Why we shouldn’t tax robots

BY Ian Stewart   /  17 September 2018

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at:

Economists of all stripes would agree that investment and the application of technology drive economic activity. For decades governments around the world have made strenuous efforts to encourage investment and new technologies. Last year this orthodoxy came under fire from an unexpected source.

In an interview with Quartz Bill Gates made the case for taxing robots at the same rate as human workers: “Right now, the human worker who does, say, $50,000 worth of work in a factory, that income is taxed and you get income tax, social security tax, all those things. If a robot comes in to do the same thing, you’d think that we’d tax the robot at a similar level.”

This is a radical idea, the more so coming from someone whose fabulous wealth came from Windows, a technology which transformed the nature of work. So, what is the rationale for introducing a robot tax now?

If the rate of technological change is increasing it seems likely that the rate of job destruction is also likely to rise. Machine learning, super-computers, autonomous vehicles and robots have the capacity to destroy or remake whole sectors. To its supporters a robot tax could slow the pace of traumatic change and fill the gap in government revenues left by rising unemployment. The revenues could be used to support the incomes of displaced workers and retrain them.

The machines of the future will do what the machines of the past did – displacing people, raising efficiency and boosting growth. But some fear that the coming wave of change will destroy far more jobs and further widen the gap between the incomes of skilled and unskilled workers.

Mr. Gates’ proposal for a robot tax has been endorsed by the Nobel prize-winning economist, Robert Schiller. The European Parliament has discussed, though rejected, the idea of such a tax. But most economists, this one included, are sceptical. Here’s why.

The financial crisis has been followed by a period of slower growth in GDP and productivity across the industrialised world. Raising productivity is arguably the greatest problem facing western policymakers. Yet a robot tax would penalise exactly the sort of high tech investment that is needed to reboot productivity growth. It would make the West’s productivity problem worse.

The advocates of a robot tax seem to believe that businesses are likely to spend too little on hiring and too much on machines. But if anything, the reverse seems to be the case. There’s been no investment boom in the West and many corporates have prioritised cost control, share buybacks and paying dividends over investment. Employment, by contrast, has boomed. The defining feature of the US, Germany and UK economies in recent years has been the rapid pace of job creation and collapsing unemployment rates.

The UK’s productivity performance in recent years has been especially awful. My hunch is that the UK has too little investment and too many low paid, low productivity jobs. The UK may be a world beater on job creation, but it lags behind other industrialised countries on investment spending and the deployment of robots.

The risk is that a robot tax would slow innovation and support the creation of low productivity, low-skilled jobs. It’s hardly an inspiring vision of the future.

There is also a definitional problem. Computer components are used in innumerable machines, from jet engines to dishwashers. Defining when a machine become a robot won’t be easy. Just remember the legal battle to settle the vexed question of whether, for the purposes of VAT, a Jaffa Cake is a cake or a biscuit. Moreover, many labour-displacing innovations, such as off-shoring or centralising functions, are low or no-tech. If robots are to be taxed for destroying jobs, shouldn’t these be too?

My guess is that for these sorts of reasons we’re unlikely to see a race to impose robot taxes.

Yet the debate about robot taxes forms part of a wider discussion about US incomes. The last 40 or so years have seen a worrying stagnation in the incomes of lower skilled, less educated American workers.

Technology has played a role, but so too has the decline of manufacturing, globalisation and a growing wage premium to skills and knowledge. A robot tax may not be the solution, but its advocates seeks to address real problems. The fact that America, the world’s richest economy, has been unable to spread the gains of growth to lower skilled workers, raises profound questions. It’s a subject to which we will return later this year.