Paul lives for two periods with an income of I0=$50,000 in his work years and zero when he retires, I1 = $0. The interest rate is 5%, the tax rate on interest income is 10%, and the consumption tax rate is 2%. Paul is planning to save for his retirement period and would like to know his lifetime tax burden if decides to save a) $10,000 or b) $40,000.

Calculate the present value of Paul’s lifetime tax burden 1) under the income tax system; 2) under the consumption tax system.

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