1. has no intergenerational effect on current consumption because the family lives forever even if individuals do not.
2. increases current consumption and reduces the capital stock passed on to future generations.
3. shifts wealth from the future to the present generation if not everyone has heirs that they care about.
4. does all of the above.
Choose the correct option.
The correct answer is option 3. The crucial issue is whether everyone has heirs and cares about them. If some people do not have heirs, they will be induced to consume more as a result of a tax cut because they leave the future tax liability behind when they die. Consumption will increase and investment will be smaller at each level of income. Future generations will as a result inherit a smaller capital stock and will be worse off. The fact that the family lives forever is relevant only when people have heirs and care about them to the extent that an intergenerational time-path of consumption is chosen that maximizes the utility of the family line rather than simply that of the current generation. We are here ignoring the extent to which those who have heirs they care about can compensate for this effect by leaving even more to their heirs.