90 MULTII'LE I'URPOSE RIVER DEVELOPMENT 



Our quantitative analysis could be presented, with no substantive 

 difference, either as an expansion of investment and a tax increase 

 or as a contraction of investment and a tax cut. It is the change 

 in taxes which is significant; it does not matter whether the public 

 investments would increase existing taxes or prevent a possible 

 reduction. Since the actual tax policy issues have appeared in 

 terms of tax reductions in recent years, we consider the problem 

 from this point of view. 



In order to measure the cost of capital for a wide range of taxes, 

 we present two models using different sets of assumptions about the 

 potential tax cuts which are forestalled by the public investments. 

 In Model A, we assume that the personal income tax is reduced in 

 a manner most advantageous to low-income families and that sales 

 taxes are lowered. These tax cuts would primarily boost consump- 

 tion. Model B consists of a reduction of the personal income tax 

 with emphasis on upper-income brackets, combined with a reduc- 

 tion of the corporation income tax. This model would increase 

 investment. 



Throughout the analysis it is assumed that the government runs a 

 successful stabilization policy. This is not to say that full employ- 

 ment and stable price levels prevail constantly, but only that 

 neither major unemployment nor severe inflation is allowed to 

 develop. This assumption accords both wath the avowed objectives 

 of the government and with the general setting assumed for federal 

 resource development programs, and it corresponds with the record 

 of recent years. Most of the data for our quantitative analysis are 

 based on the year 1955, a year in which employment was high and 

 prices stable, and the money supply was moderately tight. 



In this context, a reduction in a specific government expenditure 

 must be considered an autonomous change that must be offset by 

 some weapon in the arsenal of the stabilizers. It is this reasoning 

 which forces us to derive our estimates of social cost on the basis 

 of specific counteracting fiscal or monetary policies.^ 



'Thus our procedure measures what Musgrave calls the "differential inci- 

 dence" of expenditures (See R. A. Musgrave, "General Equilibrium Aspects of 

 Incidence Theory," American Economic Reineiu, May 1953, pp. 504-17). A 

 reduction of expenditures by $1.00 may require an offsetting tax cut of less than 

 $1.00, because the multiplier effects of the former may exceed the effects of 

 tax reduction (see H. C. Wallich, "Income-Generating Effects of a Balanced 

 Budget," Quarterly Journal of Economics, 1944, pp. 78-91). In our quantitative 



