Zach lives two periods. He earns $10,000 in the first period and nothing the second period.The rate on return is %10, and there is an income tax of %50. Zach saves half of his first period earnings which he consumes in the second period.

A) What is Zach's income tax liability each period? What is the present value of his lifetime tax payments?

B) Suppose that a consumption tax of %50 replaces the income tax in the second period. How much does he pay in taxes the second period? What is the present value of his lifetime tax payments? Compare to the lifetime tax payments in part a, and explain the relevance of the comparison to transitional problems in moving a consumption tax.