The Social Cost of Federal Financing 97 



TABLE 6. Interest Rates Faced by Households in Their 

 Saving-Spending Decisions 



Interest rates for income class 



$0 to $3,000 $3,000 to $5,000 Over $5,000 



(per cent) (per cent) (per cent) 



Owed more than $100 of con- 

 sumer debt 12.0 8.3 7.3 



Owed mortgages only 4.0 3.9 3.5 



Owed neither kind of debt 

 and held savings 3.0 3.0 3.2 



Unable to borrow at reason- 

 able rates 12.0 



Source: See text. 



The table also gives the average rate for each income class and the 

 distribution of tax savings caused by an increase of the personal 

 exemption. The final figure, computed by weighting the average 

 rates applicable to the three income classes by their shares of tax 

 savings, is equal to 5.87 per cent.^* This is the rate which our 

 quantitative analysis suggests as the proper measure of value to 

 consumers of the tax savings made possible by an increase in the 

 exemption of the personal income tax.^^ 



" The use of income classes as defined by the Internal Revenue Service in 

 combination with the definitions of the Survey of Consumer Finances introduces 

 a slight upward bias into the estimate. The Survey's "spending unit" includes 

 all related persons living together who pool their incomes, while the Internal 

 Revenue Service gives its figures in terms of tax returns. Since some spending 

 units will file several tax returns, relatively fewer spending units will fall into 

 our lowest-income class. This bias is accentuated by the fact that our tax data 

 pertain to 1951, when incomes were lower than in 1955. Data for the distribu- 

 tion of income from the two sources suggest that as many as one-half of the 

 returns filed in the lowest-income class in 1951 should be assigned to "spending 

 units" in the next income class in 1955. Similarly, the data suggest that one-third 

 of all returns filed in the middle-income class in 1951 belonged to "spending 

 imits" in the highest class in 1955. On these assumptions, our estimate for the 

 interest rate would fall to 5.70 per cent. This probably overstates the bias since 

 the Survey's sample appears to underrepresent low-income "spending units." 



" Our analysis has not endeavored to impute a rate of return to the invest- 

 ments made possible by the increased savings of consumers. Presumably, a 

 return greater than the borrowing cost is earned on these investments, which 

 serves as an inducement for the investor. An estimate of this extra return 

 requires identification of the marginal borrowers to whom these investible funds 



