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Thursday, March 9, 2017

Taxing Robots or Rewarding Jobs

In my early days as a middle manager, senior management challenged middle managers to answer the question: “Are employees an asset or a cost?”   The answer, from the point of view of the corporation, became evident over the next two decades.  Employees cost money.  The company “downsized”, reducing employment by about 70%, while maintaining roughly the same production volumes.  Efficiency was vastly improved by capital investments and technology, but the burden of providing employment to the down-sized employees was shifted to government, to other businesses, and to the employees and their families.

Both political parties are concerned about jobs – about the number, quality, and pay of jobs in America.   Republicans also want to decrease corporate tax rates, to improve the competitiveness of American companies in global markets.  It seems to me that all of these goals can be achieved by enacting a tax benefit that is based on the number of good jobs that a company provides to its employees.

Bill Gates proposes taxing robots that take away jobs from humans.  This is incomplete, because there are many aspects of technology and capital which eliminate human jobs.  Rather than taxing robots, it makes sense to do the converse – to offer tax benefits to companies that provide human jobs.

The tax break should be significant, and help compensate for the extra costs that a company incurs in providing benefits to an employee. 

Robots and the Cost of Human Employees
Bill Gates thinks robots should pay taxes.  Donald Trump thinks everybody should have access to a high-paying job.  These are two facets of the same problem in the modern economy.   Let’s look at how we could make that happen.

Bill Gates proposed taxing robots in a recent interview with the on-line news site Quartz.  Gates’ logic is clear: if a robot replaces a worker who is paying Social Security, Medicare, and Income taxes, the robot should be responsible for paying equivalent taxes.  It should be noted that the employer is partly responsible for paying payroll taxes for Social Security and Medicare.  When a business replaces an employee with a robot, the business saves money by not paying payroll taxes, health insurance and many other mandatory employee benefits.  There may not be any intrinsic efficiency of automation – the advantage lies simply in shirking the social responsibility of taking care of working citizens.

Our laws require businesses to share the social costs of taking care of people.  Businesses must provide health insurance to employees, must pay into Medicare and Social Security funds for workers’ retirement care, and usually provide retirement savings plans and other benefits.  We have structured society to care for people in this way for nearly 100 years.  Some economists argue that we need to break that tie between employment and social care, in order to allow business to operate more efficiently, and to value labor strictly on the basis of productivity.  This is one of the arguments for adopting a government-run, “single-payer” health system.  But even if the country adopted this health system, the issue of other employee benefits would remain.

It is not an even playing field, and the robot is given a huge advantage in this competition.

One of my friends pointed out that taxes are providing for the needs of workers, and that robots don’t have those needs.  However, the needs of the displaced workers have not gone away – the responsibility of providing for those needs has been shifted – to another company, to the government, or to the individuals themselves. 

Capital and Technology
Fortune magazine critiqued Gates’ proposal to tax robots, saying: “The principle Gates proposes would seem to require taxing any technology that eliminates human labor, presumably starting with the wheel.”   Well, yes.  That is exactly what is needed.  Fortune says further “To tax the robot’s owner as a human earning $50,000 would in effect make efficiency illegal.”  No, that is ridiculous.  To be adopted, any technology must provide more efficiency than providing benefits to the human employee. 

In Gates’ vision, robots are discrete, individual replacements for human workers.  But that’s not how it happens (as Gates should know very well).  Technology, in many forms, makes workers redundant or irrelevant through incremental efficiencies.  During my 26-year career, secretaries were made obsolete when managers were given desk-top computers to do their own correspondence.   Accountants were made obsolete by enterprise-wide accounting software.  Draftsmen were made obsolete when geologists could produce presentation-quality color maps directly from seismic workstations.  In the beginning of my career, geologists made maps by hand, with colored pencils on paper.  But with a workstation, a single geologist can do the work of five or ten geologists working with paper, and do the work with greater depth.  My career was marked by company layoffs about every 3 or 4 years.  By the end of my career, the company was producing as much oil as when I started, with about one-third of the employees.  And all without a single robot.

The simple way to look at the process of job losses is that capital investment, enabled by technology, replaces workers.  This represents all kinds of automation, including robots. 

Capital investment can create jobs – in fact, it is necessary to create jobs.   Capital investment can also destroy jobs.  There is a paradigm belief that technology always develops new jobs to replace the jobs it eliminates.  The paradigm is usually expressed with a reference to buggy-whip manufacturing jobs.  Certainly, in the past, new jobs have eventually developed.  But the cycle time to develop new jobs is getting longer as technology becomes more sophisticated.  There is no guarantee that the new jobs will be timely enough for displaced workers, or that the displaced workers can develop the skills necessary for the new jobs, or that the new jobs will be located where displaced workers can find work, or that new jobs will earn as much as the old jobs.  The decline of the Rust Belt manufacturing centers gives ample evidence that new jobs do not necessarily appear.

Corporate Income Taxes and Employment
Here are a few real numbers which give a sense of labor market complexity and the costs to employ a human instead of a robot.

In 2015, American workers earned the following wages.  The median wage (50% of wages lower, and 50% of wages higher) is lower than the average, because the average wage is pulled higher by a small number of very high wages.  The median is therefore more representative of typical wages. The cost for employers to provide benefits to full-time employees averages about $10.70/hour, adding about 45% to the cost of the average employee.  In the table below, I assumed that Annual Benefit Costs are linear with hourly wages; this may not be correct.  The figure for Annual Benefit Costs for Average Wages is correct.
Hourly Wage
Annual Wage
Annual Benefits Cost
Minimum Wage
Median Wage
Average Wage

2015 Profits, Employees and Taxes for Selected Companies
Sorted by Net Profit per Employee
There is a wide diversity in labor-intensity of American companies.  The financial firm Goldman Sachs earns over one million dollars per employee, whereas Wal-Mart earns only $6,000 per employee.  The corporate income tax paid per employee varies widely as well.

The Employers’ Tax Break
How should we encourage capital investment which produces high-paying jobs?  I suggest giving companies a tax break for every good job they provide for society.  The tax break should be at least sufficient to level the playing field between automation and human employees.   The tax break should compensate companies for some of the costs related to human employment – health insurance costs, social security contributions, retirement plans and human resources administration.  Because robots shouldn’t have an inherent advantage when it comes to a company’s decision to invest in automation.

 Employers should be encouraged to pay employees a living wage.  As President Trump says, every American deserves a chance at a high-paying job.   A proactive tax policy would help that happen.  I would suggest minimum tax benefits for minimum wages.  We should set the threshold for the significant tax benefit well above minimum wage, perhaps 150% of minimum wage.  This is close to the threshold established for insurance benefits under Obamacare, which is 138% of the Federal Poverty Level. 

In a way, companies hiring workers for minimum-wage jobs are already receiving a corporate subsidy, through government welfare programs, Medicaid, and other assistance for the poor.  The costs of providing for the well-being of these employees is being shirked by the company and borne by other taxpayers.  (Thanks to my son for that insight.)

It is not possible to give companies enough income tax credits to fully compensate for the cost of benefits to employees.  American companies employ about 123,000,000 full-time employees.   The average cost of benefits per employee is about $15,000, for a total cost of a little more than two trillion dollars.   By contrast, in 2015, American companies paid only 344 billion dollars in income tax. 

A tiered system of tax relief would provide an incentive to companies that provide good-paying jobs.  Companies with a large number of low-paying jobs cannot be compensated more than they are paying in taxes through tax relief; and we are not trying to give incentive for low-paying jobs anyway.  As a starting point, I would suggest $1000 of tax relief for every job less than $15.00/hour, $2,000 of tax relief for each job between $17/hour and $17.50/hour, and $4,000 of tax relief for every job with greater than $17.50/hour. 

Full-time Employees
Tax Break
Tax Cost, millions
Number of Jobs <$15/hr.
Number of Jobs $15 - $17.50
Number of Jobs > $17.50

The total tax cost of the program would be about equal to the current total business income tax collected.

A major theme of the Trump presidency is to improve American jobs – to give every American the chance for a high-paying job.  The Trump administration is proposing to reduce corporate tax rates to improve the competitiveness of American businesses in the global market and enhance shareholder value.  It seems to me that both goals could be accomplished by changing the tax rates on businesses that provide good jobs, in comparison to those companies that replace human jobs with technology and capital.  In fact, any combination of taxes or tax breaks could accomplish the same goal, by making the number of full-time jobs and the quality of those jobs a factor in the tax rate.

It might be that this tax incentive is too small.   An employer’s cost for an employee earning $17.40/hour is nearly $53,000; $36,200 for wages and $16,700 for benefits.   A tax credit of $2000 might not be material.  This suggested tax break is a nudge, rather than a shove, in the right direction.

Alternatively, rather than a tax credit, we might consider raising the tax on corporate profits, for profits which are not supporting workers.   Raising taxes on business might seem unlikely in this political climate, but perhaps in a few years that may change. 

The topic of taxes on business deserves deeper consideration.  We should be able to measure the economic wealth generated by labor and capital, and look at the tax burden on each sector.  I have never seen a clear analysis of this problem, and I would like to know if the tax burden placed on capital returns is equitable with the tax burden on labor.  Perhaps this will be the topic of a future blog post.
Original interview, with video.
“Right now, the human worker who does, say, $50,000 worth of work in a factory, that income is taxed and you get income tax, social security tax, all those things. If a robot comes in to do the same thing, you’d think that we’d tax the robot at a similar level.”

Fortune argues:  “To tax the robot’s owner as a human earning $50,000 would in effect make efficiency illegal. In addition, the principle Gates proposes would seem to require taxing any technology that eliminates human labor, presumably starting with the wheel.”

“So there are probably better ways than taxing robots to help humans avoid the harms of automation. Instead of slowing innovation, the government should think about taxing humans less and redistributing the income of robots more.”

“So Gates is right about the need to provide funds to retrain workers and to support them in making these job transitions, but taxing robots will just slow job creation. Automation is creating more jobs than it is destroying.”  -- A paradigm-type statement, given without evidence.

Article partly agrees with Gates’ proposal to tax robots, but offers several caveats.  E.g., some robots make humans more productive; some industries, such as health, deserve to have the best technologies available. 

“Every American child should be able to grow up in a safe community, to attend a great school, and to have access to a high-paying job.”

May 2015, Median hourly wages, all occupations:  $17.40
May 2015, Average hourly wage, all occupations:   $23.23

OECD statistics – US GDP/hour worked = $62.89, 2015, in constant 2010 dollars.
4th highest, behind Luxemburg, Ireland, and Norway.

Real output of all persons, non-farm business sector = $107.39, constant 2010 dollars
Labor Statistics

2017      minimum wage   $7.25/hour       $15,080/year
                Median wage     $17.40/hour       $36,192/year
                Average wage   $23.23/hour       $48,318/year

Data on number of Employees, profits, and tax rate for selected companies: A prominent stock market appraisal service.

Average wages total $23.42/hour, or about 69% of total employer costs.   Benefits cost $10.73/hour, or about 31% of total costs.

Corporate Income Taxes represent 10.6% of total Federal tax receipts.   Corporations are also responsible for significant contributions to payroll taxes.
Corporations paid $ 344 billion in income taxes, out of $3250 billion in total tax receipts.

* In 2015, 9.2% of federal individual income tax receipts came from capital gain taxes.
* For 2016, the Joint Committee on Taxation projects that 6.2% of gross income earned by individuals will come from capital gains, 2.2% from dividends, and 1.0% from interest income.

Estimated percentage of Federal Individual Income tax from dividends & Interest:  4.75%

Capital gains represent 9.2 percent of individual income taxes.

Table of capital gains and taxes paid to 2009.

Sources of Federal Tax collections.

123 million full time workers in the US in Jan. 2017.

1 comment:

  1. Thank you for sharing your tips! This is very helpful and informative! I’m looking forward to seeing more updates from you.

    Tax Professional