Higher Taxes Are Coming

BRUSSELS, Belgium: So, I just finished my breakfast at the Radisson Red hotel, about a block from the European Union Parliament, where I have a meeting with a parliamentarian later in the day. I’m sipping on my cappuccino and flipping through the day’s news stories on my phone when up pops this headline:

Inside Amazon’s robot-run supermarket that needs just three human workers.

That’s what we call lagniappe in South Louisiana, a little something you didn’t expect.

See, my meeting later is with Mady Delvaux, the member of Parliament from Luxembourg who is pushing the EU to begin considering a future in which robots, not humans, are the world’s workers.

Higher Taxes Are ComingAmong other dislocations, that day, not so far away, portends cataclysmic shifts in personal income. Tens and hundreds of millions of jobs in the U.S, Europe and all over the developing world are at risk of automation — everyone from farm worker to airline pilot (and grocery store employee) is on the chopping block as artificially intelligent machines and software take over untold hundreds of human tasks.

How do we afford a living in that world? How does government function financially when government spending is predicated on income from workers and businesses, whose revenues are predicated on consumers?

These questions are huge. They will redefine human existence in the not-so-distant future. They have the power to incite riot and upend society, if not addressed correctly.

But how do we, as a society, correctly address such questions when we want robotics to make our lives easier and more convenient, knowing, though, the pursuit of which means an end to the way people earn a living and, thus, the capacity of government to raise necessary tax revenue?

Rise of Basic Income

I’ve been contemplating such questions for well over a year and writing about the subject often. It is, bar none, the single most significant existential crisis in the world today, far outweighing terrorism. It’s one of the reasons I’m here in Brussels to talk with Ms. Delvaux and, later in the week, Zsolt Darvas, a senior fellow at Bruegel, a leading economic think tank here.

The most common idea for addressing widespread unemployment has governments paying all of us a universal basic income, or UBI — a sum of money, maybe $1,000 a month, to cover our basic needs.

How government can afford that is a monumental question that Mr. Darvas thinks “can’t be done.” He is a fan of the concept, since, in theory, it eradicates the perverse incentives people have to cheat under current welfare systems. But he, like me, figures it will be “impossible to finance.”

In the U.S. alone, a $1,000, no-strings-attached monthly stipend for every adult, courtesy of Uncle Sam, would run close to $3 trillion a year, almost three times the guesstimated level of total welfare spending in America at the state and federal level today.

Targeting Taxes

The only way D.C. could afford such a plan is replacing all existing welfare with a basic income, and then raising taxes on workers or on companies that deploy technology … but would that even be enough?

Ms. Delvaux tells me she wonders that, too.

Like America, European welfare is financed on the backs of worker salaries. But if there are fewer and fewer workers, how do you finance public services? You come to the question of, do you tax robots? If robots create wealth, is it possible to tax that wealth? And would even that be enough?

I posed that question to Mr. Darvas, and his fear is that such a system “is complete nonsense. You typically tax income [worker salaries; corporate profits] or wealth. A company that makes a big initial investment in robots might make bigger corporate profits, and that can be taxed. But taxing robots means taxing equipment or the stock of capital, and that is a very, very bad idea.”

A Taxing Future

All of which leaves but one obvious way to address what is soon to be a precipitous decline in employment as automation marches on: increased taxes on those who have jobs. (I would not be surprised to see top marginal tax rates at 90%, as we once had in this country, before 2025, maybe much sooner, particularly if technology such as automated burger machines start replacing tens or hundreds of thousands of fast-food jobs.)

We could also see increased taxes on corporate profits, graduated depending on the degree to which those profits are derived through automation rather than human labor (and here we might see graduated rates of as much 50%, maybe 60%, of automation-driven profits).

I know that sounds egregious and onerous and maybe even laughable.

But consider the alternative: Tens of millions of unemployed, low-skilled, lightly educated Americans (and millions more who do have an education and skills), struggling to live on piecemeal, menial-labor jobs with no benefits or health insurance, and increasingly angry at the system for allowing this.

That’s the fuel for violence, if not a social and political revolution that swarms through cities and lands on D.C.’s front lawn.

Throwing Money at the Problem

Obviously, no politician cares to grapple with that.

Instead, politicians will opt to extinguish the fires, as best they can, when they flame up. Since no one knows how exactly automation will play out, no government can, a priori, devise the perfect scheme to prepare.

As governments are wont to do, they will await the stirrings of discord before they act, and they will grope for the easiest solution in the moment — and the easiest is always raising taxes to fund some kind of safety net, whether it’s a UBI or some other plan to extinguish the fire by splashing them with money.

Whatever the case, sharply higher taxes are almost assuredly in our future, which will have ramifications on everything from the stock market to the dollar to your retirement savings plan (which might be taxed at a far higher rate or even lose the tax-deferred or tax-exempt status). But that’s for another day.

Until next time, good trading…

Higher Taxes Are Coming
Jeff D. Opdyke
Editor, Total Wealth Insider