96 MULTIPLE PURPOSE RIVER DEVELOPMENT 



Interest receipts, on the other hand, are taxable income, which 

 again argues for the use of interest rates after taxes. But the 

 amounts of interest received are relatively small for most house- 

 holds and frequently are not reported to the tax collectors. Only 

 7 per cent of returns with incomes below $5,000, and 20 per cent 

 with higher incomes, reported interest receipts." Therefore, we 

 use the before-tax interest rates except for half of the interest 

 recipients with top incomes. 



Our set of categories for assigning interest rates to households 

 does not properly describe one group in the debt-free households. 

 The fact that the largest percentage of debt-free households is 

 found among the lowest incomes does not mean that low-income 

 families have less need for credit. Rather, many of these families 

 are not sufficiently good credit risks to get any loans except small 

 loans at very unattractive terms. It would be incorrect to assume 

 that these families make their borrowing-saving decisions on a rate 

 of 3 per cent. For a sizeable group of low-income families, the lack 

 of the use of credit can be explained on other grounds. Unskilled 

 workers are heavily represented; because their income reaches a 

 peak relatively early in life, they have relatively little inducement 

 to borrow. Still other low-income families consist of older people 

 who are living on their capital; they also have no incentive to 

 borrow. To take account of the group who wants credit but is too 

 poor to obtain it, we assume that 20 per cent of the nonborrowers 

 have a high time-preference and, if they were free to do so, would 

 make use of short-term consumer credit at the usual rate of 12 

 per cent. 



Table 6 gives the rates derived in the manner we have indicated, 

 with adjustments for taxes incorporated in the figures. Table 7 

 gives the distribution of households by income class, asset-debt 

 position, and by their marginal borrowing or lending rates. Those 

 who owe both consumer debt and mortgages are considered to be 

 paying the higher borrowing rate (that for consumer debt), which 

 is the rate that must be considered marginal. Low-income families 

 unable to borrow at reasonable rates are listed separately. 



"U. S. Treasury Department, Internal Revenue Service, Statistics of Income 

 for 1952, Preliminary Report. These figures include returns reporting miscel- 

 laneous income on the federal income tax form 1040a. We apply after-tax inter- 

 est rates to one-half the interest recipients in the top class because that is the 

 degree of compliance suggested by our asset-debt data. 



