What if the US imposed a tax on robots? This concept has been openly discussed by policy analysts, scientists, and Bill Gates (who favors the idea). Since robots could replace jobs, the idea goes, a strict tax on them would give companies an incentive to help retain workers, while offsetting the drop in payroll taxes when robots are used. So far, South Korea has reduced incentives for companies to deploy bots; On the other hand, EU policy makers considered a bot tax but did not enact it.
Now a study by MIT economists examines the existing evidence and suggests that the optimal policy in this case would indeed include a tax on robots, but only a modest one. The research concluded that the same applies to taxes on foreign trade that would also reduce employment opportunities in the United States.
“Our results suggest that taxes on robots or imported goods should be very small,” says Arnaud Costenot, an MIT economist and co-author of a published paper detailing the findings. “Although robots have an impact on income inequality… they still result in modestly perfect taxes.”
Specifically, the study found that the tax on robots should range from 1 percent to 3.7 percent of their value, while the business tax would range from 0.03 percent to 0.11 percent, given current US income taxes.
“We came up with this without knowing what would happen,” says Evan Werning, an MIT economist and other co-author of the study. “We had all the potential ingredients for this to be a big tax, so by stopping technology or trade you’d have less inequality, but … right now we’re finding a tax in the single-digit range, and for trade, even lower taxes.”
The paper, “Robots, Commerce, and Locomotion: A Sufficient Statistical Approach to Optimal Technology Regulation,” appears submitted online in the form of Economic studies review. Costenot Professor of Economics and Co-Chair of the Department of Economics at the Massachusetts Institute of Technology. Werning is the Robert M. Solow Professor of Economics in the department.
An adequate statistic: wages
One key to the study is that the scientists didn’t start out with a preconceived notion of whether taxes on robotics and commerce are due. Instead, they applied a “statistically adequate” approach, examining empirical evidence on the subject.
For example, a study by MIT economist Daron Acemoglu and Boston University economist Pasquale Restrepo found that in the United States from 1990 to 2007 adding one robot per 1,000 workers reduced the employment-to-population ratio by about 0.2 percent; Each robot added in manufacturing replaced about 3.3 workers, while the increase in robots in the workplace reduced wages by about 0.4 percent.
In conducting their policy analysis, Costenot and Ferning drew on this and other empirical studies. They built a model to evaluate a few different scenarios, and included leverages like income taxes as another way to address income inequality.
“We already have these other tools, though not perfect, for dealing with inequality,” Werning says. “We think it’s wrong to discuss these bot and trade taxes as if they are our only tools for redistribution.”
More specifically, the scientists used wage distribution data across all five income brackets in the United States — the top 20 percent, next 20 percent, and so on — to assess the need for robot and trade taxes. Where empirical data indicate that technology and trade have altered the wage distribution, the magnitude of this change has been aided by the robot production and trade tax estimates proposed by Costinot and Werning. This has the benefit of simplicity. Aggregate wage figures help economists avoid making a model with too many assumptions about, for example, the exact role that automation might play in the workplace.
“I think that where we start methodologically, we’re able to make this link between wages and taxes without making super-private assumptions about technology and the way production works,” Werning says. “It’s all encoded in this distributional effect. We’re asking a lot of this empirical work. But we’re not making assumptions that we can’t test about the rest of the economy.”
Costenot adds, “If you’re at peace with some high-level assumptions about the way markets work, we can tell you that the only things of interest driving optimal policy on robots or Chinese goods should be wage responses across measures of the income distribution, which fortunately Lucky for us, people tried to appreciate it.”
Beyond robotics, a climate-specific approach and more
Aside from the bottom line tax numbers, the study has some additional conclusions about technology and income trends. Perhaps counterintuitively, the research concludes that after many more robots are added to the economy, the impact of each additional robot on wages may actually decrease. At a later stage, botnet taxes could then be reduced further.
“You can have a situation where we care a lot about redistribution, we have more bots, we have more commerce, but taxes are actually going down,” Costenot says. If the economy is relatively saturated with robots, he adds, “that marginal robot that you get in the economy has less inequality significance.”
The study approach can also be applied to topics besides automation and commerce. There is growing empirical work on, for example, the impact of climate change on income inequality, as well as similar studies on how immigration, education and other things affect wages. Given the increasing empirical data in these areas, the type of modeling that Costinot and Werning perform in this paper can be applied to determine, for example, the appropriate level of carbon taxes, if the goal is to maintain a reasonable income distribution.
“There are so many other applications,” Werning says. “There is a similar logic to those issues, where this methodology can continue.” This points to several other future avenues of research relevant to the current paper.
Meanwhile, for the people who envisioned a heavy tax on bots, they’re “quantitatively right, but quantitatively right,” Werning concludes.
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