The Social Cost of Federal Financing 99 



REDUCING SELECTED EXCISE TAXES 



In addition to the increase in personal exemption, amounting to 

 80 per cent of the tax cut, our Model A calls for a cut in excise 

 taxes sufficient to make up 20 per cent of the decline in government 

 revenue. We assume a reduction for only those commodities which 

 seem likely to be affected by an actual move to cut excises. Thus, 

 all road-user taxes are excluded because they have been set aside 

 to finance the expanding federal highway program. Taxes on 

 alcoholic beverages and tobacco are ruled out because they are 

 imposed, in part, for noneconomic reasons and have a long-accepted 

 place in the federal revenue structure. We treat the remaining 

 excises as if they were cut proportionately, and assume that the 

 price elasticity of consumer demand is such that the relative 

 increase in sales will be the same for all commodities in question. 

 These two assumptions imply that the proportionate cut in tax 

 rates leads to a proportionate fall in the revenues from the various 

 excises. 



The incidence of excise taxes is usually assumed to fall on the 

 consumer." The incidence by income classes, then, depends on the 

 distribution of the tax cut among commodities and on their 

 income elasticity. Table 8 sheds some light on this question. It 

 lists the major federal excises, shows the revenues derived from 

 them and their percentage distribution, and gives estimates of the 

 income elasticities of the commodities which have been made by 

 the U. S. Department of Commerce. Using the distribution of taxes 

 as weights, an average income elasticity is computed for the entire 

 excise tax cut. Both the prewar and postwar figures produce an 



would be made available, a task we shall not assay. Were we to assume that 

 the return above borrowing cost is 3 per cent — a liberal figure in view of the 

 low- and middle-income sources of these savings and the channels into which 

 their savings usually flow — and were we to apply marginal propensities to save 

 by income classes (see footnotes to Table 14) to estimate the share of the tax 

 cut that would be saved, we would increase our estimate by .12 percentage 

 points, resulting in a figure of 5.99 per cent. 



" Musgrave and Tucker followed this assumption in their studies of tax 

 incidence. (See R. A. Musgrave, J. J. Carroll, L. D. Cook, and L. Frane, "Dis- 

 tribution of Tax Payments by Income Groups: A Case Study for 1948," National 

 Tax Journal, March 1951; and R. S. Tucker, "Distribution of Tax Burdens in 

 1948," ibid., September 1951.) This assumption is only a first approximation 

 and overlooks the effects of product substitution. 



