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New Study: Bill Gates May Be Correct in Calling for a Tax on Robots

When Bill Gates supported a controversial proposal last year for governments to tax companies that utilize robots, the Kellogg School's Sergio Rebelo had serious doubts. As an economist, he knew that taxing intermediate goods can make it more difficult for suppliers to create and sell their products, thus reducing the level of production in the economy.

But Rebelo, Northwestern University graduate student Joao Guerreiro and Pedro Teles of Universidade Catolica Portuguesa have concluded that a robot tax could be part of a policy agenda that could stave off income inequality and improve the economy overall. 

In fact, their study suggests that, without such policy intervention, the workers displaced by robots would suffer big decreases in income, causing a large rise in income inequality, even as total income rises sharply overall.

Creating a model

The researchers first modeled what the economy would look like as more and more work is automated. They came up with an economy where half of the labor force is engaged in "routine" work (any job consisting of programmable tasks that can be automated, such as those done by assembly line workers and reading of a script by a call center worker), while the other half did non-routine work that cannot be automated, such as fighting fires or making scientific discoveries.

The result: routine workers will have no choice but accept lower and lower wages to compete with robots, while non-routine workers are able to use machines to their advantage to work more efficiently and increase their income. As an example, a doctor using a robot assistant can treat more patients.

Stalled incomes

But the model also found that machines will reach a point where they cannot get any cheaper, which means wages for routine workers will bottom out at that same level. However, wages for non-routine workers will also bottom out because the economy will be producing less output than if every routine task could be automated. 

This is all theoretical, but Rebelo says the model captures trends underway in the US, where only college-educated workers, who are disprproportionately likely to do non-routine work, have seen their median wage increase since 1979. In general, the real wages of less educated workers have declined. 

Taxing the robots

Will a robot tax make a difference? Nobel laureates Peter Diamond and James Mirrlees concluded in 1971 that taxing intermediate goods, such as robots used to manufacture cars, made the economy less efficient, negating any benefit of the tax.

But to Rebelo's surprise, the model indicated that "under some circumstances, it actually is optimal to tax robots,” he told KellogInsight magazine. That's because anything that makes robots more expensive will also increase the wages of routine workers. And a tax on robots is an indirect tax on non-routine workers who use them, thus helping to more equitably distribute income in the economy.

But a robot tax will have to be extremely high before it can alleviate inequality, so the researchers tested an alternative plan: a robot tax paired with a minimum income payment for everyone. They concluded that giving all workers, routine and non-routine, with regular government payments would result in an economy where everyone benefits from automation.

 

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