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a candid conversation with economist Dale W. Jorgenson about his tax reform proposal and his prediction that "we're probably going to have to increase taxes" in the States.

Introduction

T here are two opposing camps in the Republicans' war on the current tax code. Both have their intellectual gurus. Both have their advocates in Congress. And both seem to hate each other. We are talking about the flat tax crowd with Prof. Alvin Rabushka from Stanford University's Hoover Institution as their leader and the national sales tax group with Prof. Dale Jorgenson from Harvard University as their guru.

Both camps have similar aims: stampede the Beltway into action, simplify the current broken tax system, dump the entire absurd tax code, payroll, income and corporate, shift the tax burden off savings and investment and on to consumption and trigger economic growth. Their proposed ways to get there are radically different.

They are united in their hostility to the present complicated tax code and the Internal Revenue Service. This crowd is convinced that they are speaking for millions of Americans who are fed up with the current tax system and want it replaced with one they can easily understand and with less tax rules.

Mr. Rabushka's "Flat Tax", a consumption-based tax, would broaden the tax base of the income tax. Under the proposals, a single income tax rate would replace the existing complex rate structure.

"To the maximum extent possible, the flat tax removes the tax code from the economy," Mr. Rabushka recently stated before young Republican congressional staff members "and in three to five years, everybody will end up a winner."

"The benefits of a Rabushka tax package would be small," Mr. Jorgenson warned, "and the effect on national savings could be a wash."

Mr. Jorgenson's "Effcient Taxation of Income" would reform the existing income tax system, by taxing capital income at an effective rate of about 30% and labor income at a flat rate of about 10%. In addition the proposal introduces a system of Investment Tax Credits for business assets and new taxes on investments by households. There would be different rates on equipment and structures for corporate businesses, non-corporate businesses and the household sector.

Dale W. Jorgenson, born in Bozeman, Montana, at Harvard since 1969, is the Samuel W. Morris University Professor at Harvard University. Mr. Jorgenson's research focuses on information technology and economic growth, energy and the environment, tax policy and investment behavior, and applied econometrics.

Since 1984 he has directed the Program on Technology and Economic Policy at the Kennedy School of Government, Harvard University. Mr. Jorgenson served as President of the American Economic Association (AEA) in 2000, and as chairman of the Board on Science, Technology and Economic Policy of the National Research Council since 1998.

It was one of these hot evenings in this small tyrolian town of Innsbruck. Jorgenson hasn't had much sleep, as he has flown from the States to Europe to give a seminar at the Faculty of Social and Economic Sciences (SES). The building of the SES feels almost as much like a ship in a stormy sea as a building. Not a safe place for a university professor from the States, since from time to time disaster strikes and parts of the new steel and glass roof structure collapse. His working regimen was intense, he had already delivered an Eugen von Böhm Bawerk Lecture on "Information Technology and the World Economy", with great energy and enthusiasm. We met Prof. Dale W. Jorgenson shortly after eight o'clock in the Aula in the basement of the University of Innsbruck for an exclusive SAST REPORT interview. A tall and solid man, in a dark suit and a light blue shirt wearing black shoes. He seemed focused and efficient.


Interview

SAST REPORT: Prof. Jorgenson, what do you think about a popular consumption tax proposal, the simple tax, the flat tax?

JORGENSON: Oh, ... Did you hear my lecture yesterday?

SAST REPORT: No.

JORGENSON: I gave a lecture about the flat tax yesterday. And, I have a book about that called "Lifting the Burden". So, I have a story about the flat tax. Flat tax would be a big benefit, but it turns out that there is a better way to do it that I call "Efficient Taxation of Income".

SAST REPORT: After decades of debates to reform the tax system, which of the taxation reform proposals will be introduced?

JORGENSON: Oh, ... I think it's too soon to say. I spent a lot of time with the US Treasury talking about this "Efficient Taxation of Income". My view is that it is very hard to shift to a consumption based tax in the US, whether it is a VAT or a flat tax or anything else. So, I see that the first step in tax reform is going to be to reform the income tax system.

SAST REPORT: The January 1993 proposal of the former Bush administration proposed to shift the tax base from income to consumption.

JORGENSON: Yeah. Yeah, ... That's right. So I compared that with reforming the existing income tax system, and what I showed, was that, reforming the income tax actually produces more benefits.

SAST REPORT: One result of a shift to consumption based taxation would be that corporate income would be taxed at a rate of zero. In your proposal on tax reform, would you only change the income tax of corporations, or also the taxation of individuals?

JORGENSON: Oh, ... I wouldn't. No, no. I want to change .... Basically, I don't change the taxation of individuals. I would reduce the tax rate on corporations because they're taxed twice, at the individual and the company level. But my whole idea is to bring housing and consumer durables into the scheme. You have to try to equalize the rates of taxation on all forms of income. And that's the basis for Efficient Taxation of Income.

SAST REPORT: And you think your proposal is feasable?

JORGENSON: My proposal is feasable. It could be enacted today and implemented tomorrow. I testified at a hearing of the Committee on Ways and Means of the House of Representatives.

SAST REPORT: Do you remember how it went?

JORGENSON: They seemed very interested.

SAST REPORT: In view of the fact that it is always better for a government to cut taxes, do you think your proposal is politically feasable?

JORGENSON: Yes, it is politically feasable ... [Long pause] ... and they are much more interested in cutting taxes, because of the fact that we were in a recession. So that's what took over and that's what we're now seeing, and it's produced the result after many years. And, now we have to think about how to reform the tax system. So, that's the next thing on the agenda.

SAST REPORT: Your general idea is to reform the income tax system ...

JORGENSON: Yes, to reform the income tax system. That's my point.

SAST REPORT: ... and not to massively cut the taxes?

JORGENSON: No, not to cut taxes. We're probably going to have to increase taxes.

SAST REPORT: Why don't you only want to cut the taxes?

JORGENSON: Oh, ... because ... uh ... I want to cut ... I want to level the taxes and increase efficiency. But we need to raise a little more revenue. Our fiscal situation is one that's appropriate for a recession, but we're not in a recession anymore. So we shouldn't have such a low relationship of revenue to expenditure. We should begin to increase the revenues.

 

Photo: Dale Jorgenson audio.GIF audio:
Dale Jorgenson: "So, I see that the first step in tax reform is going to be to reform the income tax system."

 

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