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Congress and the president have decided to increase the Federal tax rate in an effort to reduce the budget deficit. Suppose that Caroline Weslin will pay 35 percent of her bonus to the Federal government for taxes if she accepts the bonus today and 40 percent if she receives her bonus in two years. Will the increase in tax rates affect her decision?


Let me throw a different question at you and one that won’t be quite as obvious.  Let’s think about the same question but reverse the tax rates.  It’s a much more interesting question this way. So, what if she could take her bonus now and be taxed at 40% or take her bonus 2 years from now and be taxed at 35%.   Which should she choose?


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