Many expect individual tax rates to increase and corporate tax rates to fall. Suppose the top personal tax rate increases from 35% to 40% and the top corporate tax rate falls from 35% to 31%. Suppose both changes are implemented, effective exactly three years from today. (Assume r = 6.5% throughout this problem.)

What is the amount of deferred compensation that the employer could offer and be indifferent between deferred compensation and $1 of salary?

The employer is aware that, if he offers the deferred compensation computed in (a), then the employee will choose salary. In fact, the employer recognizes that the employee would choose salary over deferred compensation even if his salary was reduced a bit. Using the deferred compensation figure computed in (a), how much of a pay cut would the employee accept and still prefer salary over deferred compensation?

Same facts as #1. However, the company is short on cash and must pay deferred compensation. How much deferred compensation will the employee demand three years from today to be indifferent between salary today and deferred compensation three years from today?

To date, we have assumed that the employer and the employee