Suppose the government reduced the tax rate on income from savings and raised taxes on labor income to avoid increasing the budget deficit.
a. Who would benefit from this tax change most directly?
b. What would happen to the capital stock over time? What would happen to the capital available to each worker? What would happen to productivity? What would happen to wages?
c. In light of your answer to part (b), how might the long-run distributional effects differ from the answer you gave in part (a)?