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2. Capital Income and Savings Taxation Consider a 2 period model of retirement savings in which individuals earn labor income Y from working in period
2. Capital Income and Savings Taxation Consider a 2 period model of retirement savings in which individuals earn labor income Y from working in period 1 and do not work in period 2 (retirement). Individuals choose how much to consume in each period. Savings in period 1 earn an interest rate r. Let C} denote consumption in period 1, C5 denote consumption in period 2, and S denote savings. Suppose that individuals have a utility function U = In C; 4+ 81In Cy. Where g = .99 is the individual's discount factor. (a) Set up the individual's lifetime utility maximization problem and solve for the optimal T, C5, and S* in an economy without taxes. If the interest rate is low, in the sense that (1 +r)
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