The Social Cost of Federal Financing 1 19 



which are considered marginal in comparison to the opportunities 

 that are undertaken without the tax cut. On the other, new invest- 

 ment opportunities may yield generally higher returns than the 

 reported average for old and new capital. Also, business will not 

 undertake any investment unless the expected rate of return meets 

 minimum standards that are sufficiently high actually to yield an 

 adequate return for the particular kind of investment. Finally it 

 should be stressed that most of Model A and a large part of Model 

 B do not use this approximation. 



Our results are not meant to apply in periods of serious inflation 

 or depression. In an inflationary period, monetary policy is likely 

 to be pursued with such vigor that the supply of investible funds 

 to firms will be severely restricted, while the attractiveness of high 

 returns on investments will exercise strong pressure to invest any 

 funds that become available. Under these conditions, the increase 

 in retained earnings made possible by a reduction in the corporation 

 income tax would, in large part, lead to investment within the 

 firm. Since large corporations tend to earn high rates of return on 

 internal investments, the interest rate applicable to such a tax cut 

 would be considerably higher than our estimates. Even the reduc- 

 tions in personal taxes are quite likely to have significant invest- 

 ment effects. For in periods of money shortage, when there is 

 sharp competition among borrowers for funds, more personal 

 savings are likely to find their way into business uses in which high 

 rates of return prevail. 



In years of depression, when government expenditures are 

 designed to raise the total level of effective demand in order to 

 employ idle resources, the social cost of capital is extremely low. 

 Tax policy, in such periods, would endeavor to tax idle hoards of 

 funds rather than money which would be spent for consumption 

 or investment; and much of public expenditures would be financed 

 by government loans designed to avoid competition with private 

 demands for investible funds. In real terms, many of the resources 

 absorbed by public investment would have been idle and, hence, 

 would have an opportunity cost close to zero. Expressed as an 

 interest rate, it is not at all inconceivable that the social cost of 

 public capital would be negative in such circumstances. 



The year 1955, for which our estimate was derived, can be con- 

 sidered typical of long-term conditions, however. Employment was 

 high, though not to a point where inflation had set in. Fiscal and 



