Taxing robots? Not recommended

Taxing robots? Not recommended

Bill Gates – amongst others – calls for a tax on robots. Is this a good idea? Researcher Uwe Thümmel from Erasmus School of Economics does not recommend a robot tax: he found that the welfare gains of taxing robots are negligible. Thümmel will be defending his PhD dissertation on optimal redistribution in light of technological change on Thursday 24 January 2019.

In recent decades, technological change has contributed to widening income inequality. How should governments optimally set redistributive policies in light of technological change, such that the benefits from ‘machines’ are shared more equally among us all – but without compromising economic efficiency too much?

Thümmel’s thesis ‘Of Machines and Men: Optimal Redistributive Policies under Technological Change’ analyzes such questions.

Taxing robots
In the main chapter of his thesis, Thümmel asks whether robots should be taxed. While Bill Gates is the most famous proponent of such a tax, there is also support for this idea in The Netherlands.

Thümmel studies a model in which robots polarize the labor market and in which income can be taxed non-linearly. He argues that it can be optimal to tax robots in order to compress the wage distribution. Taxing robots incentivizes firms to hire more workers instead of using machines.

As a result, workers’ wages increase, and income inequality is reduced. However, this comes at the cost of lowering output. Thümmel computes the welfare gains of introducing a robot tax for the US economy and finds them to be negligible. He does therefore not recommend a tax on robots.

Tax and education policy
In his thesis Thümmel also asks how tax and education policy should respond to skill-biased technical change (SBTC). Already in the 1970s, Dutch Nobel Laureate and Erasmus Professor Jan Tinbergen wrote about the ‘race between technological development and education’. Tinbergen argued in favor of raising enrollment into higher education to compress the distribution of wages by raising the supply of skilled workers.

Thümmel finds that in some cases, education subsidies should indeed increase with SBTC, but not for the reason Tinbergen had in mind: increased income inequality calls for more progressive income taxes. While higher marginal tax rates allow for more redistribution, they also distort investment in higher education.

Raising education subsidies can partly offset these distortions. It is for this reason that education subsidies may optimally increase with SBTC. However, at the same time, education subsidies also benefit individuals who would have attended higher education anyway.

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