Daniel Dalton

Tax and Spend on Robots

Workers shouldn’t be afraid of AI - if only we liberate the tax system

It has become fashionable to believe that automation, the process by which some human jobs are replaced by machines, will mean that workers, in particular low-skilled workers, will be unable to find employment, that the gap between rich and poor will grow as a result and that eventually we will descend into a soulless society which has a chasm at its heart.

But in truth these fears are as unfounded today as they have been in the past. For the last two hundred years, every time technology has advanced, people have fretted that they will be left powerless in the face technological advancement. The English textile workers in the 1800s - known as the Luddites - are the most famous example of this but panic has erupted periodically ever since, even though we have at no stage seen fewer jobs in the economy. Rather, technological breakthrough has led to more employment, greater productivity and enhanced living standards.

There has been disruption. Existing jobs have been replaced - and that is always traumatic - but on each occasion the time saved and productivity gained thanks to new machinery has opened up possibilities for humans to do new types of job, in new areas and new industries. When it comes to AI, there is nothing to suggest that this time things will be any different.

AI technologies, at least for the foreseeable future, will not be able to think for themselves or mimic human creativeness, emotions or reactions. As a result they will remain our servants. They will, however, move into jobs that are routine, predictable and normally done by humans and even some skilled jobs. However, just as was the case in previous industrial revolutions, AI will create many more jobs than it destroys. They will reduce the cost of entry into many industries, increasing competition and allowing room for new and innovative industries to spring up. The AI revolution is not fundamentally different in this sense to any previous industrial revolution.

It is not AI which presents the biggest threat to jobs but our own governments and particularly their approach to taxation. If an employer needs a job done and has the choice of hiring a human or using a machine to do it, the main consideration will be cost. Machines are expensive but they are getting cheaper by the day. Humans on the other hand are not getting cheaper, mainly because of the taxes that governments charge companies to hire them.

To put the equivalent of €100 in a worker’s pocket, a company will have to pay substantially more. In addition to income tax levied on the employee, the company also pays an employer contribution. European countries are the worst offenders in this respect. In some countries this can amount to more than double the cost of employing someone. In Belgium, in 2013, it cost a company €252 to put €100 in a worker’s pocket. Belgium has one of the highest tax wedges in the Western world, but many other European countries are not far behind. In France, the cost is €230, in Germany €213. For the UK, the cost is still substantial, at €157.

The most effective approach to dealing with the challenge of automation is to reduce the cost of hiring human workers.

These taxes make human workers uncompetitive against machines and will worsen the potential disruption caused by automation. As governments will lose this tax revenue anyway if the direst predictions about job losses are proven to be accurate, it may not prove to be a sustainable long-term source of government funding. Governments would be better advised to preempt this threat and drastically reduce, if not eliminate, taxation on income and on hiring workers, particularly at lower income levels. To compensate, governments can look to focus more on consumption taxes and on capital. The most effective approach to dealing with the challenge of automation is to reduce the cost of hiring human workers, while ensuring more of the money a company pays to employ a worker actually gets to the employee.

The future of work in a digital world will not just be about full time work. The advent of the sharing economy, video conferencing, and the smartphone have shown that in future people will have to be more flexible, will move jobs more frequently or work for more than one company at the same time and perhaps maintain multiple sources of income. They are also likely to work at different times of the day. The internet has effectively enabled everyone to become an independent contractor. The future development of AI suggests this trend will only increase, and substantially in the years to come. In the UK, self-employed workers already made up over 15% of the workforce in 2017.

This has many benefits. It increases autonomy and independence as well as an individual’s earning potential. It also means that it will be easier for many more people to join the workforce as the current nature of work - based around the nine to five, five days a week - doesn’t work for many people, including those with young children.

However, governments need to recognise this and use the tax system to preempt these changes. This should focus firstly on ensuring that tax systems are better suited and tailored towards the self-employed and those with multiple sources of income. The UK made a positive step in this direction in 2017 when it introduced a £1000 tax free threshold for income generated from the sharing economy. However, many countries, the UK included, penalise the self-employed and those with second jobs through the tax system. This is based on the outdated but still widely followed doctrine that full time employment with a single employer is what matters, as it is easily identifiable, stable and therefore easily taxed.

The future world of work will not be as simple, jobs will be fluid, people will use their skills in a variety of ways to earn a variety of incomes at the same time. This will happen regardless of what governments do, so they should encourage and promote it, and create effective systems to facilitate it.

AI will enhance the world of work, it will make us far more productive and will open up new industries and new jobs in areas that we haven’t even thought of yet. Automation will replace many low skilled and routine or predictable jobs, but it will not challenge the many jobs which require human qualities. By reducing the need for us to spend time on routine tasks, it will increase productivity and allow for the creation of new industries. Ultimately, this will increase, not reduce employment.

But to ensure that humans can compete with machines, governments will have to have to be nimble in taxation. If they do this, the AI revolution should allow us all the potential to be more productive, more flexible and earn more money - whilst giving us more free time to enjoy the fruits of our labour. Fear is not a rational response to a future such as this - we should be open to it, hopeful and excited.

Rana Mitter

Get real about China