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Tax Questions

A. In 2003, Senate Democrats proposed that all workers receive a one-time tax rebate check of $300 for each adult in a family, and $300 for each of the first two children. The goal of the program was to stimulate the consumer spending. On the basis of the life-cycle model of consumption behavior, would you expect this proposal to be successful? If the life-cycle model is correct and the US Government wishes to stimulate consumption, what advice would you give it?

b. An editorial in the Wall Street Journal (April 19, 2001) argued that "high marginal tax rates discourage incentives ... to invest in one's own human capital with additional training or education." Discuss the circumstances under which this statement is likely to be correct, focusing on the nature of the costs of the human capital investment.

c. The tax act passed in 2001 increased the contribution limit on IRA's from $2,000 to $5,000 by 2008. What impact, if any, would you expect this provision to have on personal savings?

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a. In 2003, Senate Democrats proposed that all workers receive a one-time tax rebate check of $300 for each adult in a family, and $300 for each of the first two children. The goal of the program was to stimulate the consumer spending. On the basis of the life-cycle model of consumption behavior, would you expect this proposal to be successful? If the life-cycle model is correct and the US Government wishes to stimulate consumption, what advice would you give it?

On the basis of the life-cycle model, I do not expect the government program to stimulate consumer spending. The reason is that according to the life-cycle theory this unexpected increase in income will lead to the lifetime annuity value to be consumed and the rest saved.
The life-cycle model predicts that people will consume an annuity of their expected lifetime income at all points in time. So, if the government wants to stimulate consumption it should not give ...

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