Nobel Laureate Solow Says Tax Hike Next Year Is Nearly Certain

Robert M. Solow, the 1987 Nobel laureate in economics, said Monday that it is extremely likely Congress will raise taxes to reduce the budget deficit next year, and he criticized Vice President George Bush, the presumptive Republican presidential nominee, for ruling out a tax hike.

“All we’ve got out of Bush is, ‘I will not raise taxes--period.’ And the only sensible word in that sentence is ‘period,’ ” the Brooklyn native said in an interview. “I keep telling myself he must know better. But I’d like to see some evidence of that.”

Solow, 63, a Massachusetts Institute of Technology professor, was visiting Los Angeles as part of fund-raising activities for MIT, including an alumni meeting in Marina del Rey. Honored last year for his research on such abstruse matters as the effect of technology on productivity and economic growth, Solow spoke in the interview in a down-to-earth manner about the presidential campaign, taxes, inflation and other topics.

“I think it’s an open secret that when January rolls around, the next Congress is going to have to pass some kind of tax increase,” said Solow, a registered Democrat. “And the question is not ‘whether?’, and not even particularly ‘how big?’, but ‘what kind?’--what taxes are they going to be? And that is so plain, it’s hard to believe the vice president doesn’t know it.”

Doesn’t Come Close

While describing Democratic aspirant Michael S. Dukakis as “my governor and my candidate,” the professor, in effect, gave the Massachusetts governor an “incomplete” for his handling of economic issues in the presidential campaign.

Dukakis, he said, has “avoided committing himself” to specific policies. Solow added that the governor’s suggestion for reducing the budget deficit--tougher enforcement of tax collections--would not come close to solving the problem.

“The best thing about good enforcement of the internal revenue code is that it makes us feel better about paying our taxes if we know other people are not escaping,” the economist said during the conversation in his hotel room. He noted, however, that “no amount of rigorous enforcement of the tax law is going to buy more than a few billion dollars” toward narrowing a gap estimated in the range of $150 billion for this year.

Despite his criticisms of the candidates, Solow made it clear that he recognizes the political risks of advocating tax hikes and holds little expectation that Bush and Dukakis will alter their strategies greatly.

Solow said it would be preferable if the next tax increase were based on consumption--that is, the amount people spend on purchases--rather than income. Such an approach, he maintained, would encourage people to save rather than spend, and the added investment would help narrow the budget and trade deficits.

“We need it (investment) for international competitiveness,” he said. “We need it to get American industry up and running.”

At the same time, Solow noted that many industries are now operating close to full bore, with assistance from the lower-valued dollar that has made U.S. prices far more competitive than they were a few years ago. He said higher interest rates--for which the Federal Reserve Board has been maneuvering in recent weeks--are the wrong approach to tackle inflation right now, because greater investment in factory expansions is required to ease bottlenecks and upward pressure on prices.

“Up until now, I think (Federal Reserve Board Chairman) Alan Greenspan has been doing extraordinarily well,” he said, but he added, “The slight uptick in inflation is not the kind that is well met by higher interest rates.”