The Social Cost of Federal Financing 117 



Combining this estimate with the interest rate of 5.29 per cent 

 for the proportionate reduction of personal income taxes, we derive 

 an over-all estimate for Model B of 5.44 per cent. 



Interpretation of Our Results 



The estimates of opportunity costs derived from our two models 

 were quite similar, although the assumed changes in taxation were 

 very different. This suggests that a value of the order of magnitude 

 of our derived results could serve as a measure of the social cost of 

 capital for federal investment. But before accepting this conclu- 

 sion, it is necessary to examine possible errors in the assumptions 

 and in the data of our quantitative analysis. 



ACCURACY AND LIMITATIONS 



A possible source of error is our analysis of the incidence and 

 effects of taxation. Insofar as possible, we have tried to follow the 

 views generally held by experts in this field. Changes in most of 

 our assumptions would have only a moderate effect on the results. 

 Experiments with somewhat different assumptions of incidence 

 produced estimates similar to those obtained. Two exceptions, 

 however, would upset our results. First, if it is assumed that a 

 reduction in the corporation income tax will lead to an upsurge of 

 investment by large corporations, then more of the tax cut would 

 earn the high rates of profit which are prevalent. We have tried 

 to show, however, that this effect is unlikely under the assumed 

 economic condition of high employment. Second, it can be argued 

 that the high levels of federal taxation lead to a large waste of 

 economic resources caused both by the managerial efforts devoted 

 to the tax problem and the distortions in economic decisions of 

 firms and households resulting from a desire to avoid taxes. These 

 considerations are not likely to have much relevance to the problem 

 under study here because the magnitudes of the possible tax reduc- 

 tion are so small compared to the taxes which are needed to finance 



the total estimate would rise to 6.59 per cent. In times of modciate monetary 

 policy, the condition postulated for our analysis, these effects would not be of 

 the magnitude indicated here. 



