Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. His column appears in Indiana newspapers.
Microsoft founder, Bill Gates recently opined that we should tax robots as we tax people in order to slow technological job changes. Since I have written about the distortions inherent in the way we tax capital (which is the monetized measure of robots), I feel the need to respond to Gates' suggestion. I do so in three parts.
First, on the face of it, it is hard to take Gates too seriously on these sorts of pronouncements. His take on taxes is much like his adventurism into education policy; he has not troubled himself to learn much about the matter, but has plenty of cash to subsidize his views. Therefore, he can count on many eager listeners, ready to implement his notions. So, Gates, we do tax capital, heavily, but it is highly politicized and terribly inefficient, and that leads to a second point.
Gates’ view on taxing robots might be easier to swallow if his own company was not a leading culprit in the capital tax incentive game. Since 2000, Microsoft has collected roughly $400 million in subsidies from state and local governments. The hypocrisy of his position might be lessened were he to refund that amount to state and local governments.
Finally, he is right to worry that our tax systems distort the hiring decision and incentivize capital over labor. That it surely does is the result of some very high-minded, but poorly informed, efforts by policymakers to influence the location of business. What began in the 1950s as a tool to attract businesses to some less attractive locations, has turned into a big business. Today, the business incentive shell game has devolved into its own industry, supporting a large class of lawyers, consultants and site selection grifters. The imbalance is shocking. For every $6 we spend on K-12 education in Indiana, we spend perhaps $1 subsidizing capital investment.
The distortion of this is magnified by the heavy, mostly federal taxes on labor. A new worker begins with a 15 percent payroll tax, which often includes unemployment insurance and workers compensation taxes. On top of this comes local, federal and state income taxes. In the county in which I live, local governments collect a flat income tax on workers to make up for the lost revenues from providing incentives to businesses. This tax on people to subsidize capital would seem to be ripe for a voter rebellion.
Gates is incorrect in arguing that we should try to modify the tax code to disincentivize capital purchases, for two reasons. First, it is devilishly hard to craft an effective tax incentive plan. It is difficult to know just what the distortions might be in any tax. History is replete with examples of entirely misguided interventions. More importantly, it is hard to know what to incentivize. In the end, we largely have to tax something that is clearly measured. Robots aren’t easily compared, but money is. For example, if we tax a computer, we might save the job of a truck driver whose skills it is a good substitute. But, it might also prevent new job creation, such as web designers, for which computing is a complementary piece of machinery. In the end, we’ll just be taxing capital investment of all kinds.
It is a great human folly to suppose that much of the tinkering of our tax system has made us better off. Instead, it just erodes our sense that government can be effective, reasonably equitable and immune from undue influence of wealthy donors. Our nation, our workers and our communities would be better off with a tax system that collected necessary resources while limiting the distortions that are such a bane to the current system.