L and allow for larger R(1) though this could have little effect since also X(1) rises (see below). While these properties apply to the reduced form, the same mechanisms apparently apply to the structural form too (as they concern the same reality).
Substituting (5-t) in (6-t) gives M(t) as an explicit function of R(t). The regime switch occurs at M(1) = M(RS, 1) = L with switch marginal rate RS and implied exemption XS:
bB - (h + l) (L - B)
RS = ----------------------------- (7-RS)
h (H - L)
bB - (hH/L + l) (L - B)
XS = L ---------------------------------- (7-XS)
bB - (h + l) (L - B)
Rewriting conditions K(0) < B and K(1)
B gives:
{L - T(L, t) < B}
{ X(t)