Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Bill Gates wants Robots to Pay Income Tax

The world’s richest man wants robots to pay income tax – if they take humans’ jobs.

Bill Gates endorsed the idea of a “robot tax;” on automations that replace human workers, in video interview with Quartz editor in chief Kevin Delaney.

“If a human worker does $50,000 of work in a factory, that income is taxed,” Gates said. “If a robot comes in to do the same thing, you’d think we’d tax the robot at a similar level.”

The Microsoft Founder did not say how the tax would work but he did put a spotlight on one of greatest problems created by technological unemployment. Much of the tax money that funds governments throughout the world is generated by taxes on wages and salaries.

How will We Pay for Government?

In the United States Social Security and Medicare funded by the FICA (Federal Insurance Contributions) tax on incomes under $127,000 a year. Therefore most of the money that funds those programs comes from wages.

What happens when machines replace large numbers of people? Who will pay the tax?

The Social Security Trust Fund is projected to run out of money by 2034 with our present level of unemployment, CNN Money reported. Another Social Security Fund that finances disability payments might be tapped out by 2023. Under the present status quo, Medicare will be out of money by 2028.

We cannot pay for those programs with the workforce we have now. What happens when technological unemployment puts 15% or 20% of the population out of work?

Yes, the new economy creates a lot of jobs; many of which are more emotionally fulfilling than the old factory work, but many of those jobs don’t pay as much as manufacturing did. Today’s economy is generating lots of work for freelance writers, Uber drivers, dog walkers, nurse’s aides, Starbucks baristas and hairstylist but few welding jobs.

Why Robots will have to be taxed

We will still have to pay for government which makes the prospect of a tax on robots and other job-killing technology attractive. It would certainly be better than the current U.S. tax code which rewards companies that embrace technological unemployment.

When a manufacturer replaces workers with a robot it can write the price of the robot off on its income tax. Since the US has a 35% corporate income tax rate that can be a major savings. More importantly, it can also write the cost of operating the robot and the depreciation as it loses value over time off on taxes as well.

If the manufacturer kept the human workers; it would have to pay taxes for their FICA, their unemployment insurance and if it employed more than 50 people, pay for their health insurance under Obamacare. Replace the people with machines, eliminate those costs and receive a nice tax write off. Get the picture, the current tax code effectively rewards the use of job-killing tech.

What is a Robot?

Gates is not alone in suggesting a robot tax, such a levy is actually part of the platform of Benoit Hamon the presidential candidate for France’s Socialist Party. Yet the suggestion raises a host of problems and questions, the biggest of which is: what is a robot?

Would the robot tax also cover “hard automation” in which machines designed for a specific task replace workers? Walmart (NYSE: WMT) recently replaced 7,000 people with cash-counting machines – a technology invented in 1957. Or what about digitalization, Goldman Sachs (NYSE: GS) replaced 600 stock traders with trading robots – bundles of software. The investment bank is now slowly replacing loan underwriters and processors with algorithms.

Most of the technological unemployment in the United States today is caused by digitalization and hard automation not robots. Would the robot tax cover Goldman Sachs’ trading bots, or Walmart’s cash-counting machines? A potential problem is that business owners will simply try to label robots something else; a robot welder can become an “automatic-welding machine” for example.

What about technologies that replace contractors or commission workers? This is already occurring in insurance where websites are driving the neighborhood insurance agent of business. It’s also happening in investment where the local broker is being replaced by websites. Should we be taxing those entities too?

The Problem of Artificial Intelligence

Beyond these examples there is the looming problem of artificial intelligence which is already stealing some jobs. The Libratus AI at Pittsburgh’s Carnegie Mellon University now plays a better game of poker than top pros. What happens when Libratus starts trading stocks or commodities or writing loans and insurance policies?

An even greater problem is the AI-run hedge fund Numerai; which is capable of issuing its own cryptocurrency. If it works as advertised Numerai will generate an income and it is capable of taking over some functions of government – issuing currency.

Will Numerai or Libratus have to start paying taxes, if they start generating income on their own? That raises the interesting problem of AI rights – will Libratus or Numerai also demand the vote? Remember the American Revolution was fought because of “taxation without representation.” What about political involvement would some future President attempt to appoint Numerai; or its successor, Secretary of the Treasury?

How will the Money be Spent?

The biggest debate over the robot tax will be how to spend the money it would raise.

Should we spend the proceeds on existing programs like Social Security, job training and education for workers, unemployment insurance or some sort of basic income scheme? What about the basic needs of a nation for example police, fire protection, schools, national defense, roads, etc. how will those be funded?

Some thinkers including Hamon and Elon Musk think basic income is inevitable. Their thesis is that the economy will not be able to create jobs for everybody, so a new means of distributing wealth will be needed.

The coming Battle Over the Robot Tax

What about all the money that local governments lose to technological unemployment. For example when unemployed factory workers stop paying the sales or property taxes. Will the robots pay for the schools, the police, the fire department, the public library and road maintenance?

My prediction is that the first robot taxes in the United States will be passed by local governments desperate for revenue. The concept and the battle will then spread to Congress and state legislatures where corporations will try to block robot taxes.

When the robot tax comes there will be massive and vicious battles over how to spend the proceeds. Particularly if it starts generates large amounts of revenue for government.

One thing is certain some sort of robot tax is probably inevitable. How the money will be spent is just of many problems inherent to the proposal.