The Social Cost of Federal Financing 109 



"See text. 



* The following marginal tax rates are applied to the respective income 

 classes: .25, .29, .36, .47, .59, .65, .76, and .89. These rates represent the mar- 

 ginal rate in each income class as indicated by the average tax liability reported 

 for the class. In applying the rates, half of the income from stock is considered 

 long-term capital gain. Also 25 per cent of the interest income in the top two 

 brackets is considered to be from tax-exempt bonds yielding an average of 2.6 

 per cent; this assumption is based on the findings of Butters, Thompson, and 

 Bollinger, op. cit., p. 468. 



•^ These rates are derived as follows: We assume the following marginal pro- 

 pensities to save: 0, 12, 26, and 26 per cent respectively on the first four 

 brackets, and 40 per cent on all brackets over $20,000. (Source: Survey of the 

 Bureau of Labor Statistics to revise the Consumer Price Index, 1950, as reported 

 in Business Week, June 16, 1956, p. 104; the figure for the top bracket is based 

 on the 1936 survey of the National Resources Committee, reported in M. Bron- 

 fenbrenner, et al., "A Study in Redistribution and Consumption," Review of 

 Economics and Statistics, May 1955, p. 153, adjusted downward in accordance 

 with the shift of the known portions of the consumption function.) We apply 

 the rates after tax to the portion of the tax cut that would be consumed and 

 the rates before tax to the share that would be invested, and then compute a 

 weighted average. 



These rates can be given an alternative interpretation to that of the text. 

 Where the government is considered a "partner" in the ownership of the assets, 

 the return in excess of the after-tax rate can be considered to be the return 

 earned by the government on the assets. The rate at which taxes are paid on 

 the part of the tax cut which is invested measures the government's share of 

 the returns. 



14 first gives the rates of return after taxes, and then shows the 

 adjusted rates of return allowing for the higher rates that must be 

 applied to the portion of the tax cut which is actually invested. 

 Taking these adjusted rates in combination with the distribution 

 of various kinds of property income of Table 13, we derive the 

 average rates of return applicable to the property holders in each 

 income class (final column of Table 14). Combining the resulting 

 rates with the rates given for debtors in Table 11, we derive the 

 average interest rate for the entire income class (column 3, Table 

 15). Finally, bringing in the rates for low-income classes from 

 Model A, and the distribution of the tax cut from Table 10, we 

 compute the over-all interest rate for this form of tax cut. These 

 computations, summarized in Table 15, show an over-all rate of 

 5.29 per cent.-^ 



^* If we assume that an additional return of 3 per cent above borrowing cost 

 accrues to the investors to whom the additional savings are made available, our 



