“Taxing Robots and Some Good Tax Policy”
Thomson Reuters 10/17/17 David Brunori
This is an opinion piece. The views expressed in this article are solely the views of Mr. Brunori and do not represent the views of Thomson Reuters. The contents of this article should not be construed, and should not be relied upon, as legal or tax advice in any particular circumstance or fact situation.
David Brunori is a regular contributor to Checkpoint State & Local Tax News. David is a partner at Quarles & Brady and a professor at The George Washington University. He can be reached at [email protected].
There has been a lot of talk lately of taxing robots. Bill Gates popularized the notion this past year when he called for a tax on robots. But there have been proposals in the European Parliament, South Korea, and, yes, in San Francisco. Gates' rationale, shared by many proponents, is simple. If a human being was earning $50,000 a year, the government would collect tax on that income. If the human being had the misfortune of being replaced by a machine, the government would not collect the tax on income anymore. Plus, the poor worker is out of a job.
We have been thinking of replacing humans with machines forever. Better spouses (Stepford Wives), better police (RoboCop), better soldiers (Universal Soldier), and even better Starfleet officers (Data) have long captured our imagination. I always thought it would be great to have one of the robots from the Will Smith classic I Robot, where the machines are basically servants. Heaven is where your robot brings beer home and then mows your lawn.
But I don't think Gates was talking about those kinds of robots. He is concerned with the loss of wages and tax revenue when people are replaced by machines. It is curious that Gates and others would start a conversation about this issue now. Workers around the world have been replaced with technology for over a century. One need only look at modern steel and auto plants to know that is true. What may have spurred the current discussion is increasing evidence that higher minimum wage laws have led fast food restaurants to replace workers with self ordering kiosks. Maybe if we impose a tax on the machines taking our hamburger orders, the restaurants will let people do that job again.
There are many who believe that automation exacerbates income inequality. The wages of people who can easily be replaced by machines fall. But wages of those who can't easily be replaced - hopefully tax opinion writers – increase. Thus, supporters of taxing machines that replace humans believe that there is a societal cost of people displacement. And the tax on machines would replace the lost direct revenue and be used for training and education of the displaced workers. But the march of progress is inevitable. No tax will significantly change that. No matter how hard we wish it weren't true, in 10 years driverless ridesharing cars will replace every human taxi driver. Tax what you like but the Jetsons are coming.
But let's say we want to tax the robots and give the money to the displaced workers. I have had three legislative staffers and one NGO lobbyist call me to ask how a robot tax might be implemented. My answer is it can't be. There is never going to be a direct tax on robots. First, we are not really talking about robots in the movie sense, but automated machines that presumably replace humans. How exactly would we define these taxable machines? Would we use some definition of “mechanical” or of “programmatical?” Do we define taxable machines by their displacement of workers? If that were the case, aren't all machines subject to tax? Doesn't virtually every machine reduce labor hours? Isn't that the point of a machine? The robotic arms bolting cars together replaced thousands of auto workers. ATM machines replaced thousands of bank tellers. Autonomous trucks are replacing truck drivers. Email capabilities have essentially ended the need for people to deliver documents. Everything or nothing would be taxable.
But even if we could define the base, what is the tax? I have heard several less than sound ideas. We could impose a property tax on the machine. But imposing personal property taxes on business machinery is an idea almost universally criticized by public finance experts. We could have an excise tax tied to the number of employees you are shedding, say $1,000 per employee. But such a tax would be unfair to small businesses. A variation of that would be to make the machine owners pay the equivalent of the lost payroll taxes. I am not sure how we could ever measure the number of employees replaced by a particular machine. Yet another idea is to impose a tax based on the ratio of revenue to employees. But such ratios are not always influenced by machines. There is simply no good way to impose a direct tax.
In South Korea, there is a proposal to reduce tax incentives commensurate with reductions in employment from automation. But, in the United States, at least at the state level, many incentive programs are already tied to the number of jobs created. Companies “employing” lots of robots but few humans are already unlikely to get much in terms of incentives.
True story: I had a legislator actually ask me how they would get the robot to pay taxes. He said he didn't understand how that was possible. Not understand? Indeed. Remember robots don't pay taxes, people pay taxes. In the Terminator movies, the machines decided they would destroy mankind for no apparent reason. Just think of their fury if they had to face an MTC audit.
Here is some good news
By the time you read this, the Cook County Illinois soda tax will be repealed. The tax was the subject of both litigation and intense political opposition. Excise taxes should be imposed with great caution and only to pay for externalities – societal costs not born by the market. Some people want to tax soda to discourage consumption. Some want to tax soda to pay for public services unrelated to soda (teachers, for example). Both are unsound from a policy perspective.
A good idea
I believe localism is a normative good. Local governments are more efficient and democratically responsive than more centralized governments. But that efficiency is dependent on political and financial autonomy. Some states, like Wyoming, don't give their local jurisdictions much autonomy.
Local governments in Wyoming are lobbying for greater taxing authority. The goal, according to the Wyoming Association of Municipalities, is greater self reliance. Local governments are at the mercy of the legislature on many money matters. But the state budgets have been rocked by years of declining natural resource prices. The cities want the ability to levy sales taxes. The counties want fewer restrictions on their sales tax authority. And all local governments want the state to increase its sales tax rate from 4% to 5%. I am ambivalent about the state tax increase. But allowing local governments more control over their finances is a good idea.
And another good idea
Missouri Revenue Director Joel Walters is taking a major role in the effort to reform the state's tax system. Walters, who took the helm of the Department of Revenue, is particularly well suited to lead a reform effort. He has a lot of practical tax experience when it comes to how taxes affect business. Various press reports say that Walters will focus on the state's income taxes. That is an eminently good idea. Of the 41 states that tax personal income, few rely on it more than Missouri. About 70% of state tax revenue is raised from the personal income tax. That means the state is either not taxing sales enough or it's taxing personal income too much. And despite its heavy reliance on the tax, the state offers huge numbers of credits and incentives.
Early this year, the governor's “Committee on Simple, Fair and Low Taxes” recommended tightening the credit system. The committee had considered recommending repeal of the corporate income tax – a very good idea. But, its plan was to replace the corporate tax with a gross receipts tax. As readers know well, the gross receipts tax is just about the worst way to raise revenue. In any event, all state tax systems need reform. Luckily, the citizens of Missouri have leaders who understand this.
Last week I asked who was the first executive director of the Multistate Tax Commission? The answer, as many knew, is Gene Corrigan. Today's question: Who was the first executive director of COST? Be first to email me and win an autographed copy of State Tax Policy.
Originally published in Thomson Reuters and is reproduced here with permission, October 17, 2017