AI and tax reform, a modest proposal

 by John MacBreath Watkins

Lately, I've been thinking about artificial intelligence ("when you can't get enough of the real thing!") and the replicator economy.

In Star Trek, when a crewmember gets peckish, they simply go to the replicator in their chambers and order what they want, and in less time than it takes to heat a cup of coffee in a microwave, they have a nice dinner.

But what happens when society can make whatever it needs without human labor? Well, in Star Trek, the answer seems to be that most people work for the government.

But what are the tax implications? Here I will introduce a couple of charts.

From this websiteI https://taxpolicycenter.org/briefing-book/what-are-sources-revenue-federal-government

From this website: https://fred.stlouisfed.org/graph/?g=2Xa#

As you can see, taxes are more and more paid by people who work for wages -- all of the payroll taxes and a large percentage of the individual income taxes. One discrepancy here is that 'individual income tax' includes passive income such as dividends, and capital gains. However, the ultra-rich are increasingly avoiding both of these revenue streams and using the 'buy, borrow, die' strategy. You buy stocks (or get them from your startup), and instead of selling them to get money to live on, you borrow money using the stock as collateral to get the money to live on. Rich people can borrow at much lower rates than the poor, so the stock is likely to increase in value at a higher rate than the interest on the loan. When the robber baron dies, the heirs don't have to pay capital gains. They can sell the stock immediately to pay back the loan, and any capital gains owing will only be on the increase in value since they inherited it.

As a result, much of the money enjoyed by the ultra-rich is never taxed at all.

As AI continues a trend started with the mass production of goods, constantly reducing the need for human labor, we will need to reform our tax system. If capital goods, including AI, are doing most of the work, a system increasingly based on taxing labor will become unworkable. If labor plays a diminishing role in producing wealth, and capital is producing wealth instead, we will need to tax capital. Not just capital gains, capital itself.

Middle-class people already pay taxes on their assets. Typically, their largest asset is their home, and they pay property tax on that property. Rich people have homes too, but they typically have far more assets in forms that are not subject to property tax. We don't need to tax middle-class people's retirement savings, but if someone has, say, $100 million in stock, why not tax the assets above $5 million? Companies that have economized by not raising real wages for wage and salary workers since about 1973 could help save Social Security by paying a small property tax every year.

They will object that this is some sort of double taxation, since the owner of the stock will presumably pay a tax in capital gain. Well, see above. And besides, people paid taxes on the money they paid to buy their house, and the money thay paid in sales taxes if they live in a state with such taxes.