Consumers live for two periods and have the following lifetime utility: U =lnc1 +lnc2 (1) Where c1 and c2 are consumption in the first and second period respectively and is the discount factor. Everyone has full-time contracts and cannot change their hours of work. They receive exogenous income Y1, profits 1 and pay lump sum taxes T1 in the first period and Y2, 2 and T2 respectively in the second period. Consumers can buy or sell any amount of bonds at the same interest rate r.

c) Assume that the government wants to give a tax break of 5 units in the first period without changing the overall government spending. Given that the government needs to balance the lifetime budget over the two periods, find the new T1 and T2.