Rise of the Machines: Who will pay tax in future?
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 (President of The Ex'tax Project) 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.
Are robots taking 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. Not surprisingly, many wild
predictions are made on the future of work. But regardless of how we feel about
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 bulk of tax revenues is
based on the taxation of human workers. 60% of the United States budget, for
example, and 50% in European countries consists of personal income tax, social
contributions and payroll tax.
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.
The circular economy
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.
[circular_economy.jpg]
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 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. Scaling up circular activities is an uphill battle when labour
costs are high and polluters roam free.
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 [pdf] 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.
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