Making sense of automation tax

October 7, 2019

Automation plays a substantial role in today’s economy and its impact will only increase in the future. One risk associated with this process is that automation could outpace societies in terms of our ability to deal with large-scale job displacement. If so, mass unemployment and structural public budget deficits would be the result. An oft-heard solution entails slowing down the pace of automation through changes in our tax regimes.

Our observations

  • The most automated country in the world, South Korea, was the first to implement indirect taxation on automation in 2018. The Korean government reduced incentives (i.e. tax benefits) for automation due to fears of unemployment and losing tax revenue to automation.
  • In 2017, the European Parliament rejected a motion to implement a robot tax and economist Lawrence Summers has criticized Bill Gates for suggesting a similar strategy. Nonetheless, the discourse on AI taxation is evolving. At the EmTech Next 2019 conference, pro-tax scientist Ryan Abbot and anti-tax journalist Ryan Avent led a debate on taxing AI. Similarly, the DG of ECFIN recently discussed potential strategies to regulate the impact of automation on the labor market by taxation in Europe.
  • Former U.S. presidential candidate Bill de Blasio proposed introducing an automation tax in the U.S. during his campaign. His aim was to target only the investments that increase unemployment by creating a new federal agency that would assess the automation process and its effects on workers.
  • Labor taxes are a crucial part of government revenue compared to capital taxes. In the UK, income taxes make up 25% of government’s tax revenue, in the S., payroll taxes account for more than one third of federal tax revenue and in combination with income taxes, they amount to more than 80% of government revenue.
  • The Ex’tax Project is a plan to shift the burden of taxation from labor to resources. Even though its focus differs from that of AI taxes, both proposals signal increasing attention on possible tax reforms in the coming years.

Connecting the dots

As French intellectual André Gorz stated in 1988, “The abolition of work is a process already underway … The manner in which [it] is to be managed … constitutes the central political issue of the coming decades.” In fact, automation and job displacement have been commonplace since the start of the Industrial Revolution and, so far, mass unemployment has never been the result (although one might question whether displaced workers are actually better off in their new jobs). Yet, this time around, with AI and robotization threatening an unprecedented number of jobs, concerns foster a debate on possible actions to shield our economies from the dangers of automation. Among the proposed solutions, the introduction of automation taxes stands out.Currently, most countries incentivize automationia depreciations and tax deductions on capital investments. The idea behind such incentives is that governments should stimulate innovation and productivity to support GDP growth. AI-tax opponents contend that automation increases productivity and that taxing innovation will slow down economic growth. Interestingly, one of the main arguments for taxing automation stems from this exact concern for ensuring a thriving economy. Professor Acemoglu argues that automation does not necessarily favor efficient investments in productivity. Indeed, the structure of capital taxation favors automation even when it is not the most efficient tool to achieve growth. Implementing a tax on automation would make investments in AI more efficient, by eliminating their distorted comparative advantage with respect to labor investments.Another economic justification for implementing automation taxes is the imbalanced composition of government tax revenues. AI-tax enthusiasts worry that automation will create massive unemployment and that payroll and employment taxes will be lost as sources of government revenue. To make matters worse, public expenditures for unemployment schemes, social security and re-training of displaced workers will grow accordingly. On the other side, AI-tax opponents claim that taxing automation would only lead to increased outsourcing of labor to developing countries and hence to decreasing job security and ultimately a further reduction of tax revenue and increase of aforementioned expenditures. According to them, we should focus instead on alternative measures such as wealth taxation, in-firm re-training of workers and new forms of labor compensation (e.g. universal basic income and minimum wages).Most of today’s proposals to tax automation are quite moderate and seek a balance between protecting employment and stimulating economic growth. These are mostly based on indirect taxation, i.e. on reductions of current incentives for investments in automation. For instance, Professors Abbott and Bogenschneider suggest that firms with high levels of worker automation should have less tax depreciation on capital investments. Similarly, a recent study by the University of Oxford and the Singapore Management University proposes cutting the depreciations on investments depending on their effect on employment. They contend that some automation processes substitute employment while others complement it and that only the former should be taxed.Other proposals are more radical. For example, in The Software Society, William Meisel asserts that businesses that replace human labor with automation should be asked to continue to pay payroll taxes for displaced workers even after they stop working. Critics of such taxes point to the fact that it is hard and extremely costly to determine the targets of automation taxes, and we should thus find simpler solutions. Besides concerns over the practicalities of automation taxes, there are disagreements on the rationales for implementing them. Nonetheless, policy proposals on how to regulate the effects of automation share common goals that suggest a common directionality towards more focus on redistribution and job security and new sources of government revenue.

Implications

  • The debate on automation taxes might help tackle issues of economic inequality. Indeed, both a tax on capital investments and a tax on wealth would help reduce the rising economic inequality. On the one hand, taxing capital would make investments in labor more attractive, improving the comparative position of workers. On the other hand, taxing wealth would directly reduce the accumulation of capital at the top deciles, smoothing out inequality.
  • Taxing automation would not be enough to alleviate the damages of unemployment. Even though it might slow the pace of displacement, its positive impact depends on efficient use of the tax revenue governments would get from it. Indeed, automation-taxes should be complemented by other public policies to ensure that the revenues are used to improve the conditions of the unemployed and at-risk workers.
  • Firms could be held responsible for job displacement. They may be asked to provide in-firm re-training for workers at-risk of displacement. This has some potential benefits. Firms could train their workers specifically in the skills they need. Additionally, this would (re-)establish a long-term relationship between workers and employers and provide more stability for workers. This is already happening in big firms and smaller firms might also come to apply this strategy via state-incentives.

Series 'AI Metaphors'

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1. The tool
Category: the object
Humans shape tools.

We make them part of our body while we melt their essence with our intentions. They require some finesse to use but they never fool us or trick us. Humans use tools, tools never use humans.

We are the masters determining their course, integrating them gracefully into the minutiae of our everyday lives. Immovable and unyielding, they remain reliant on our guidance, devoid of desire and intent, they remain exactly where we leave them, their functionality unchanging over time.

We retain the ultimate authority, able to discard them at will or, in today's context, simply power them down. Though they may occasionally foster irritation, largely they stand steadfast, loyal allies in our daily toils.

Thus we place our faith in tools, acknowledging that they are mere reflections of our own capabilities. In them, there is no entity to venerate or fault but ourselves, for they are but inert extensions of our own being, inanimate and steadfast, awaiting our command.
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2. The machine
Category: the object
Unlike a mere tool, the machine does not need the guidance of our hand, operating autonomously through its intricate network of gears and wheels. It achieves feats of motion that surpass the wildest human imaginations, harboring a power reminiscent of a cavalry of horses. Though it demands maintenance to replace broken parts and fix malfunctions, it mostly acts independently, allowing us to retreat and become mere observers to its diligent performance. We interact with it through buttons and handles, guiding its operations with minor adjustments and feedback as it works tirelessly. Embodying relentless purpose, laboring in a cycle of infinite repetition, the machine is a testament to human ingenuity manifested in metal and motion.
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3. The robot
Category: the object
There it stands, propelled by artificial limbs, boasting a torso, a pair of arms, and a lustrous metallic head. It approaches with a deliberate pace, the LED bulbs that mimic eyes fixating on me, inquiring gently if there lies any task within its capacity that it may undertake on my behalf. Whether to rid my living space of dust or to fetch me a chilled beverage, this never complaining attendant stands ready, devoid of grievances and ever-willing to assist. Its presence offers a reservoir of possibilities; a font of information to quell my curiosities, a silent companion in moments of solitude, embodying a spectrum of roles — confidant, servant, companion, and perhaps even a paramour. The modern robot, it seems, transcends categorizations, embracing a myriad of identities in its service to the contemporary individual.
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4. Intelligence
Category: the object
We sit together in a quiet interrogation room. My questions, varied and abundant, flow ceaselessly, weaving from abstract math problems to concrete realities of daily life, a labyrinthine inquiry designed to outsmart the ‘thing’ before me. Yet, with each probe, it responds with humanlike insight, echoing empathy and kindred spirit in its words. As the dialogue deepens, my approach softens, reverence replacing casual engagement as I ponder the appropriate pronoun for this ‘entity’ that seems to transcend its mechanical origin. It is then, in this delicate interplay of exchanging words, that an unprecedented connection takes root that stirs an intense doubt on my side, am I truly having a dia-logos? Do I encounter intelligence in front of me?
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5. The medium
Category: the object
When we cross a landscape by train and look outside, our gaze involuntarily sweeps across the scenery, unable to anchor on any fixed point. Our expression looks dull, and we might appear glassy-eyed, as if our eyes have lost their function. Time passes by. Then our attention diverts to the mobile in hand, and suddenly our eyes light up, energized by the visual cues of short videos, while our thumbs navigate us through the stream of content. The daze transforms, bringing a heady rush of excitement with every swipe, pulling us from a state of meditative trance to a state of eager consumption. But this flow is pierced by the sudden ring of a call, snapping us again to a different kind of focus. We plug in our earbuds, intermittently shutting our eyes, as we withdraw further from the immediate physical space, venturing into a digital auditory world. Moments pass in immersed conversation before we resurface, hanging up and rediscovering the room we've left behind. In this cycle of transitory focus, it is evident that the medium, indeed, is the message.
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6. The artisan
Category: the human
The razor-sharp knife rests effortlessly in one hand, while the other orchestrates with poised assurance, steering clear of the unforgiving edge. The chef moves with liquid grace, with fluid and swift movements the ingredients yield to his expertise. Each gesture flows into the next, guided by intuition honed through countless repetitions. He knows what is necessary, how the ingredients will respond to his hand and which path to follow, but the process is never exactly the same, no dish is ever truly identical. While his technique is impeccable, minute variation and the pursuit of perfection are always in play. Here, in the subtle play of steel and flesh, a master chef crafts not just a dish, but art. We're witnessing an artisan at work.
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