Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution. It may then be the case that a tax on interest income is efficient even if savings fall in response to the tax.
Answer the following statement true (T) or false (F)
True
Rationale: When a tax on interest income is imposed, the wealth effect implies less consumption more (i.e. more savings) while the substitution effect implies more consumption now (i.e. less savings). The only way for savings to fall as a result of an increase in the interest rate is for the substitution effect to outweigh the wealth effect -- but the substitution effect then implies the tax is inefficient.
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