ECONOMIC

and raise the return to capital income, which could be expected to resultin higher saving as well as consumption. However, if integration were accompaniedby an increase in other taxes, leaving total revenue unchanged,the effect on saving would be ambiguous. Saving would rise only to theextent that a net increase in the rate of return remained after the offsettingtax changes (and saving responded positively to such an increase) or incomewas redistributed to individuals with above-average propensities to save.Since the response of saving to changes in the rate of return is uncertainin any case, and it is unlikely that the offsetting tax increases wouldproduce a significant change in the after-tax distribution of income, itis probable that the effect of revenue-neutral integration on aggregate savingwould be minimal. The major benefits of integration thus stem from theimproved allocation of capital resources and the more equitable distributionof tax burdens that it would bring about—not from its presumed effectson total saving.Full integration in its purest form would eliminate the corporate incometax entirely and allocate income to stockholders as if they were generalpartners in a small business. There may be certain administrative problems,however, which would make this partnership approach difficult to implementin the case of widely held corporations. Moreover, severe cash flowproblems could be created for shareholders with high marginal tax rates iftheir tax liabilities significantly exceeded the dividends paid out.A more modest scheme of partially integrating the personal and corporateincome taxes would remove only the double tax on dividends, either byallowing corporations to deduct their dividend payments in calculatingincome for tax purposes, or by treating the corporate tax on dividends aswithholding for the shareholders. Under either of these methods of partialintegration, the bias toward reliance on retained earnings in corporate financingdecsions would be reduced. The Administraton's integration proposalcombines both approaches. A portion of dividends paid would be treated asa cost of doing business and therefore would be deductible from a corporation'sgross income. The remaining amount of dividends would be subjectto the ordinary corporate income tax, but the tax paid would be imputed toshareholders and treated as withholding in the calculation of their individualincome taxes. The shareholders would then be required to raise theirdividend income by the amount of tax imputed to them and withheld by thecorporation, calculate their individual income tax on this adjusted basis,and credit the amount withheld against their tax liability. If there were nooffsetting increase in taxes, this integration procedure could be expected toraise the after-tax incomes of both corporations and their shareholders,assuming no change in dividend payout rates.Full integration of corporate and personal income taxes would completelyeliminate the distortions in resource allocation mentioned earlier. Partialintegration, affecting dividends only, would not be completely neutral becauseit would not change the present tax treatment of retained corporate income.167