uppose that a consumer has income y in the current period, income y in the future period,

and faces proportional taxes on consumption in the current and future periods. There are no

lump-sum taxes. That is, if consumption is c in the current period and c in the future period,

the consumer pays a tax sc in the current period, and sc in the future period where s is the

current-period tax rate on consumption, and s is the future-period tax rate on consumption.

The government wishes to collect total tax revenue in the current and future periods, which

has a present value of R. Now, suppose that the government reduces s and increases s, in

such a way that it continues to collect the same present value of tax revenue R from

consumer, given the consumers optimal choices of current-period and future-period

consumptions.

What effect, if any, does the change in tax rates have on the consumers choice of

current and future consumptions, and on savings? Does Ricardian equivalence hold here?

Explain why or why not