112 MULTIPLE PURPOSE RIVER DEVELOPMENT 



the firm has been restored. ^^ In the first year, dividends will rise 

 13.5 per cent of the increase in earnings; in subsequent years, the 

 same percentage of the gap between the dividend paid in the 

 previous period and the dividend called for by the firm's traditional 

 payout ratio will be closed. For the country as a whole, the 

 average payout ratio was about .50 ^^ in 1955, so a reduction of 

 the tax by $1.00 will increase dividends 13.50 in the first year, 

 23.40 in the second year, and so on until the increase would equal 

 500. An average of these payments over a period of 100 years — a 

 period corresponding to the economic life of water resource projects 

 — would be 470. So, of the 54 per cent of the tax cut which accrues 

 to increased profits, 47 per cent is passed on to dividend recipients. 

 The distribution of dividends by income classes is given in Table 

 17. Applying the interest rates derived earlier, we find that a rate 

 of 4.96 per cent is applicable to this portion of the tax cut. 



These allocations leave 29.2 per cent of the tax cut as the increase 

 of retained earnings. How much will the investment of the taxed 

 firms increase as a result? To answer this question, we consider 

 firms with assets greater than $10 million separately from smaller 

 firms. This division into "large" and "small" corporations is 

 necessary because the influence of the availability of additional 

 funds on investment varies sharply with the size of the enterprise. 

 We assume that 75 per cent of the tax is paid by large firms, 25 

 per cent by the rest.^^ 



In regard to large corporations, Lintner cites a number of reasons 



^J. Lintner, "Determinants of Corporate Savings," Chapter 14 in Savings in 

 the Modern Economy, W. Heller, ed. (Minneapolis: University of Minnesota 

 Press, 1953); and Lintner, "Distribution of Incomes of Corporations among 

 Dividends, Retained Earnings and Taxes," American Economic Review, May 

 1956, pp. 97-113. 



^Statistics of Income for 1952, op. cit. The payout ratio of small corporations 

 is lower, and we assume a ratio of .35. This figure is an average of the payout 

 ratios by asset size, weighted by the distribution of tax payments, and allowing 

 for a gradual approach to the average ratio. 



"In 1951, corporations with assets over $10 million paid 70.4 per cent of the 

 tax (Statistics of Income for 1951, op. cit.). Figures for all corporations for 

 1951 are not yet available, but we can make a good estimate from the data on 

 manufacturing. In this sector, which pays two-thirds of the entire tax, the per- 

 centage paid by large corporations rose from 76 to 82 per cent from 1951 to 1955. 

 Our estimate assumes a somewhat smaller increase of taxes paid by large corpora- 

 tions outside manufacturing. 



