The Social Cost of Federal Financing 113 



TABLE 17. Derivation of Interest Rate Applicable to the Share of Corporation 

 Income Tax Cut Benefiting Dividend Recipients 



Income class Per cent distribution Interest rate '' 



($ thousand) of dividends " (per cent) 



to 3 4 7.0 



3 to 5 6 5.8 



5 to 7.5 8 5.8 



7.5 to 10 7 5.4 



10 to 15 11 5.0 



15 to 20 7 4.6 



20 to 30 11 4.6 



30 to 50 13 4.6 



50 to 100 14 4.6 



Over 100 19 4.6 



Average applicable interest rate . . 4.96 



" Statistics of Income for 1952, op. cit. 

 " See Table 15. 



for believing that the effect on real investment will be small.^^ 

 Most corporations are forced to maintain a certain level of invest- 

 ment. Failure to expand capacity or to maintain a steady rate of 

 reduction of costs, by jeopardizing the firm's competitive position 

 in the industry, would pose a serious threat to its long-run future. 

 Investment for diversification, which is usually motivated by a 

 desire to reduce the variability of production levels and earnings, 

 would also be relatively immune to changes in tax rates. If inter- 

 nally generated funds are inadequate for these purposes, the firm 

 borrows. The effect on investment incentives caused by a tax rate 

 which takes away part of a firm's profits on successful ventures, is, 

 to a large extent, offset by the government's bearing part of the 

 losses through reduced tax liability in the event of failure. Finally, 



'^J. Lintner, "Effects of Corporate Taxation on Real Investment," American 

 Economic Review, May 1954, pp. 520-34. For an analysis of the effect of tax- 

 ation on the conditions of supply of capital see J. K. Butters, "Federal Income 

 Taxation and External vs. Internal Financing," Journal df Finance, September 

 1949, pp. 197-205. In times of very tight money, the effect on internal invest- 

 ment will be larger, of course. For a somewhat stronger emphasis on liquidity 

 as an investment-determining variable, particularly in recessions, see J. Meyer 

 and E. Kuh, "Acceleration and Related Theories of Investment: An Empirical 

 Inquiry," Review of Economics and Statistics, August 1955, pp. 217-30. 



