Ever wonder why companies spend so much money on machinery and software that kills jobs? One reason is that the U.S. tax code practically forces their hands. The tax on capital has fallen to around 5% in recent years while the tax on labor has remained around 25%, according to a new white paper (PDF) for the Massachusetts Institute of Technology’s Task Force on the Work of the Future.
“Favorable taxation of capital leads to excessive automation,” MIT economist Daron Acemoglu, the lead author of the paper, said in an Oct. 1 interview. Acemoglu testified about excessive automation before the House Budget Committee on Sept. 10 (PDF) and expanded on the tax aspects in the new paper.
The standard economic argument in favor of lightly taxing capital (equipment, software, buildings) is that the supply of capital is highly sensitive to tax rates. High taxes will discourage investment in capital and make the economy less productive, while the supply of labor is comparatively less sensitive to taxation, the argument goes.
But historical evidence shows that capital and labor have “fairly comparable” sensitivity to tax rates, according to the white paper, whose co-authors are MIT graduate student Andrea Manera and Boston University economics professor Pascual Restrepo.
For workers, the researchers say, the best kind of technology amplifies their strengths, or replaces one machine with a better machine. The worst kind is “so-so” technologies such as checkout kiosks at supermarkets that replace workers without significantly boosting productivity, and might not exist if not for favorable tax treatment, they say. “The goal should not be to reduce capital as a whole, but rather to identify those cases where automation is being used for marginal tasks simply because the tax system encourages it,” they write.
It’s hard to devise a tax system that discourages labor-replacing technology while encouraging labor-enhancing technology, but a good first step is to raise taxes on all kinds of capital to around the same rate as on labor, Acemoglu said in the interview.
Says the paper: “The reality is that governments have to levy taxes to raise revenue, and there is a strong conceptual and empirical case for taxing labor and capital about equally. And yet, the United States has been moving precisely in the opposite direction in recent decades.”