102 MULTIPLE PURPOSE RIVER DEVELOPMENT 



Model B: A Tax Cut Stimulating Investment 



In Model B, we make quite different assumptions about the tax 

 cuts made possible by a reduction in expenditures, though we again 

 try to cast our assumptions in a plausible form from a political 

 point of view. We assume that 50 per cent of the reduction will be 

 taken by reducing the rate structure of the personal income tax. 

 Rather than assume a new rate schedule, we assume that it is the 

 objective of the rate changes to reduce the tax bill of each taxpayer 

 in the same proportion. Income tax payments represent a larger 

 percentage of the income in higher brackets; therefore, such a tax 

 cut would produce a more than proportionate increase in after-tax 

 incomes in the higher-income classes and would, therefore, reduce 

 the degree of progression of the personal tax structure. The 

 remaining 50 per cent of the reduction is assumed to take the 

 form of a cut in corporate income taxes, distributed among corpor- 

 ations in proportion to their tax liability. Combining the interest 

 rates applicable to each of these tax cuts, we derive our over-all 

 estimate for Model B as follows: 



Per cent 



Proportionate reduction of personal 



income taxes 5.29 



Proportionate cut in corporation taxes 5.59 



Weighted Average for Model B 5.44 



REDUCING PERSONAL INCOME TAX 

 LIABILITIES PROPORTIONATELY 



Much of the method applied in Model A can be used for the 

 personal income tax cut favoring upper-income families. Let us first 

 look at the distribution of tax savings among income classes, given 

 in Table 10. Comparing the incidence of this tax cut with the inci- 

 dence of an increase in the exemption, we find that much more 

 of it accrues to high-income classes, 59 per cent of it to incomes 

 over $7,500. Where Model A emphasized the asset-debt position 

 of families with low and middle incomes, for whom the Survey of 



