The Social Cost of Federal Financing 89 



Our analysis necessarily is confined to small changes in expendi- 

 tures and taxation relative to the over-all levels of the federal 

 budget. Large tax changes, such as a 30 per cent reduction in 

 income taxes, would lead to such substantial shifts in consumers' 

 decisions and in the rate-of-return schedules of business that 

 assumptions of the present relationships between incomes, prices, 

 interest rates, and rates of return would no longer be valid. There 

 might be effects on consumers' incomes which would convert bor- 

 rowers into savers, effects on the total amount of saving and of 

 investment which might alter and shift the interest rate structure, 

 and changes in the relative prices of consumer goods and capital 

 goods which would result in a shift from investment to consump- 

 tion in the private sector. Since all of water resource development 

 absorbs little more than I per cent of the federal budget, any tax 

 changes made possible by changes in this program would be so 

 small as to be truly marginal; no limitation to the applicability of 

 our analysis to this field is imposed by these considerations. 



As with other criteria of economic efficiency, our measure 

 abstracts from changes in the distribution of income. We view the 

 public investment as a loan by society to itself in order to build 

 certain physical investments. That is, we assume that it does not 

 matter to whom benefits and costs accrue. In fact, much of the 

 cost is usually borne by individuals who do not benefit from the 

 investment, so that the distribution of income is changed. If we 

 attached a different value to a dollar of cost or benefit for different 

 groups, our efficiency measure would need to be modified. In the 

 present context, the value of the addition of a dollar to the future 

 income stream is assumed to be the same for all taxpayers and 

 beneficiaries. And if we go beyond the measurement of cost and 

 compare it with benefit, we make the additional assumption that 

 who receives the benefits and costs is a matter of indifference. 

 These are ethical judgments which each person is free to accept 

 or reject. Insofar as our interest is focused on the increase in total 

 national income and on the efficiency of particular programs in 

 promoting this objective, this assumption serves as a means of 

 isolating this facet of the problem from redistributive issues.^ 



'For further discussions of this question, see the last sections of Chapters li 

 and III. In the water resource field, this value judgment lias been made explicit 

 by the Congress in the I'lood Control Act of 1036, where it is specified that 

 benefits must exceed costs for a project "to whomsoever they may accrue," in 

 order for a project to have economic feasibility and to be eligible for authoriza- 

 tion. 



