Policy Economics Dec 1, 2017

How a Robot Tax” Could Reduce Income Inequality

This tax can also be part of a plan to improve the econ­o­my as a whole.

Michael Meier

Based on the research of

Joao Guerreiro

Sergio Rebelo

Pedro Teles

Ear­li­er this year, Microsoft founder Bill Gates threw his sup­port behind a con­tro­ver­sial pol­i­cy: a robot tax. As work­ers in many sec­tors are replaced by machines, the gov­ern­ment is los­ing huge amounts of income tax rev­enue. Tax­ing the com­pa­nies that employ robots, Gates rea­soned, could help slow the pace of automa­tion, and the rev­enue could be used to retrain employees.

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Ser­gio Rebe­lo, a finance pro­fes­sor at the Kel­logg School, had seri­ous doubts when he heard Gates’s argu­ment. For decades, econ­o­mists have known that tax­ing so-called inter­me­di­ate goods” — goods that are used to make oth­er goods, like the bricks used to build a house, or the robots used to man­u­fac­ture cars — can make it hard­er for sup­pli­ers to cre­ate and sell their products. 

When you do that, you reduce the lev­el of pro­duc­tion in the econ­o­my,” Rebe­lo says.

Nonethe­less, Rebe­lo thought the robot tax made for a com­pelling research top­ic. So he teamed up with Joao Guer­reiro, a grad­u­ate stu­dent at North­west­ern, and Pedro Teles of Uni­ver­si­dade Católi­ca Portuguesa.

They fig­ured their study would con­firm what pri­or research sug­gest­ed: that a robot tax cre­at­ed more prob­lems than it solved.

Maybe there would not even be a paper to write,” Rebe­lo says.

So it was quite a sur­prise when they found they were wrong — that a robot tax could be part of a pol­i­cy agen­da that staved off income inequal­i­ty and improved the econ­o­my overall. 

Because I can be replaced by a machine, my oppor­tu­ni­ties are worse and worse.” 

In fact, the study sug­gests, if robots con­tin­ue dis­plac­ing peo­ple with­out any pol­i­cy inter­ven­tion, those dis­placed might suf­fer large decreas­es in income, cre­at­ing a poten­tial­ly large rise in income inequal­i­ty. At the same time, automa­tion pro­duces a large increase in total income.

This is not a fan­ci­ful sce­nario,” Rebe­lo warns. It’s already happening.” 

A Very, Very Tough Scenario”

Today, more and more work is being auto­mat­ed, with­out much of a safe­ty net for the peo­ple whose jobs evap­o­rate. The authors first want­ed to under­stand how the econ­o­my will con­tin­ue to evolve on its cur­rent path.

They imag­ined an econ­o­my in which half of the labor force was engaged in what econ­o­mists call rou­tine” work — any job con­sist­ing of pro­gram­ma­ble tasks that can be auto­mat­ed (such as work­ers on an assem­bly line, or at a call cen­ter where a script is fol­lowed). The oth­er half of the labor force did non­rou­tine work that can­not be auto­mat­ed (such as fire­fight­ers or scientists.)

The researchers used this mod­el to see how incomes of the two groups would change as machines grew ever cheaper.

The upshot: It’s a very, very tough sce­nario for rou­tine work­ers,” Rebe­lo says.

Many peo­ple assume that if automa­tion is allowed to con­tin­ue unchecked, then even­tu­al­ly machines will take over all of the rou­tine work in the econ­o­my. But the researchers found that rou­tine labor­ers will like­ly con­tin­ue work­ing — and their cir­cum­stances will get worse.

If I’m a rou­tine work­er, I’m going to have to put food on the table for my fam­i­ly,” Rebe­lo explains. So over time, as machines become cheap­er and more effi­cient, rou­tine work­ers will have no choice but to accept low­er and low­er wages so they can com­pete with the robots.

Because I can be replaced by a machine, my oppor­tu­ni­ties are worse and worse,” he says.

Mean­while, the oth­er half of the work­ers pros­per. Those who can­not be replaced by robots are able to use machines to their advan­tage, allow­ing them to work more effi­cient­ly, which increas­es their incomes. For exam­ple, a doc­tor using a robot to help com­plete surg­eries can treat more patients in a day than a robot-less doctor.

Thus, the gap between rich and poor stretch­es ever wider.

How­ev­er, the mod­el also reveals that under the present sys­tem, robots will nev­er entire­ly replace rou­tine human labor. Even­tu­al­ly, machines will reach a point where they can­not get any cheap­er, and wages for rou­tine work­ers will bot­tom out at the same lev­el. This sce­nario is prob­lem­at­ic not only for rou­tine labor­ers (who will have to work for peanuts), but also for non­rou­tine work­ers, since the over­all econ­o­my is pro­duc­ing less out­put than it would if every­thing rou­tine could be automated. 

Could a tax on robots pre­vent this dystopi­an future? 

Although the researchers’ mod­el is the­o­ret­i­cal, Rebe­lo says that, at least so far, it cap­tures trends under­way in the US. He points out that the only group whose medi­an wage has increased since 1979 is col­lege-edu­cat­ed work­ers, who are dis­pro­por­tion­ate­ly like­ly to do non­rou­tine work. Less-edu­cat­ed employ­ees, on the oth­er hand, have gen­er­al­ly seen their real wages decline. 

Test­ing the Robot Tax

Could a tax on robots pre­vent this dystopi­an future? The authors had their doubts.

The notion that tax­ing inter­me­di­ate goods should be avoid­ed comes from an icon­ic 1971 paper by Nobel lau­re­ates Peter Dia­mond and James Mir­rlees. The duo con­clud­ed that such a tax made the econ­o­my less effi­cient, which negat­ed any net ben­e­fits of the tax. Going in, Rebe­lo and coau­thors expect­ed that, from the per­spec­tive of max­i­miz­ing the over­all wel­fare of the econ­o­my, a tax on robots would be undesirable.

But when they added the tax into their mod­el, they found a sur­prise. We dis­cov­ered that under some cir­cum­stances, it actu­al­ly is opti­mal to tax robots,” Rebe­lo says.

Because robots can be sub­sti­tut­ed for rou­tine work­ers, any­thing that makes robots more expen­sive will also increase rou­tine work­ers’ wages. A tax on robots offers an indi­rect way to tax non­rou­tine work­ers and more equi­tably dis­trib­ute income in the economy.

That’s what changes com­plete­ly the pic­ture, and makes it opti­mal to use a robot tax,” Rebe­lo says.

South Korea, which recent­ly intro­duced tax penal­ties for com­pa­nies that auto­mate jobs, is now the first, and so far the only, coun­try to have imple­ment­ed such a tax.

Let­ting Every­one Reap the Benefits

Still, while slap­ping a tax on robots is bet­ter than the sta­tus quo, it can only do so much.

The robot tax would have to be extreme­ly high before it began to alle­vi­ate inequal­i­ty, Rebe­lo says, since the tax has to coun­ter­act the strong down­ward pres­sure of machines on rou­tine work­er wages. Such a high tax would deter non­rou­tine work­ers from using machines to increase their pro­duc­tiv­i­ty, dis­tort­ing over­all pro­duc­tion in the economy.

The researchers deter­mined that the best option in terms of increas­ing over­all wel­fare would be to sim­ply trans­fer income from non­rou­tine to rou­tine work­ers with­out dis­tort­ing pro­duc­tion and oth­er deci­sions. In this ide­al­ized sce­nario, it is not opti­mal to use robot taxes.

But this plan would be dif­fi­cult to imple­ment in the real world. The gov­ern­ment can­not eas­i­ly dis­tin­guish between rou­tine and non­rou­tine labor — and work­ers would have plen­ty of incen­tives to try to be cat­e­go­rized one way over the other.

Which is why the authors test­ed an alter­na­tive plan: a robot tax paired with a min­i­mum income pay­ment for every­one. They con­clud­ed that issu­ing all work­ers reg­u­lar gov­ern­ment pay­ments result­ed in an econ­o­my where every­one would ben­e­fit from automation. 

It is worth not­ing that, in this sce­nario, the robot tax would slow the pace of automa­tion, but not stop it entire­ly. Unlike in the sta­tus-quo pro­jec­tion, all rou­tine work­ers would even­tu­al­ly be replaced by robots. (Since rou­tine work­ers in this sce­nario now receive a min­i­mum income, they no longer need to work to sur­vive. So once automa­tion dri­ves their wages below a cer­tain lev­el, they will relin­quish their low-pay­ing jobs to the robots altogether.)

As Rebe­lo explains, the effi­cien­cy that robots pro­vide is good for the econ­o­my as a whole.

What tends to get for­got­ten is that, when you’re using robots, you’re increas­ing the pro­duc­tiv­i­ty of the econ­o­my,” he says. You want to get that high lev­el of effi­cien­cy — but then you want to redis­trib­ute the boun­ty that comes from tech­nol­o­gy so that every­one can reap the benefits.” 

Featured Faculty

Sergio Rebelo

Tokai Bank Distinguished Professor of International Finance

About the Writer

Jake J. Smith is a writer and radio producer in Chicago.

About the Research

Guerreiro, Joao, Sergio Rebelo, and Pedro Teles. 2017. “Should Robots Be Taxed?” Working paper.

Read the original

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