Lawrence Howard Seltzer

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: Interest as a Source of Personal Income and Tax Revenue
Volume Author/Editor: Seltzer, Lawrence Howard
Volume Publisher: UMI
Volume ISBN: 0-87014-365-4
Volume URL: http://www.nber.org/books/selt55-1
Publication Date: 1955
Chapter Title: INTRODUCTION to "Interest as a Source of Personal Income
and Tax Revenue"
Chapter Author: Lawrence Howard Seltzer
Chapter URL: http://www.nber.org/chapters/c2873
Chapter pages in book: (p. 1 - 2)INTEREST AS A SOURCE OF PERSONAL INCOME
AND TAX REVENUE*
A Report of the National Bureau of Economic Research
LAWRENCE H. SELTZER
Wayne University
CONTENTS
Introduction 1248
I. The Shifting Importance of Interest as a Source of Personal Income.. 1249
II. The Small Proportion of Personal Interest Receipts Reported on
Taxable Returns 1272
III. Tax Revenues from Interest 1289
IV. Interest Income and Interest Rates after Taxes 1293
V. Future Trends in Personal Interest Income 1309
INTRODUCTION
C
HANGESin interest rates in recent years have sometimes given rise
to heated controversies about their economic effects and the public
policies involved. The present study was not undertaken because of
any special concern with such controversies but as part of a larger
analysis of income taxation in the United States. Nevertheless, some of
the facts revealed may be useful to those who debate policy.
For example, it is relevant to know something about the distribution
of interest income in discussing debt management or tax policy. A once
popular belief was that the bulk of interest goes to a class of wealthy
investors who are enabled to live by clipping bond interest coupons and
receiving interest on mortgages rather than by more direct contribu-
tions to production. How far this assumption is from the present situa-.
tion in the United States is indicated by some of the figures contained
in this report. It will be found, for example, that the importance of
interest as a source of personal income has shrunk strikingly in recent
years and that much the greater part of the total interest income re-
*Thispaper arose out of a study, still in process, of the personal income tax. I am indebted to vari-
ous members of the staff of the National Bureau of Economic Research and collaborators for criticism
and suggestions, notably to W. L. Crum, Solomon Fabricant, Raymond W. Goldsmith, Daniel M.
Hofland, C.HarryKahn, John W. Kendrick, Geoffrey H. Moore, George Soule, and, for valuable
statistical aseistance, to Arnold Oliphant and Bella Shapiro. I am also indebted to Charles F. Schwartz
and Selma F. Goldsmith of the Department of Commerce, and Marius Farioletti of the Bureau of In-
ternal Revenue, for supplying special tabulations or making useful suggestions. The charts were drawn
by H. Irving Forman.
This paper has been approved for publication, as a report of the National Bureau of Economic Re-
search, by the Director of Research and the Board of Directors of the National Bureau, in accordance
with the resolution of the Board governing National Bureau reports (see the 35th Annual Report of the
National Bureau of Economic Research, May 1955). It is to be reprinted as No. 51 in the National
Bureau's series of Occasional Papers, and the Occasional Paper may be ordered from the National
Bureau of Economic Research, 261 Madison Avenue, New York 16, N. Y.
1248INTEREST AS INCOME AND TAX REVENUE 1249
ceived by individuals is received by those with small and moderate
incomes.
Another subject of debate is the influence of tax policy on the choice
of investments, that is, on the inducement to invest in relatively safe
interest-bearing securities as against possibly risky equities, or vice
versa. This study offers some revealing evidence in this connection,
indicating, among other things, the great importance of the prevailing
expectations with respect to the possibilities of capital gains.
Is the tendency to higher interest rates which has been in evidence
since 1946, despite some interruptions and reversals, likely to continue,
and, if so, are interest rates likely to rise to former peaks? On these
questions, too, some light is thrown by analysis of the statistics and
related considerations.
It will doubtless surprise many persons to learn that only about one-
fourth of the interest income estimated to have been received by indi-
viduals in the years 1930—1950 was reported on taxable income tax re-
turns, despite the sharp decreases during the 1940's in the level of
personal exemptions and the huge increase in the number of taxable
returns filed. What are the important reasons for this fact?
It is the aim of the National Bureau of Economic Research, in this
as in its other studies, not to take a position on disputed issues of public
policy but rather to make available empirical evidence and impartial
analysis for whatever uses may be appropriate.
The present paper begins by tracing the changing absolute and rela-
tive importance of personal interest receipts and their changing distri-
bution as between higher and lower income groups. Then it examines
the principal causes of the long decline in personal interest income after
1929 and attempts to account, so far as possible, for the fact that only
about one-fourth of total personal interest receipts have been reported
on taxable individual income tax returns in recent years. The third
section of the paper presents some measures of the importance of inter-
est income as a source of tax revenues. The fourth discusses the effects
of the progressive income tax rate structure upon interest yields and
interest income after taxes and the resulting influence upon incentives
to individuals to invest in taxable fixed-interest securities. A final sec-
tion considers some probable future trends in personal interest income.
I. THE SHIFTING IMPORTANCE OF INTEREST
AS A SOURCE OF PERSONAL INCOME
1. Substantial fluctuations in the absolute and relative importance of in-
terest have occurred since 1913
Although interest has the reputation of being a relatively stable

Interest as a Source of Personal Income and Tax Revenue

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