In the simplified model with proportional taxation there can

In the simplified model with proportional taxation there can be two equilibria, one with a high tax rate and one with a low tax rate. Now, suppose that government spending increases. Determine the effects of an increase in G on consumption, leisure, labor supply, real output, and the tax rate in a high-tax-rate equilibrium and in a low-tax-rate equilibrium. How do your results differ? Explain why.

Solution

Equilibria with high tax rate.

Equilibria with low tax rate: