If AI starts to replace jobs, it isn't just American workers who will feel the loss of income. So will the U.S. Treasury.
Nearly two-thirds of all federal revenue comes from taxes levied on human labor, a recent RAND study noted. That revenue will not be easy to make up if AI starts to put large numbers of people out of work.
Carter Price has been looking for ways to rebalance the tax code so that it doesn't incentivize employers to replace humans with AI. He's a mathematician at RAND and co-director of the RAND Von Furstenberg Family Budget Model Initiative. And he has an idea for how to give workers an edge in the age of AI.
How does the existing tax code disincentivize keeping human workers on the job?
We went through all 7,000 pages of the tax code with a tool we built as part of the RAND Budget Model Initiative. It allows us to identify every provision, every line item, and its implications. There's a lot in there. But we identified several places where the existing U.S tax code works against companies hiring or keeping workers.
The employer payroll tax is one obvious example. Companies have to pay that tax for every worker they hire, so more workers means more expense. Meanwhile, the tax code allows companies to write off the depreciation of big, expensive assets early, before those assets actually wear out. That can make buying something like a robotic system much more cost-effective—which makes that tax write-off a direct subsidy for displacing human workers.
What's your idea to change the incentives here?
You and I pay progressive taxes on our income. That means if we make more money, we move into a higher tax bracket.
Our idea is somewhat similar, but for companies. The government would tax high corporate profits per worker in addition to taxing their income overall.
Imagine a company makes $1 million in profit and has 100 employees. Its profit per worker is $10,000. Now let's say that company brings in a lot of AI and lays off all but ten of its workers. Now its profit per worker is $100,000, and it just moved into a higher tax bracket. It's going to pay more in taxes for that same $1 million in profit.
AI might still be so much more efficient that it still makes sense for some companies to replace those workers. This tax structure wouldn't stand in the way of that.
But where the current tax code sometimes disincentivizes keeping human workers, our proposed change would flip the script. It would put the tax code more on the side of workers instead of on the side of AI and automation.
What else did your tax code analysis find that could help promote employment?
We found a lot of special, niche provisions that are just scattered throughout the tax code. You could eliminate those and really clean everything up. There are three different clean-energy vehicle tax provisions, for example, and they all do pretty much the same thing.
These niche provisions pointed us to a suite of changes that could really make a difference. The government could eliminate those special tax breaks. That would bring in additional revenue.
The federal government could then eliminate the employer payroll tax and replace it with two business taxes: one a flat tax on business revenue, and the other the per-worker tax on high profits.
Companies would be no worse off. The government would balance the loss of revenue from eliminating the payroll tax with an increase from eliminating special tax carve-outs. And we'd be incentivizing human employment instead of using tax breaks to incentivize things like investments in distilled spirits.
Our proposed change would put the tax code more on the side of workers instead of on the side of AI and automation.
What would it take to implement those changes?
It takes an act of Congress to change the Internal Revenue Code. But that's a low barrier compared to what some other popular policy ideas that are floating around would face. For example, a value-added tax, which would be like a nationwide sales tax, would require an entirely new tax-collection infrastructure. And a federal wealth tax, which could generate revenue from huge concentrations of wealth, would require a constitutional amendment in addition to new tax-collection infrastructure.
By contrast, policymakers could at least theoretically wake up tomorrow and pass a law that would make the tax code more robust by reducing its dependence on income from labor.
Furthermore, simplifying the tax code would give people back millions of hours that they currently spend filling out forms. It would improve the efficiency of the economy, and that's something everyone can like.
What motivates you to do this work?
I'm a mathematician. And there have been a lot of headlines about the advances that AI models have made in mathematics in particular. AI can generate code that would take a human hours, or even days, to write. I'm biased, but I think human mathematicians still provide a lot of value that AI can't fully replace. I'm not sure that will be true forever. But until that changes, we shouldn't rush into replacing workers with AI, and our tax code certainly shouldn't incentivize employers to do so.
