Saving and Tax Integration 

Warren E. Weber 

Comment 

Robert E. Hall 
Saving and Tax Integration 

Warren E. Weber 

Under pre.sent U.S. tax law, the income from debt and the 

income from equity are treated differently. The income from 

equity is taxed twice (as both corporate income and personal income) whereas the income from debt is taxed only once (as personal income) . This asymmetrical treatment of debt and equity 

may introduce allocative inefficiencies into the economy, since 

agents in the economy make their economic decisions on the basis 

of after-tax rates of return. This paper is concerned with one 

particular allocative inefficiency of the current tax system: its 

effect on personal and total private saving. The purpose of this 

paper is to examine the effects on personal and total private saving if taxes were integrated so that all income was treated the 

same regardless of its source. Thus, this paper is not concerned 

with tax integration from the standpoint of tax equity. Rather, it 

addresses the question of what the consequences on the supply of 

saving available to finance inve.stment would be if taxes were integrated. 

The Effects of Integration 

Under present U.S. tax law the return to equity is taxed twice. 

First, corporate income is taxed, typically at 48 percent. Then, if 

after-tax income is distributed in the form of dividends, these 

WARREN E. WEBER is with the Department of Economics at Tulane University. The research reported herein was supported by the Office of Tax 

Analysis, U.S. Department of the Treasury. The views expressed are solely 

those of the author and do not necessarily reflect those of the U.S. Department of the Treasury. This paper draws heavily on the author's more detailed and technical study, Some Estimates of the Effects of Personal and 

Corporate Tax Integration on Personal and Total Private Saving. 

(305) 
306 COMPENDIUM OF TAX RESEARCH 

dividends are subject to the personal income tax (except for a 

minimal dividend exclusion). If after-tax income is retained, it is 

also subject to a second, although milder, tax. Although retained 

earnings are not directly subject to the personal income tax, the 

present value of the net income from retained earnings is capitalized into higher stock prices. If the stocks are subsequently 

sold, the capital gains are subject to the personal tax, but generally at rates that are only one-half of those for other income. The 

effective rate of taxation on retained earnings is further reduced 

by virtue of the fact that taxes are due only when capital gains 

are realized, so that the value of rate reduction is compounded by 

the value of deferral. In contrast with the treatment of equity, 

interest on debt is deductible from the taxable income of corporations, so that return to debt is taxed only once and is taxed at personal income rates. 

Elimination of the differential treatment of equity income and 

debt income through corporate and personal tax integration could 

affect personal and total private saving in three ways: through 

changes in interest rates and wealth, through changes in retained 

earnings and dividends, and through changes in disposable labor 

income. We now consider these types of changes in turn. 

Interest Rate and Wealth Changes 

The effect of the current tax system on the prices of debt and 

equity is to raise the ratio of the price of debt to the price of 

equity above what it would be if the same tax rate applied to both. 

This effect occurs for several reasons. A firm can be considered 

as generating a stream of (before-tax) income that presumably is 

unaffected by the tax structure. Claims on this income stream can 

be purchased by investors either in the form of bonds or in the 

form of equities. However, investors will base the prices they 

will be willing to pay for debt and equity upon the after-tax income streams they will receive through these alternative types of 

claims. Therefore, if debt has a lower tax rate than does equi.ty, 

invest.ors will be willing to pay a higher price for debt than for 

equity. As a consequence, the price of debt will be bid up relative 

to the price of debt until the after-tax rates of return on these 

two instruments are equalized. 

By eliminating the differential treatment of equity income and 

debt income, integration should increase the demand for equity 

and decrease the demand for debt, raising both st.ock prices and 
SAVING AND TAX INTEGRATION 307 

interest rates. 1 Further, the prices of fixed nominal return assets 

should fall due to the increased interest rates. Therefore, integration could result in interest rate and wealth changes that could 

affect personal saving. 

Based on unpublished research by Nicolaus Tideman that takes 

account of the debt/equity effects on risk premiums, we estimate 

that integration will cause a one-half percentage point increase in 

the Moody's Baa corporate bond yield. However, this should be 

regarded only as a rough guess. Nonetheless, because of the existence of substitute debt instruments such as government bonds, 

it is unlikely that the interest rate change would be gerater than 

a full percentage point. In fact, even a half percentage point 

change would make the interest rate differential between the 

Moody's Baa and three to five Government securities larger than 

at any time since 1945.2 

The magnitude of the effect of the interest changes on wealth 

depends upon the composition of the portfolio of households. This 

composition for the 11eginning of 197 4, as given by the Board of 

Governors of the Federal Reserve System, is given in table 1. We 

neglect the eff oot of interest rate changes on the first item in table 

1, since total financial assets is approximately equal to the value 

of household demand, time, and savings deposits, which will not 

change in value when the rate changes. 

The change in value of corporate stock is determined by using 

Harberger's (1968) formulation as given by Reuber and Bodkin 

( 1968, p. 218) . The ratio of stock prices before and af.ter integration is 

{ r; ( 1 - t 0 ) [ 1+8 ( t, - t) ] / [ rb ( 1-t) ] } - 1, (1) 

1 Since the supply of debt and equity should be relatively fixed in the 

short run, the price change should not affect the debt/equity ratio of firms 

in the short run. However, the debt/ equity ratio may be lowered in the long 

run. As Tambini (1969) has noted, an increase in the debt/equity ratio increases for both the holders of debt and the holders of equity the risk of 

losing their investments. The higher the debt ratio, the smaller will be the 

fall in income, relative to investment, that would compel a firm to default 

on its obligations to its creditors. If the firm becomes bankrupt, stockholders 

lose their entire investment. Bondholders may receive partial repayment may 

obtain control of the firm, but they will not receive the secure income stream 

for which they had bargained. Therefore, integration, by lowering the debt/ 

equity ratio, may reduce the risk premiums on both debt and equity. This 

may act in the long run to counter some of the short run increase in interest 

rates. 

s In generating their estimates of the effects of tax integration in Canada, 

Reuber and Bodkin (1968) used estimates of the impact on interest rates of 

one-half a percentage point and a full percentage point. Our method of 

estimating the wealth effects of integration is very similar to theirs. 
308 COMPENDIUM OF TAX RESEARCH 

TABLE 1.-Composition of household wealth, 1974 in millions of dollars 

Type of wealth 

Financial assets 

Corporate stock 

Tangible inventories 

Durables 

Real estate & land 

Total 

Amount 

740.1 

882.5 

87.0 

696.6 

1923.0 

4329.1 

Percent of total 

17.1 

20.4 

2.0 

16.1 

44.4 

where r~ is the after-integration yield on corporate bonds, r,, is 

the before-integration yield on corporate bonds, 8 is the divided 

payout rate, ti is the investment tax credit, tc is the beforeintegration corporate tax rate, and t is the tax rate of the beforeintegration buyer of corporate stock. We assume a dividend payout ratio of 38 percent, an investment tax credit of 10 percent, a 

current corporate tax rate of 48 percent, and a marginal tax rate 

of the buyer of equity of 39.4 percent. These are the approximate 

values that held in 197 4. Then if the current corporate bond yield 

is 9.50, a one-half percentage point increase in the corporate bond 

yield will iincrease stock prices by approximately 25 percent. 

This analysis ignores, however, the effect of pension funds on 

stock prices. Pension funds could be expe.cted to have a different 

evaluation of the prices they would pay for corporate stock after 

integration since they have a mar.ginal tax rate (t) of zero. 

Using equation (1) and the assumptions given earlier we find 

that the change in stock prices would be approximately 75 percent if pension funds held all stock. 

This assumption seems extreme. However, it also seems extreme 

to neglect completely the effects of pension funds when estimating 

the magnitude of the stock price changes that would result from 

integration. As a result, we w~ght the two changes by the percentage of total corporate stock held by zero and non-zero marginal-tax-rate stockholders. These percentages are 23 percent and 77 

percent, respectively. 3 Thus, we obtain an estimate of approximately a 36 percent stock price increase if interest rates rise by 

one-half percentage point. 

An upper bound on the change in the value of real assets can 

be determined by assuming that real assets are perpetuities whose 

real returns are fixed. In this case, the change in price of real 

a These percentages are calculated from the flow-of-funds data of the 

Board of Governors of the Federal Reserve System by assuming that households pay the marginal tax rate of 39.4 percent and all other holders pay 

the tax rate of zero. 
SAVING AND TAX INTEGRATION 309 

assets is given by rb r~. Using the corporate bond yield that prevailed in 197 4 and our assumption about interest rates changes, 

we find the decrease in the value of real assets to be 5 percent. 

Combining our assumptions concerning the effects of the interest rate changes on total wealth, and using the composition of 

assets that prevailed in 197 4, we can obtain estimates of the effect 

of integration on total wealth. We estimate that integration would 

increase the nominal value of wealth by 4.6 percent to $4,515.1 

billion. 

Retained Earnings and Dividends 

The second effect of integration that could affect both personal 

and total private saving is that it may change retained earnings 

and dividends by raising the amount of income corporations have 

available either to retain or to pay out as dividends. 

According to Brittain the corporate income tax "apparently ... 

reduces the level of dividends but not the after-tax payout ratio" 

(Brittain, 1966, p. 112). This result was also found by Feldstein 

(1970). If this result continued to hold after integration, and if 

integration does not change the level of before-tax corporate 

profits, then the current amount of corporate taxes collected 

($49.1 billion) would be d·istributed between dividends and retained earnings in the same ratio as current a:f.ter-tax profits are 

distributed between dividends and retained earnings. The dividend 

payout ratio in 197 4 was approximately 38 percent. If this ratio 

continues after integration, then retained earnings will rise by 

$30.3 billion, and dividends should increase by $18.9 billion. 

However, these estimates are obtained by assuming that integration's only effect is to lower the corporate tax rate to zero. 

It ignores the fact that because CO·rporate income is taxed at a 

lower rate if it is retained, the shareholders of a corporation 

should presently prefer that the corporation retain earnings 

rather than distribute them, other things being equal. This bias 

toward retained earnings would be eliminated by integration and 

should reduce retained earnings and increase dividends. From the 

Feldstein ( 1970) study we estimate that the removal of this 

differential tax treatment would increase dividends and decrease 

retained earnings by $5.4 billion. Thus, we estimate that integration will increase retained earnings by $24.8 billion and dividends 

by $24.3 billion. 

However, that estimate of the impact of integration on retained 

earnings does not take into consideration the possibility that the 
310 COMPENDIUM OF TAX RESEARCH 

integration of corporate and personal income taxes could include 

a provision for a withholding tax on corporate income. Under such 

a plan a shareholder's taxable income would include the dividends 

he received plus his pro rata share of corporate retentions. He 

would be credited with paying tax equal to his pro rata share of 

corporate withholdings. 4 

Because corporations might treat this withholding tax as the 

equivalent of .the corporate income tax, Break and Pechman 

(1975) and Surrey (1975) point out that integration would not 

necessarily lead to any increase in retained earnings. In fact, they 

predict that if the withholding rate were set close to the current 

maximum personal income tax rate of 70 percent, integration 

could lead to a substantial reduction in retained earnings. 

However, as Holland (1975) correctly points out, there is no 

reason why the withholding rate must be at the maximum personal income tax rate. Shareholders could pay their taxes by realizing the increment in the value of their shares due to the higher 

retained earnings. Or they could pay the taxes out of other forms 

of current income. For these same reasons it is possible that integration could occur with no withholding tax on corporations 

which would give rise to the increase in retained earnings estimated earlier. The same result would occur if corporations ignored 

the withholding tax in determining their levels of retained earnings and dividends and then subtracted all of the withholding 

from dividends. On the other hand, we estimate that if a 40 percent (approximately the average marginal tax rate on dividends) 

withholding tax were placed on corporate income, and if corporations treated this tax as if it were a corporate income tax, then 

retained earnings would fall by approximately $6.1 billion. 

A further consideration in the discussion of retained earnings 

is that every dollar increase in retained earnings may not lead to 

a dollar increase in total saving. The reason is that households 

may regard all corporate income as the same regardless of its 

source. 5 In such a case, an increase in retained earnings matched 

by an equal decrease in dividends would leave household con-

'For example, the tax integration plan of the Royal Commission on Taxation ( 1966) (Carter Commission) in Canada provided for such withholding at a rate of 50 percent. 5 For example, David and Scadding (1974) argue that households should 

be viewed "as 'ultrarational' in the sense of regarding the corporate sector 

as an extension of themselves, an instrument of their private interests; the 

distinction between corporate and household sectors therefore is a legal but 

not an economic one. One intriguing implication of this view ... is that 

corporate and personal saving are perfect substitutes" (David and Scadding, 

1974, p. 266). 
SAVING AND TAX INTEGRATION 311 

sumption unchanged. Consequently, households would reduce their 

personal saving by one dollar for each dollar increase in retained 

earnings, leaving the level of total saving unchanged. 

Empirical evidence from studies of Feldstein and Fane ( 1973) 

and Weber ( 1976) does not support the conclusion that households 

regard personal and corporate saving as perfect substitutes. However, this evidence does suggest that some substitution of corporate saving for personal saving does take place. Basing the estimates on my previous study of the effects of retained earnings-on 

personal saving, we estimate that households rdeuce their personal 

saving by $0.3t> for each dollar that corporations increase their 

retained earnings. 

Finally, it is possible that changes in the dividend yield will 

influence personal saving. The effect of integration on the dividend 

yield can be determined directly from the changes in the level of 

stock prices and the level of dividends. In particular, we know that 

drd'°=rd-(ye-Ya)/(l+ye), (2) 

where rd and drd are the current level and the change in the current level of the dividend yield, respectively, and Ye and Ya are the 

percentage changffi in the level of stock prices and the level of 

dividends that result from integration, respectively. From the earlier discussion we estimate that integration will increase beforetax divid_ends by $24.3 billion, or approximately 75 percent. Combining this estimate of the percentage change in dividends with 

the previous estimates of percentage change in stock prices, we 

find that the dividend yield will increase by 1.12 percentage 

points, based upon lhe 1974 dividend yield of 4.47. The taxes on 

dividends can be taken into account by adjusting the dividend 

yield by the average marginal tax rate on dividends. 

Labor Income 

The third effect of integration that could affect personal saving is that it may necessitate an increase in personal income tax 

rates. If personal tax rates were unchanged and personal and 

corporate taxes were integrated, the increase in personal tax 

payments due to taxing retained earnings and dividends as personal income might not fully offset the loss in corporate tax payments. As a result, personal income tax rates would have to be 

increased to keep total tax revenues constant. 6 Since these higher 

•Unless tax revenues are kept constant, the evaluation of integration proposals would also have to include the impacts of financing higher Government deficits or surpluses. 
312 COMPENDIUM OF TAX RESEARCH 

tax rates would apply to all income including labor income, integration could affect personal saving through changes in disposable labor income. 

The total yield of the corporate income tax in 1974 was $49.1 

billion. If retained earnings plus corporate taxes were paid out 

to individuals and taxed a..t the average marginal tax rate for 

dividends of approximately 0.4, the tax yield would be $40.6 billion, a loss of $8.5 billion in tax revenues. This estimate, however, 

does not take into account that the corporate-source income of 

tax-exempt organizations may not be subject to tax after integration. Taking account of zero marginal tax rate holders of corporate stock, the tax yield on corporate-source income would fall 

to $30.3 billion, a reduction of $18.8 billion. Thus, we estimate 

that between 17 percent and 38 percent of lost corporate income 

tax revenue would have to be made up by higher taxes on labor 

income. 7 

The Implications for Personal and Total Saving 

In the previous section we presented some estimates of the 

effects of corporate and personal tax integration on variables that 

are exogenous for the households' personal saving decision. These 

effects are summarized in table 2. Predictions of the effects of 

these changes on personal and total saving are obtained by substituting the values in table 2 into the model of savings behavior 

given by Weber (1977). 

Our model predicts that the changes presented in table 2 will 

lead to a decrease in personal saving of between $5.1 billion and 

$7.4 billion. 8 The decrease is larger the larger the revenue loss 

that has to be made up from labor income. Since the level of personal saving in 197 4 was $77 billion, these estimates indicate that 

although integration would reduce personal saving, the reduction 

would amount to less than 10 percent. 

7 These estimates are very similar to those of Break and Pechman (1975), 

who estimate the revenue losses due to integration using 1972 tax return data 

projected to 1976. They estimate a $6.9 billion loss of revenue if corporatesource income of tax-exempt organizations is subject to tax and a $19.4 billion loss of revenue if it is not. 8 The estimates are obtained using cases 9, 10, 11 in table 4 of Weber 

(1977). We should also note that the estimated effects do not change markedly from those reported in the text if no interest-rate change1 a full percentage point interest-rate change, or no dividend-yield change are used as 

the basis for predicting the effects of integration rather than the values in 

table 2. 
SAVING AND TAX INTEGRATION 313 

TABLE 2.-Summary of predicted effects of integration 1 

Parameter 

Interest rates 

Wealth 

Dividend-yield 

Retained earnings 

Revenue loss 

1 Based on 1974 values. 

Result 

0.5 percentage point increase 

$186 billion increase 

1.12 percentage point increase 

$24.8 billion income (no withholding tax) 

$6.8 billion decrease ( 40% withholding tax) 

$8.5 billion (all corporate source income 

taxed) 

$18.8 billion (tax exempt organization income 

excluded) 

The important saving concept, however, is total private saving 

rather than personal saving since this is the amount available to 

finance investment and the Government deficit. When the increase 

in retained earnings for the case of no withholding tax is added 

to the change in personal saving, we find that integration will increase total saving by between $19.7 billion and $17.4 billion, with 

the increase in total saving being less the greater the revenue loss 

that has to be made up from labor income. Further, even when 

the substitutability of personal saving and corporate saving is 

taken into account, total saving will still increase, although the 

increases will be smaller by $8.9 billion ($0.35 x $24.8 billion). 

In order to give these magnitudes some perspective, we note that 

total saving was $149.4 billion in 197 4. 

On the other hand, if a withholding tax is coupled with integration, then the predicted effects of integration become negative and 

range from a decrease in total saving of $11.9 billion to $14.2 

billion if there is no substitutability between the two forms of 

saving, and of $9.5 billion to $11.8 billion when this substitutability is taken into account. 

Summary and Conclusions 

In this paper we have estimated some effects of integrating corporate and personal income taxes. We estimate that integration 

will increase interest rates, wealth, and dividend yields and that 

integration will result in a loss in tax revenues which will have to 

be made up by increased taxes on other forms of income. The 

effect of integration on retained earnings depends upon the magnitude of withholding tax placed upon corporate income and the 
314 COMPENDIUM OF TAX RESEARCH 

extent to which corporations treat this tax as a corporate income 

tax. Our analysis suggests that retained earnings will increase 

more, the less is the withholding tax on retentions. With respect 

to personal and total private saving our major conclusions are: 

a) that integration will decrease personal saving, but that the 

reduction will most likely be less than 10 percent of the current 

level, and b) that even if the effect of increased retained earnings 

on personal saving are taken into account, the overall effect of 

integration will be to increase total personal and corporate saving unless the withholding rate is large. 

The arguments in favor of tax integration and against the continuance of the present separate corporate income tax should be 

based upon issues of vertical and horizontal tax equity and upon 

the allocation inefficiencies introduced by the separate corporate 

income tax. These allocational efficiencies occur regardless of 

whether the burden of the corporate income tax is borne by 

holders of corporate stock or is shifted either to all holders of property or to consumers. These arguments are well summarized by 

McClure (1975). 

This paper has not attempted to consider the question of tax 

equity; nor has it considered more than one allocational effect of 

the separate corporate income tax: the effect on saving. The major 

result of this paper is to point out that it is possible to integrate 

corporate and personal income taxes in such a way that total 

private saving will increase. Therefore, concern that integration 

would decrease total private saving should not stand in the way 

of consideration of tax integration based on its tax-equity and 

allocational-efficiency merits. 

References 

Break, George, and Joseph A. Pechman. "Relationship Between the 

Corporation and Individual Income Taxes." National Tax Journal 28 

(1975),pp.341-352. 

Brittain, John A., Corporate Dividend Policy. Washington, D.C.: Brookings Institution, 1966. 

David, Paul A. and John L. Scadding. "Private Savings: Ultrarationality, 

Aggregation, and 'Dension's Law'." Journal of Political Economy 

(1974),pp.225-249. 

Feldstein, Martin S. "Corporate Taxation and Dividend Behavior." Review of Economic Studies 39 (1970), pp. 57-72. 

Feldstein, Martin S., and George Fane. "Taxes, Corporate Dividend 

Policy and Personal Saving: The British Postwar Experience." Review 

of Economics and Statistics 55 (1973), pp. 399-411. 
SAVING AND TAX INTEGRATION 315 

Harberger, Arnold C. 4'A Landmark in the Annals of Taxation." 

Canadian Journal of Economics (supplement), I 1968, pp. 183-194. 

Holland, Daniel M. "Some Observations on Full Integration." National 

Tax Journal 28 (1975), pp. 353-357. 

McClure, Charles E., Jr. "The Case for Integrating the Income Taxes." 

National Tax Journal 28 (1975), pp. 257-264. 

Report of the Royal Commission on Taxation. Ottawa, Ont., Can.: 

Queen's Printer, 1966. 

Reuber, Grant L., and Ronald G. Bodkin. "On Estimating the Effect of 

the Carter Commission's Recommendations on Domestic Savings." 

Canadian Journal of Economics vol. I (supplement), 1968, pp. 206-

232. 

Surrey, Stanley S. "Reflections on 'Integration' of Corporation and Individual Income Taxes." National Tax Journal 28 (1975), pp. 335-340. 

Tambini, Luigi. "Financial Policy and the Corporation Income Tax." In 

Harberger and Bailey (Eds.), The Taxation of Income from Capital. 

Washington, D.C.: Brookings Institution, 1969. 

Weber, Warren E. Life-Cycle Consumption and Corporate Savings. 

Mimeo., 1976. 

Weber, Warren E. Some Estimates of the Effects of Personal and Corporate Tax integration on Personal and Total Private Saving. 

Mimeo., 1977. 
316 COMPENDIUM OF TAX RESEARCH 

COMMENT 

Robert E. Hall, Massachusetts Institute of Technology 

Before launching into a discussion of the details of Warren 

Weber's numerical estimates of the effect on saving of the integration of the corporate income tax, I think it would be useful to 

state the general conclusions of the modern theory of saving with 

respect to this question. According to the life-cycle model that is 

the basis of most modern thought on the subject, a corporate income tax depresses the level of corporate capital and raises the 

before-tax return to corporate investments to a level high enough 

so that the after-tax return equals the rate of consumers' time 

preference.1 · Reduction of the tax through integration or any 

other method stimulates corporate investment in the short and 

medium runs so as to raise corporate capital and depress its rate 

of return. In the long run, no additional net investment is needed 

to sustain the higher stock, so the stimulus to saving and investment dies out. 

Against this general view, Weber's conclusion that integration 

probably has a favorable effect on saving seems eminently reasonable, though I would place less emphasis than he on the likelihood 

of a perverse effect in the opposite direction. He makes no attempt 

to trace the feedback of higher corporate investment on the return to equity, and so his paper should be regarded as a shortand medium-run, rather than a long-run, analysis. 

The most difficult part of Weber's work to appraise is his estimation of the effects of changes in income on saving. His estimates are based on a detailed unpublished study of his that I 

have not seen, but I gather he assumes that the rates of saving 

out of different types of income are different. This type of model 

has been fitted by other workers in the past with varying degrees 

of success. Only by heroic and highly questionable assumptions 

can these models be made consistent with theoretical life-cycle 

models. However, I know of nothing better for use today in making quantitative estimates. By far the most troublesome aspect of 

Weber's results for saving is how large a difference it makes 

1 Robert E. Hall, "Consumption Taxes versus Income Taxes: Implications 

for Economic Growth," National Tax Journal, Proceedings (1968), pp. 125-

145. 
SAVING AND TAX INTEGRATION 317 

whether or not the personal income tax on corporate income is 

withheld at the corporation. Part of this problem stems from the 

very difficult question of the effects of faxes on pension funds and 

other institutions not subject to the personal income tax. But, if 

I understand the problem correctly, the rest seems to involve ~ 

very elementary illusion on the part of taxpayers or corporations. 

Surely both sides of the transaction understand that the corporation is no more than the agent for the Government, and that the 

individ~al is one dollar ahead for every dollar withheld by the 

corporation~ If economists and noneconomists have been confused 

on this point, there is no reason to perpetuate the confusion here. 

Weber's estimates for the effect of integration on interest rates 

seem perfectly reasonable, though the reader should recognize that 

everything depends on the substitutability of equity and debt, and 

this 'is still a matter of controversy. But everyone agrees that 

integration is a bon'anza for the owners of equity. Again, uncertainty about the role of the untaxed sector introduces wide variations in the estimates. 

Weber's paper calls attention to the urgent need for a better 

understanding of pension funds and other nontaxpaying institutions. The convention of treating them as if they were economic 

entities separate from their beneficiaries is clearly inappropriate. 

But the alternative of treating pension funds as if they were just 

elements of individuals' portfolios is unpersuasive to many economists. Before the economy is completely engulfed by pension 

funds, it would be a good idea to have a much better understanding 

of how these funds fit into the economy. In the interim, we must 

be very cautious in making predictions about the effects of tax 

changes on portfolios, rates of return, and rates of saving. 

0