Robots are wealth creators and taxing them is illogical

March 7th, 2017

March 5, 2017

Governments can offset lost jobs by investing in education and retraining

I usually agree with Bill Gates on matters of public policy and admire his emphasis on the combined power of markets and technology. But I think he went seriously astray in a recent interview when he proposed, without apparent irony, a tax on robots to cushion worker dislocation and limit inequality.

The Microsoft co-founder is right about the gravity of the problem and need for action, but he is profoundly misguided in his proposed solution – and in ways that point up problems with the current public debate.

First, I cannot see any logic to singling out robots as job destroyers. What about kiosks that dispense aeroplane boarding passes? Word processing programmes that accelerate the production of documents? Mobile banking technologies? Autonomous vehicles? Vaccines that, by preventing disease, destroy jobs in medicine?

There are many kinds of innovation that allow the production of more or better output with less labour input. Why pick on robots? Does Mr Gates think anyone, let alone the US Congress, the Trump administration or a commission comprised of his fellow technocrats, can distinguish labour-saving activities from labour-enhancing ones?

Surely even if experts could draw such distinctions, the ability of the US Internal Revenue Service to administer them is in doubt.

Second, much innovative activity, even of a robot-like variety, involves producing better goods and services rather than simply extracting more output from the same input.

Autonomous vehicles, for example, will probably be safer than ones driven by humans. Robotics already help surgeons perform certain operations better than they can on their own. Online reservation systems are faster and more convenient than travel agents.

Moreover, because of emulation and competition, innovators capture only a small part of the benefit of their innovation. It follows that there is as much a case for subsidising as taxing types of capital that embody innovation.

Third, and perhaps most fundamentally, why tax in ways that reduce the size of the pie rather than ways that assure that the larger pie is well distributed? Imagine that 50 people can produce robots who will do the work of 100. A sufficiently high tax on robots would prevent them from being produced.

Surely it would be better for society to instead enjoy the extra output and establish suitable taxes and transfers to protect displaced workers?

It is hard to see why shrinking the pie, rather than enlarging it as much as possible and then redistributing, is the right way forward.

This last point has long been standard in international trade theory. Indeed, it is common to point out that opening a country up to international trade is just like giving it access to a technology for transforming one good into another. The argument, then, is that since one surely would not regard such a technical change as bad, neither is trade, and so protectionism is bad. Mr Gates’ robot tax risks essentially being protectionism against progress.

None of this is to minimise the problem of job destruction and rising inequality (although it is a major paradox that we seem to be seeing unprecedentedly rapid job destruction by machinery while at the same time observing extraordinarily low productivity growth).

Rather, it is to suggest that staving off progress is a poor strategy for helping less-fortunate workers. In addition to difficulties of definition and collateral costs, there is the further problem that in an open world, taxes on technology are likely to drive production offshore rather than create jobs at home.

There are many better approaches. Governments will, however, have to concern themselves with problems of structural joblessness. They likely will need to take a more explicit role in ensuring full employment than has been the practice in the US.

Among other things, this will mean major reforms of education and retraining systems, consideration of targeted wage subsidies for groups with particularly severe employment problems, major investments in infrastructure and, possibly, direct public employment programmes.

This will be a major debate that I suspect will define a large part of the politics of the industrial world over the next decade. Little is certain. But we will do better going forward than backward.

That means making America even greater, not great again. And it means embracing rather than rejecting technological progress.