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s as mentioned by Carmichael(1982), Buiter(1979) and Burbidge(1983).

Government Debt

The above growth model analysis helps us understand the closing of barro's model according to Diamond 1965 as mentioned in his 1976 article. It helps us relate his model to the macroeconomic models we are familiar with and understand his market clearing equation and equilibrium analysis. With this understanding of the barrovian framework i revert back to the initial analysis from equation 1-13 and develop the model further incorporating government debt and deciphering its effects as barro portrayed. The optimal growth model would also be referred to showing that the same results hold in case of this well known macroeconomic theory too.

Carrying on from the calculus of individual wealth and the market clearing equation in the earlier analysis. I now suppose that the government issues an amount of debt B. The debt takes the form of single period, real-valued bonds. These bonds pay a specific amount of real interest, rB, in the current period and would pay the specified real principal , B, in the next period. The amount of bond issue would depend on the taxing capacity i.e. ability to finance the interest and principal payment. A further assumption for the model is that individuals who desire to hold assets regard equity and government bonds as perfect substitutes. For the sake of simplicity i take use of the same assumption for bond issue that barro used, i.e: a helicopter drop to the currently old generation t households, or equivalently the sale of bonds on a competitive capital market, with proceeds of these sales to effect the generation t households in the form of a lump-sum transfer.

INHERITANCE TAXES:

It is interesting to hear the same arguments on the legitimacy of death taxation in countries. The proponents for repealing it claim that it would remove an unfair, immoral and inefficient tax. According to them this tax adds to the pain suffered by mourning families; it hurts people of equivalent wealth differently depending on their acumen at tax avoision; it penalizes the frugal who pass wealth on to their children; it reduces everybody's incentive to save and to invest. Supporters of the tax, by contrast, argue that it is fairly based on the equal opportunity principle, that it is a small but effective counterweight to the concentration of wealth, and that it has few disincentive effects since it is only payable at death.

In the United Kingdom Inheritance tax was introduced in 1986 as a replacement for capital transfer tax. The tax is applied to transfers of wealth on or shortly before death that exceed a minimum threshold. The threshold is set at ￡312,000 in 2008-09, and. the Government has announced that it will increase to ￡325,000 in 2009-2010 and ￡350,000 in 2010-2011.Inheritance tax is charged on the part of the transfers above this threshold at a single rate of 40% for transfers made on death or during the previous three years, and is normally payable out of estate funds. Transfers made between three and seven years before death attract a reduced tax rate, while transfers made seven or more years before death are not normally subject to inheritance tax.