Is Bill Gates Right That Robots Should Be Taxed?

If robots are poised to take over billions of jobs worldwide, isn’t it wise to tax robots to ensure the state’s continued survival? That is what Bill Gates recently suggested. Bill Gates is an extremely smart guy. But in this instance, he doesn’t understand economics.

His idea is that as machines replace workers, the tax burden should start to fall increasingly on machines. There are however several problems with his reasoning.

The first is the lump of labor fallacy. This is the assumption that more machines must mean fewer jobs. It’s called the lump of labor fallacy because it assumes that the number of jobs in an economy is a static lump of fixed size. The reality is that the labor market can absorb any amount of labor, as long as the salary corresponds to the productivity of that labor. Furthermore, as we also made clear in our ‘Will Robots Steal Our Jobs’-video, more machines will not necessarily mean fewer jobs. Although the number of jobs may fall in some sectors, new jobs will most likely open up in others.

More and better machines usually also lead to higher wages. In every instance of world history so far, machines have made labor more productive. This is because machines are complementary to labor. A man with excavator has higher productivity than a man with a shovel, and a woman with a PC can edit and produce text faster than a woman with paper and pen.

Furthermore, labor’s overall share of income and capital’s overall share of income is almost always constant in an economy regardless of the amount of labor and capital. So as the amount of machines in an economy grows, incomes will rise at a fairly equal rate for employees and capital owners. Thus, the tax burden and tax structure of the economy will not change. But let us assume for the sake of argument that wages will somehow remain static instead of rising. Well, then capital is still taxed!

Another point is that machines are already paying tax – several times over in fact. Or rather: The owners of the machines pay taxes on their returns from capital; capital which is in fact taxed twice over in many Western countries, since capital was originally income, which was also taxed as such when it was earned in that form.

Okay, but what about the argument that robots will become so good that they can do every job a human can do cheaper and better? Then, instead of robots complimenting human labor, robots will outright replace it. Alright, let’s assume this happens.

This still won’t make the economy poorer, but will however shift income from workers to capital owners. However, in such a scenario, states can still earn money by doing the same thing capital owners do – that is, saving up. If the relative income of untaxed machines vis-à-vis taxed workers will grow, then the return on savings will rise, since savings can be used to buy new machines.

All in all, though the future is uncertain, economic theory presents a better model for thinking about what will happen than the one employed by Bill Gates or indeed that of most science fiction writers. Of course one could argue that unlike Bill Gates, the job of science fiction is not to predict realistic futures, only to create captivating and dramatic ones. Nonetheless, most people’s thinking about the economics of our robot future seem to be far more influenced by sci-fi flicks than economic theory – and perhaps that is even true of Bill Gates.