Why taxing robots is easier said than done

By Doug Beazley March 13, 201713 March 2017

Why taxing robots is easier said than done

Tesla assembly line

 

The populist wave turning democratic politics inside out throughout the developed West has many drivers; voter paranoia over migration and terrorism is only the obvious one.

Arguably, a bigger factor is the way globalization and the spread of automation have been eliminating many forms of work. Several solutions have been proposed, from the controversial (protectionism) to the novel (a guaranteed annual income). Bill Gates is now getting people to talk about taxing robots.

“Right now, the human worker who does, say, $50,000 worth of work in a factory, that income is taxed,” the philanthropist and tech mogul said in a recent interview. “If a robot comes in to do the same thing, you’d think that we’d tax the robot at the same level.”

What Gates proposes is to use the revenue from a robot tax to invest in employee re-training, to speed up the painful adjustment from one form of economy to another. What he fears is a neo-Luddite revolt against automation and new technologies in developed nations. He’s not wrong to worry about it; economists recently told the U.S. Congress that workers earning less than $20 an hour have an 83 per cent chance of losing their jobs to machines.

But how would a robot tax work? Would it work?

“The first question you’ve got to ask,” says Michael Dolson, tax law practitioner and partner at Felesky Flynn LLP in Edmonton, “is what you mean by ‘robot’. Anybody can look at Commander Data and say that’s a robot. But what about customer service ‘bots run by software that have no physical manifestation beyond a server? What if that server is based outside your taxation jurisdiction?”

Jurisdiction is only problem one. Dolson sees five separate ways a robot tax might be structured — all of them ‘leaky’ or trouble-prone in different ways. The first is a simple excise tax, imposed on the purchase price of the machinery itself. Large tech-dependent companies — carmakers, for example — could get around the tax by diversifying into robotics and building the equipment themselves.

The second method is a capital tax: Assess the book value of the ‘bots and apply the tax on that basis. “That would require having an assessor look over the company’s assets on a regular basis,” says Dolson. Difficult — and costly — to administer.

Third method: Take the value of the combined through-put of all of a company’s robots and levy the tax on that. “But then you’re basically imposing a corporate tax, which we already collect,” says Dolson. “So what’s the point?”

Fourth method: Count the number of workers displaced by automation at a particular company, and impose a tax on the difference between what the payroll is and what it would be without the robots. But that’s a fiendishly hard calculation to make with confidence; such a tax would make a lot of work for tax lawyers, but might not accomplish much else.

Finally, there’s the method that comes to mind when you hear the words ‘robot tax’: Treat the robot as an individual for taxation purposes and tax the value of the product it produces — the ‘work’ it does. “This idea is the least tenable of all,” says Dolson. “It’s going to be very difficult to say with certainty what the value of Robot A’s work on the Toyota assembly line was compared with that of Robot B.”

In fact, all of these methods share the same basic flaw: A robot tax is not the obvious solution to the problem Gates wants to fix, so not every jurisdiction will consider adopting one. And a tax on a capital asset — particularly an asset that enhances productivity — is practically a gilt-edged invitation for a manufacturer to move to a lower-tax jurisdiction.

It’s worth remembering that the relationship between automation and human employment isn’t zero-sum; while robots do replace human labour, they tend to boost employment down the road by boosting productivity. Before automation hit the textile trade, cloth was made by hand and was, as a result, expensive. Machines made cloth cheaper, which meant more people were buying more clothing — which meant that, over the turn of the last century, the number of people working in textiles actually increased, even as automation spread.

So limits on automation have consequences, says E. Patrick Shea, LSM, corporate law practitioner and partner at Gowling WLG in Toronto. “The cost of your smartphone is based on the use of automation and global supply chains,” he says. “Take them away, and the price of that phone shoots up many times.”

The problem — at least for those working in the manufacturing sector — is that the “virtuous cycle” linking automation and employment has limits; at some point, making a product cheaper doesn’t actually cause people to buy more of it, because the market is saturated. The textile sector reached that point back in the 1950s. Many sectors other than manufacturing still have a lot of ‘slack’ to exploit — by adopting automation they can meet unmet demand in the marketplace and, as a side effect, hire more people.

None of this offers any help to workers in older industries being pushed aside by machines now. Shea and Dolson both suggest that what Gates wants — more money to re-train workers to thrive in an information-based economy — can be accomplished without imposing a tax on a social good: the enhanced productivity that comes with automation.

“Maybe what we should be talking about here isn’t taxing robots but moving the tax system away from income and towards consumption,” says Dolson. “Maybe the tax system is too dependent on income tax. Cutting the GST was a mistake. The GST is very politically visible — but it’s also the tax that imposes the least dead weight on the wider economy.”

“I think the big question is whether what we’re experiencing now is a permanent employment gap, or merely temporary,” says Shea. “If it’s a temporary problem, responding to it with a tax might not be a good idea because taxes tend to become permanent.

“Remember what happened when the Canadian government introduced an income tax for the first time. It was supposed to pay for our involvement in the First World War, and it was supposed to be temporary. And yet, here we are.”

Photo licensed under Creative Commons by jurvetson

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