/ect on wages or prices (that is, the nominal wage W and the price of consumption P are constant throughout).

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