Again, in the consumption savings model, assume that lump-sum taxes are zero. Bu

Question

Again, in the consumption savings model, assume that lump-sum taxes are zero. But suppose the government taxes on interest earnings. I.e. borrowers face interest rate r while the lenders face an interest rate (1 - t)r. What is the effect of introducing the tax rate on the consumer's budget constraint? Draw the constraint for borrower and lender. What is the effect of the tax on a consumer who was initially a lender and is still a lender after the tax? Explain in terms of income and substitution effect.

Explanation / Answer

kindly refer: http://pages.towson.edu/mchamber/twoperiodmodel.pdf concerning life time budget constraiint.

http://www.economics.soton.ac.uk/staff/alicesch/Teaching/200910/Econ2004/ch6b_slides.pdf

Refer lifetime budget constraint n its graphical version.

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