The Legacy of Harvard Economist Dale W. Jorgenson

Taxes

Noted economist Dale W. Jorgenson, the Samuel W. Morris University Professor at Harvard University, passed away on June 8. He was 89.

Dr. Jorgenson’s insights and analytical approach have enormously improved the understanding by the economics community of the effect of taxation on capital formation. He developed the concept of the cost of capital, the rate of return a business would expect and demand from a prospective investment after taxes to make it worth the cost and risk. He demonstrated how to measure the cost using readily available economic data, and how to estimate its effect on GDP. The concepts and formulas in Jorgenson’s work informed the development of the series of analytical models that have led to the Taxes and Growth model currently employed by the Tax Foundation, and we are in his debt.

Dr. Jorgenson earned his PhD in economics from Harvard in 1959. He taught at the University of California, Berkeley before joining the Harvard economics faculty in 1969. Dr. Jorgenson was Chairman of the Harvard Department of Economics from 1994 to 1997.

In 1971, Professor Jorgenson received the John Bates Clark Medal of the American Economic Association, granted for excellence in economic research by an economist under forty. The award cited his outstanding work in applied economics involving both economic theory and statistical expertise, including his investigation of the factors determining investment spending and capital formation. He served as the Association’s president in 2000 and was named a Distinguished Fellow of the Association in 2001.

Dr. Jorgenson was a member of the American Philosophical Society, the Royal Swedish Academy of Sciences, the U.S. National Academy of Sciences, and the American Academy of Arts and Sciences. He was a fellow of the American Association for the Advancement of Science, the American Statistical Association, and the Econometric Society, and the recipient of several honorary doctorates. He was active in the National Research Council and the National Academy of Sciences, and he was President of the Econometric Society in 1987.

Before Jorgenson, many models of economic growth and performance assumed that capital investment was driven by capacity utilization and the level of interest rates set by the Federal Reserve, leading to weak predictions of investment behavior and little guide for policymakers on how to improve productivity. Jorgenson’s approach to measuring the aggregate, economy-wide cost or “service price” of capital is a much closer match to the calculations done by actual businesses to determine whether they should add to or reduce their stocks of physical capital (equipment, industrial structures, and residential and commercial buildings).

Jorgenson’s work has been instrumental in convincing many in the tax policy community to take seriously the need to factor in the economic effects of taxation on capital formation, productivity, wages, and employment in forecasting the welfare and federal budget consequences of changes in tax policy. Accounting for such effects is called “dynamic scoring.” Jorgenson participated in a study and symposium on the subject sponsored by the Joint Tax Committee of the Congress in 1969. (See Joint Committee on Taxation Tax Modeling Project and 1997 Tax Symposium Papers, November 20, 1997, available at JCS-21-97 | Joint Committee on Taxation (jct.gov).)

During the JCT symposium discussions, some participants suggested that the dynamic economic and budget effects of the taxation of capital were not sufficiently important, and were too difficult to estimate, to be included in the information given to the Congress in the federal budget process. Professor Jorgenson stated that he could not support such a conclusion, because the effects of tax policy on investment and output were large and he had been calculating them readily for 20 years.

Dr. Jorgenson has also advised the Congress and the tax policy community on the benefits of a more rational and neutral taxation of the income of various types of capital, factors affecting the growth of productivity, corporate taxation, and the economy, and ways of improving the national income accounts to deal with leisure and quality of life issues. His work will continue to influence many areas of economic theory and fiscal policy for generations.

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