The Social Cost of Federal Financing 



111 



The interest rate applicable to the share of the tax cut benefiting 

 wage and salary earners can be derived from the distribution of this 

 form of income by income classes and our earlier estimates of 

 interest rates. Similarly, the part of the tax cut passed on to con- 

 sumers can be allocated to income classes in accordance with the 

 distribution of consumption, and then be combined with our 

 interest rates. The rates derived from these computations, sum- 

 marized in Table 16, are 5.81 per cent for wage and salary earners 

 and 5.68 per cent for consumers. 



TABLE 16. Derivation of Interest Rates Applicable to the Shares for Wages and 

 Salaries and Consumption of a Reduction in the Corporation In- 

 come Tax 



Per cent Per cent Applicable in- 



Inconie class distribution of distribution of terest rates " 



($ thousand) wages and salaries '' consumption '' (per cent) 



to 3 15 12 7.0 



3 to 5 33 24 5.8 



5 to 7.5 29 29 5.8 



7.5 to 10 11 15 5.4 



10 to 15 5 9 5.0 



Over 15 7 11 4.6 



Average applicable interest 



rate (per cent) 5.81 5.68 



" Statistics of Income for 1952, op. cit., adjusted for 1955 conditions by apply- 

 ing the pattern of change of the distribution of personal income as reported in 

 Goldsmith, op. cit. 



•" Assumes average propensities to consume in the respective income brackets 

 as follows: 1.1, .96, .90, .82, .75, and .60. These propensities are taken from 

 M. Bronfenbrenner, et al., op. cit.; values for the four lower income classes are 

 based on Federal Reserve Board data for 1950; values of the two upper income 

 classes are from National Resources Committee data for 1935-6, adjusted upward 

 in accordance with the drift of the known portions of the consumption function. 



"= See Tables 7 and 15. 



Part of the unshifted portion of the tax cut is passed on to divi- 

 dend recipients. We use the relationships between dividends and 

 earnings established by Lintner to discover the share going to 

 dividends. He found that an increase in earnings will lead to a 

 gradual increase in dividends until the traditional payout ratio of 



