A consumer receives current income 100y= and future income ' 120.y= She pays lump-sum taxes 20t= in the current period and ' 10t= in the future period. The real interest rate is 0.1, or 10%, per period. Suppose that current and future consumption are perfect complements and the consumer desires equal current and future consumption, if possible. In the questions below, illustrate your answer with diagrams showing the consumer's budget constraint and indifference curves.

Now suppose there is a change in timing of taxes: current and future tax payments become 0, ' 32.tt= =Is there any change in lifetime tax liability? How would the consumer react?

Explain why the tax deferral in (d) works like a compulsory loan from the government that the consumer does not really want. Make use of this example to explain the idea of Ricardian equivalence.