Don’t Fight the Robots. Tax Them.

Don’t Fight the Robots. Tax Them.

Daron Acemoglu, an economist at the Massachusetts Institute of Technology, explains that automation often produces benefits of dubious value to the business itself. More important, he suggests that the investment in technologies designed to replace workers has come at the expense of alternative investments that might find more productive uses for human labor. This may help explain the sluggishness in overall productivity growth across the economy.

One powerful reason that businesses deploy so many robots, despite their sometimes questionable contribution to the bottom line, is that automation is subsidized. “Subsidies induce firms to substitute capital for labor even when this is not socially cost-saving, though it is privately beneficial because of the subsidy,” Professor Acemoglu and his co-author, Pascual Restrepo, wrote.

The tax subsidies to robots are varied. For starters, machines don’t incur payroll taxes, which are used to fund Social Security and Medicare. For every worker replaced by a robot, the employer saves on payroll taxes. The federal tax code and many state governments allow companies to use “accelerated depreciation” for capital investments, which allows them to deduct the cost of their robots faster than they could deduct the wage of the payroll of the workers they replace.

This means that eliminating the tax break for robots would not hurt economic growth. It would, in fact, improve economic efficiency. By subsidizing capital investment, the government is encouraging businesses to use capital when they otherwise would not, to replace workers with machines. That might be rational for the individual business reaping the tax benefits. But as Professor Acemoglu put it, across the economy, this kind of spending on automation “shows up as a productivity loss.”

What’s more, curbing businesses’ pumped-up enthusiasm for robots might help mitigate the broader social costs of automation, which has flushed so many workers into unproductive occupations where cheap labor still holds an edge and knocked many more out of the labor force entirely.

What is the best way to change the tax incentives for robots? One solution would be to disallow accelerated depreciation for investments in automation. Professors Abbott and Bogenschneider propose that businesses with high levels of worker automation could have their tax depreciation automatically reduced beyond a certain threshold.

Businesses that use robots to replace workers could also be required to cover the payroll taxes of workers knocked out by automation, as proposed by the technology analyst William Meisel. A tax calibrated according to the ratio of a company’s profit to its employee compensation could match the wage taxes avoided by automation. Companies deploying robots could also be required to pay some kind of fee, just as employers that lay off workers must subsequently pay more into the unemployment insurance system.

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