Proposed Robot Tax: A Potential Threat to Tech Innovation and Economic Growth

Why a proposed 'robot tax' could kill tech innovation, impede growth and complicate tax system

On the face of it, a robot tax sounds appealing. This perspective suggests that as robots take over human jobs, a tax could mitigate job losses, provide funding for retraining programmes and support social safety nets, thus preventing the widening of the wealth gap and inequalities. But won't job loss due to AI be a transitory phenomenon in the long run?

Why a proposed 'robot tax' could kill tech innovation, impede growth and complicate tax system

It's often said that governments have a talent for taxing things. But the real jaw-dropper is when economists start cheering for more taxes. A group of economists met Nirmala Sitharaman recently for pre-budget consultations. What popped up on the agenda? The impact of AI on employment, with a proposal for a 'robot tax' to reskill displaced workers. On the face of it, the idea sounds appealing. At its core, it's about philosophical questions about the nature of work, economic justice and societal progress. Proponents argue that a robot tax could ensure a fair distribution of wealth generated by automation, aligning with the 'difference principle' where social and economic inequalities are arranged to benefit the disadvantaged members of society. This perspective suggests that as robots take over human jobs, a tax could mitigate job losses, provide funding for retraining programmes and support social safety nets, thus preventing the widening of the wealth gap and exacerbation of social inequalities. A 2020 study, 'Robots and Jobs: Evidence from US Labor Markets', by Daron Acemoglu and Pascual Restrepo shows that in the US, one more robot per thousand workers reduces the employment-to-population ratio by 0.2 percentage points and wages by 0.42%. But won't job loss due to AI be a transitory phenomenon in the long run? This is where one should invoke John Maynard Keynes. In his 1931 essay, 'Economic Possibilities for our Grandchildren', he asserted that technological unemployment - the loss of jobs caused by technological change - would be a temporary phase followed by a period of prosperity. While technological unemployment can lead to increased productivity and economic growth in the long term, it poses significant challenges in the short term, including income inequality. However, there are several issues with introducing a robot tax. Hampers growth It penalises innovation and entrepreneurship unjustly, stifling growth and infringing upon market evolution. Robert Nozick's entitlement theory argues that wealth generated through free exchange and innovation should not be redistributed coercively, as this violates principles of justice in acquisition and transfer. Empirical research supports this, showing that robots, while displacing some workers, contribute to productivity growth and economic expansion, creating new opportunities. Taxing robots distorts investment decisions, causing firms to favour traditional physical capital over automation, leading to higher costs for using robots. Initially, this boosts worker productivity, wages and aggregate income, temporarily elevating economic output. However, the long-term suppression of automation investment hinders sustained growth, preventing the economy from leveraging automation for continuous progress. Thus, while a robot tax may improve short-term conditions, it fails to create a foundation for perpetual growth. Bars investment Taxing robots or AI differently from other capital assets will distort a business' production decisions. Peter Diamond and James Mirrlees, in their 1971 paper, 'Optimal Taxation and Public Production', argue that taxes should be structured to keep the marginal effective tax rate (METR) consistent across all capital investments, even in less-than-ideal situations. This approach prevents inefficiencies and supports balanced growth. Empirical evidence from OECD and IMF shows that a uniform METR across sectors promotes economic efficiency and stability. Such distortions cause businesses to underinvest in crucial technologies. It can lead to capital flight, where firms move their automation investments to countries without such a tax. A tangled web A recent IMF working paper, 'Broadening the Gains from Generative AI: The Role of Fiscal Policies', highlights the challenge of identifying technologies that might replace human labour and integrating this into tax policy. Codifying these distinctions is difficult because tax systems typically classify capital assets by lifespan and other characteristics, not by their impact on job tasks. This ambiguity complicates defining a specific technology tax base. Additionally, varying tax rates for similar assets can lead to the relabelling of assets to evade taxes. Thus, robot tax will lead to complications in the tax system, increased litigation and eventually higher costs - even for the government. So, our robotic overlords may need tax advisers to navigate this tangled web. Focus on reskilling, not robots While the end goal is to invest in skilling the workforce, achieving this should not involve stifling innovation through additional taxation. Utilitarian thinkers argue that the efficiency gains from automation should be harnessed, not hindered, and that the focus should be on maximising societal welfare through education and reskilling initiatives. Empirical research supports this, demonstrating that automation can create new job opportunities and boost productivity if the workforce is adaptable. Governments should focus on enhancing existing tax mechanisms and improving tax efficiency as alternatives to a robot tax. One thing is clear as we consider the future of robot taxes. If robots ever gain sentience, they'd probably form a union to protest being taxed. Imagine the headlines: 'Robots Demand Representation, Claim Unfair Taxation'. Amid all this, we could see the rise of the first robotic tax advisers - machines designed to help other machines navigate the labyrinth of tax codes. So, while economists may dream up ways to tax our metallic friends, perhaps it's best to remember that innovation thrives when too many levies do not weigh it down.