Consider the exercise above and set the capital income tax rate in country 1 at τ = 0:20.
a. Find the change in total capital income, total labor income, and the revenue raised in country 1 for N = 2 and N = 100.
b. What happens to the before-tax marginal product of capital in the countries without taxes for N = 2 and N = 100?
c. Are the workers in country 1 better o¤ as a result of the tax? What about the impact of the tax on the welfare of the workers in non taxing countries?
d. Discuss the tax-shifting between workers and capitalists as the number of countries increases from N = 2 to N = 100.