Assessing the Feasibility of Taxing Robots

What is the issue?

The rise in automation with increase in robots is likely to shrink the government’s tax revenue.
This has raised the need for assessing the implications and feasibility of taxing robots.

What are the recent proposals?

Microsoft co-founder Bill Gates proposed the idea of imposing a tax on robots a couple of years ago.
The idea was widely opposed by many.
In 2017, a draft motion came up in the European Parliament, which recommended considering a tax on the owners of robots.
The tax was to fund retraining programmes for workers displaced by the machines and to increase the finances of their social security system.
But Europe has rejected the idea, and the draft motion was defeated.
South Korea, the most robotised country in the world, instituted a robot tax of sorts in 2018.
It reduced the tax deduction offered on business investments in automation.

Why is taxing robots crucial now?

As per estimations, half of today’s work activities could be automated by 2055.
If that happens, hundreds of billions of tax dollars that now come as income tax would be lost every year.
E.g. in the U.S., income taxes account for half of the $3 trillion collected every year by the Internal Revenue Service
Jobs that are “most susceptible to automation” in the U.S. account for 51% of the activities in the economy and $2.7 trillion worth of wages.
So an inevitable objective for taxing robots is that the governments need money.
Besides this, the consequence of automation will place more demands on government services.
The U.S. will probably need more money to retrain workers ousted from their jobs by automation and place them elsewhere.
Also, millions of workers would be displaced to the bottom end of the service economy, where wages are low and robots are scarce.
As a result of this, welfare expenses of government would increase significantly.

To afford any kind of government services in the robot era, governments will have to find a new source to tax.

What are the shortfalls in current automation policy?

Subsidies - A lot of automation is not deployed to enhance economic productivity by firms.
It is instead done because automation is highly subsidised, encouraging many businesses to invest in it.
Subsidies thus induce firms to go for capital investment in the place of paying for the labour employed.
This is going on despite the disadvantage of the social cost involved in labour replacement i.e. expenses to the society as a whole.
Taxes - The vast majority of government tax revenues are now derived from labour income.
Payroll tax requirements necessitate employers to pay a percentage of the salaries they pay for their employees.
So firms avoid taxes by eliminating employees and increasingly going for automation.
Productivity - In effect, subsidies and taxes just make capital investment in automation attractive only financially.
So firms go for automation irrespective of whether there is a real need for it or not.
So the anomaly is that this kind of spending on automation does not transform into any significant improvement in the economy's productivity level.

How will taxing robots help address this?

Taxing robots would make the employers opt for automation only when there is a logical need in terms of productivity enhancement.
So in effect, taxing would not hurt economic growth, but would only rationalise investments and thus improve economic efficiency.
It would ensure a level playing field between automation and labour use.
So if properly constructed, a tax on automation may not be as destructive as it sounds.

Source: The Hindu