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Suppose we have a two-period model. An individual earns labor income Y0 =$100k at time zero,...

Suppose we have a two-period model. An individual earns labor income Y0 =$100k at time zero, and earns no labor income at time 1. The individual may consume or save that income. Savings grow at rate r=.03. For every dollar of consumption, the individual pays the tax rate τ=.30 to the government.

  1. Graph the two-period budget constraint for consumption. What is the slope? Is this tax distortionary?
  2. The government modifies the consumption tax somewhat so that the first $20k of consumption in each period is tax free. Now graph the budget constraint.
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