Consider an economy populated by a large number of identical, infinitely lived people. Suppose the government decides to tax the capital stock, but only at date 1. (The only existing capital stock in this period is k₀)
a. How will lifetime wealth be affected if the government tax is used to finance a lump-sum transfer payment to people in date 1?
b. Demonstrate that the capital tax will not affect lifetime wealth if the proceeds are used to purchase government capital that offers the same return as private capital.
c. Demonstrate that the capital tax will affect lifetime wealth if the proceeds are thrown in the ocean.