3.This question compares lump-sum taxes to proportional income taxes for financing government spending in our static model without capital. Assume there is a representative household described exactly as in Question 2 with lambda = 0.50. Assume there is a technology for final goods production described exactly as in Question 2. There is a government who may spend G= 40 when z=zL= 15. The government may finance this by a lump-sum tax ,T= 40 or by a proportional income tax of the household. If the government uses aproportional income tax, according to my calculations, the government can finance this level of spending by imposing a tax at rate t= 0.4155 or by imposing a tax at rate t= 0.9723. That is for either rate, t*(w*)(N*)= 40 =G.

(3.A.) (18 points) Complete Table 3. Use economic intuition to explain the difference in the direction of change in labour input,N, moving from Column 1 to Column 2 compared to moving from Column 1 to Column 3.

Table 3: Lump-Sum and Proportional Income Taxation Proportional Taxes z = 15 G = 40 t\"' = 0.9723 Variable Column 4 U(C*,*)+AV(G)