The Social Cost of Federal Financing 107 



largest and most successful, and located in the better regions, and 

 so we assume a raFe of return of 6 per cent to apply. 



Treatment of the returns on stock poses severe problems. The 

 ex post rate of return has been extremely high in recent years 

 because of the doubling of common stock prices. If we considered 

 all capital gains to be income, the annual rate of return of recent 

 years would exceed 15 per cent. But in making decisions, indi- 

 viduals did not fully anticipate these capital gains, nor would it 

 be realistic to suppose that this rate will continue indefinitely. 

 Yet, it also would be unrealistic to exclude all capital gains, since 

 the high rate of income retention of corporations makes likely the 

 continued growth of the value of stocks. To take account of this 

 factor, we assume that the yield on stocks is equal to dividends 

 plus retained earnings. In 1955, the average dividend yield on all 

 common stock was 3.93 per cent; since only 50 per cent of earnings 

 was paid out, we assume a total rate of return of 8 per cent. 



Income from rent, interest, and trusts represents relatively small 

 shares of total property income. For the rate of return on real 

 estate, we use two sources. The first is profits of corporations whose 

 main business is the holding of real estate. This has been at the 

 rate of 12 per cent before taxes,-^ a figure which primarily repre- 

 sents commercial property and apartment houses. Second, for 

 residential property as a whole, some unpublished investigations of 

 R. Muth suggest an average rate of 5.5 per cent.-* Since commercial 

 property and residential property of above average profitability 

 are likely to be held by individuals in the upper-income brackets, 

 we assume that rental income is earned at a rate of return of 8 per 

 cent. For interest, a rate of 3 per cent is assumed. This is slightly 

 higher than the rates of 2.8 to 2.9 per cent which prevailed on 

 government bonds in 1955, but lower than the average yield of 

 3.25 per cent on corporate bonds. -^ Finally, we assign an interest 

 rate to income from trusts. Since the trusts represent various 

 combinations of other assets, we simply assume that their rate of 



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

 1951 (Washington, D. C: Government Printing Office, 1955), and Statistics of 

 Income for 1952, op. cit. 



"For an abstract, see R. F. Muth, "The Demand for Non-Farm Housing," 

 Econometrica, y\pril 1957, p. 365. 



^ Board of Governors, Federal Reserve System, Federal Reserve Bulletin, May 

 1956, p. 477. 



