Suppose that you expect to work for another 50 years and then live 20 years in retirement. You have no wealth, and there are no taxes. You want to smooth consumption over your lifetime, and you will earn $75,000 per year.
a. Calculate consumption in each period.
b. Now assume that you receive $500,000 in wealth. How will your consumption change?
c. The government decides to tax you $15,000 per year. What is your new level of consumption? [Assume that you still have the wealth received in part (b).]
d. How would your consumption change if the government cut taxes this year from $15,000 to $10,000, but taxes next year and in the future return to $15,000 per year?
e. How would your consumption change if the government permanently decreased taxes from $15,000 to $10,000 per year?