Rise of the machines: who will pay tax in future?

By Femke Groothuis, October 30, 2017

Earlier this year, Bill Gates sparked a conversation on taxing robots to make up for lost tax revenues. Rather than putting a penalty on innovation, Femke Groothuis proposes to shift the tax burden from labour to resource use and pollution. A tax shift redirects incentives to business from reducing head count towards smart resource use. This approach creates a level playing field between man and machine and makes it more likely for people to find new roles when chores are taken over.

Every day we hear stories about robots substituting people as factory workers, bartenders and companions for the elderly. We watch videos of robots taking over truck driving, brick laying, burger flipping, accounting and banking and even teaching people how to dance. Regardless of how we feel about these technological developments, let’s step back and look at the financial drivers behind them, as fiscal policies are impacting our decisions to choose between man and machine.

The biggest cost is talent

In most developed countries, the taxation of human workers comprises the bulk of tax revenues. 60% of the United States budget, for example, and 50% in European countries consists of personal income tax, social contributions and payroll taxes.

For many companies, the biggest cost is talent. In order to reduce costs, entrepreneurs have developed creative ways to lower head count, including automation, standardization (as opposed to custom-made production), understaffing, outsourcing and lowering customer service levels. Our current tax systems are incentivising business to make people redundant.

A goldmine of human capital

Irrespective of the future pace of technological development, unemployment is already among the greatest challenges of our time. Decent work is one of the Global Goals adopted by 193 countries of the UN General Assembly.

Even countries with low unemployment rates have an abundance of untapped human potential. US unemployment, for example, stood at 4.7% as of May 2016, while the underemployment rate (which includes discouraged workers and those involuntarily working part-time) was almost three times as high at 13.7%.

According to the ILO, 600 million new jobs must be created by 2030 to keep pace with the growth of the global working-age population. Wouldn’t it be smart to tap into the goldmine of human capital (talents and capacities) for economic growth and wellbeing?

This brings us to the second way tax systems are counteracting human labour versus machine labour: low taxes on energy, pollution and materials.

The polluter doesn’t pay

In this era of climate change, water scarcity and geopolitical tensions over fuels and materials it would be wise to use natural capital prudently. But in practice, the use of natural resources (such as water, fossil fuels, metals and minerals) tends to be tax-free, or even subsidized.

In EU countries, just 6% of tax revenues are ‘green’ taxes. In the United States they are 3% and in Brazil 2% of revenues.  Asian economies also show modest green-tax revenues: 13% in India; 9% in Korea, 7% in China and 5% in Japan.

Meanwhile governments around the globe subsidize fossil fuel consumption (and thus, pollution) through tax expenditures and budgetary transfers. The IEA estimates fossil-fuel subsidies at $325 billion per year, which is double the value of renewable energy subsidies.

Pollution kills 9 million people per year. Around 1.2 billion people live in areas of water scarcity. And by 2050 oceans are expected to contain more plastics than fish. Humanity is draining natural capital.

Over the last few years, the concept of the circular economy has been gaining traction. Ultimately, such economy should be regenerative and bring natural resources in closed loops without causing pollution or degradation. Businesses can then add value over and over again through recycling (‘urban mining’), repair, refurbishment and maintenance services. Products are redesigned according to biomimicry and cradle-to-cradle principles and massive R&D efforts are needed to develop renewable energy sources and materials.

In every sector, businesses are exploring the circular economy. Philips offers a ‘pay per lux’ service model in which it retains ownership of the materials in lamps. BMW/Mini offers car-sharing services, Deutsche Post/DHL uses electric vehicles, IKEA offers solar panel purchase and installation services and mining company Teck recovers materials from e-waste.

But circular business models tend to be more labour- and knowledge-intensive than ‘linear’ models focused on simply selling stuff ending up in landfill. When polluters roam free and labour costs are high, it’s an uphill battle to scale up circular activities.

Preferential tax treatments

The third way tax systems are counteracting human labour versus machine labour: companies deploying robotic equipment receive preferential tax treatments. In South Korea and Thailand, for example, employers who invest in automation qualify for a reduction in corporate taxes. Malaysia provides capital allowances and tax breaks to increase automation and China has set aside hundreds of billions of dollars to replace human labour with robots.

A level playing field between man and machine

Computers and robots don’t need holidays, maternity leave, retirement funding, travel allowances or coffee breaks. As one Amazon supervisor states: “Their stomachs don’t grumble.” Their output isn’t burdened with income tax or social contributions. They do require capital investments, materials and energy resources, which are relatively tax-free or subsidized. This means that there is no level playing field between man and machine.

In February, Bill Gates started a global conversation on putting a tax on robots to level the playing field. This might be a good time to revisit the idea of shifting the tax burden from labour to resource use and pollution, as proposed in the early 90s by the Dutch IT entrepreneur Eckart Wintzen. Over the years, institutions such as the European Commission, European Parliament, OECD and IMF have supported the principles of such a tax shift as it fixes the market failure of ‘external costs’ being paid by society at large, rather than the polluter.

Necessity is the mother of invention. A tax shift from labour to pollution redirects the creative force of entrepreneurs from focusing on reducing head count to smart resource use. In this approach tax is not a penalty on innovation; innovation can run freely, as long as it’s clean. This approach makes it more likely for people to find new roles if and when their chores are taken over by machines.

The greatest opportunities exist when technology supports, complements and amplifies the talents of people. If we want humans to flourish in balance with technology, it is time we update our tax systems to match 21st century challenges.


Find out more at www.ex-tax.com