88 MULTIPLE PURPOSE RIVER DEVELOPMENT 



given interest rate only if his enjoyment of the return is at a rate 

 at least as great as his interest payments. Thus, we can assume 

 that a person who is willing to pay 12 per cent interest on the 

 purchase of a car on credit, or a homeowner paying 5 per cent on 

 the mortgage on his house, presumably is enjoying satisfaction 

 from these assets at rates at least equal to these figures. 



In order to determine the social cost of funds raised through 

 taxation of an individual with given preferences about his saving- 

 borrowing behavior (or with given opportunities for investing in 

 durables), we must ascertain the interest rates which he faces. A 

 dollar of taxation is a reduction of his current income. If we can 

 assume that the marginal dollar an individual spends for present 

 consumption, or the dollar he saves, would be worth a future 

 annual income stream equal to his interest rate, then the same 

 interest rate would apply to the dollar required to pay an increase 

 in taxes. Conversely, a tax reduction of a dollar can be converted 

 into a future income stream equal to his interest rate. Interpreting 

 taxation for public investment as a compulsory loan for the sake 

 of future benefits, the social cost of this investment is equal to the 

 interest rate which the government would have to offer to the taxed 

 individuals to induce them to grant the loan voluntarily. Our 

 analysis does not assume that all of the taxed money would have 

 been saved voluntarily; presumably part of it would have been 

 consumed. We assume only that the decision about the fraction 

 to be saved is made rationally and in the light of the opportunities 

 for changes in future income which the interest rate measures. 

 These assumptions are sufficient to derive the value of marginal 

 income in terms of a future stream which can be expressed as an 

 interest rate. We can then apply this reasoning to marginal changes 

 of income which are caused by taxation. 



A further requirement for the estimate of the social cost of mar- 

 ginal tax dollars is to discover how these dollars are apportioned 

 among the major categories of decision-making units that face 

 different interest rates. This means allocation of the taxes between 

 businesses and households, between borrowers and lenders, between 

 borrowers at high rates and borrowers at moderate rates, and so on. 

 For households, we use three categories — lenders, borrowers at 

 mortgage rates, and borrowers at short-term credit rates — combined 

 with a breakdown by income class. In the case of business, we 

 estimate the effect on investment and its potential return, in 

 accordance with the size of assets of the taxpaying firms. 



