Answer
a) If the capital taxes from investments were to remain low, then the level of investment would be expected to increase.
b) The government does have an incentive to renege. They know the firms have already invested in new capital projects, so the government could raise tax rates and take advantage of the new projects.
Work Step by Step
c) Investors would not likely believe the government's announcement. The government would need to delay increasing the tax rates on investments for some time. The government could also start taking consistent actions based on policies.
d) This situation is similar to the time inconsistency problem since the government could agree (non-bindingly) to one action in a future time frame and then take a different action when the future time frame becomes the current time frame.
