Suppose that the government imposes a proportional income tax on the representative consumer's wage income. That is,
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Suppose that the government imposes a proportional income tax on the representative consumer's wage income. That is, the consumer's wage income is w(1 – t)(h – l) where t is the tax rate. What effect does the income tax have on consumption and labor supply? Explain your results in terms of income and substitution effects.
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