The Social Cost of Federal Financing 



101 



interest rate applicable to this form of tax cut.^^ This rate turns 

 out to be 5.49 per cent. 



Averaging the 5.87 per cent rate for the increased personal 

 exemption and the 5.49 per cent for excise cuts, weighted by their 

 relative importance, we get an over-all estimate of the applicable 

 rate under the tax assumptions of Model A, which is equal to 5.79 

 per cent. 



TABLE 9. Reduction of Selected Excise Taxes: Distribution of 

 Income and Applicable Interest Rates, 1955 



Applicable 

 Family income Family personal Per cent Per cent interest 



class income " distribution distribution rate "^ 



($ thousand) {^ billion) before tax after tax '' (per cent) 



to 3 25.0 9 10 7.0 



3 to 5 59.1 21 22 5.8 



5 to 7.5 81.6 28 28 5.8 



7.5 to 10 47.1 16 16 5.4 



10 to 15 29.3 10 10 5.0 



Over 15 46.0 16 14 4.6 



Average applicalile 



interest rate 5.49 



" S. F. Goldsmith, "Income Distribution in the Ignited States, 1952-55," Survey 

 of Current Business, op. cit., June 1956, pp. 9-16. Our income classes have to be 

 defined as income before tax becau.se the Survey data on which our interest rates 

 are based are given that way. 



'■ Since the income elasticities were derived from regressions on disposable, or 

 after-tax, income, it is the distribution of income after taxes which supplies the 

 proper weights for our average interest rate. The distribution after taxes was 

 computed by applying the average tax rate for each income class (given in the 

 Goldsmith article cited al)o\e) to the i)cforc-tax income. 



"^ The rates for the lower brackets are carried over from the preceding section. 

 The breakdown in the upper Ijrackets is derived in detail in the discussion of 

 Model B. 



'* A reduction of excise taxes is less likely than a reduction of income taxes 

 to result in accrual of additional returns to marginal investors to whom addi- 

 tional private savings arc made available. This is betausc the tax cut leads to 

 price reductitms of consumer goods ami hence induces some substitution of 

 consumption for saving. While we cannot he sure that the substitution effect 

 will exactly cancel the income effect on consumption, it is unlikely that the net 

 rcsidt will be significant. Ihe distribution of the tax cut among income classes, 

 and particularly to high-consumption families, strengthens this conclusion. 



