The life cycle model discussed in this chapter presumes that the income tax system taxes interest income
Question:
The life cycle model discussed in this chapter presumes that the income tax system taxes interest income received by savers and permits deductibility of interest paid by borrowers. Suppose that the income tax system has asymmetric treatment of interest, with interest payments by borrowers not deductible (as in the case of consumer interest). Explain how the graphical model would be altered to account for the asymmetric treatment.
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The asymmetric treatment of interest causes the budget line to be kinked The slope is flatter ...View the full answer
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