Robots, Unemployment and Tax Reform: The Discussion and Debate We Need From Congress and The President

It's been just over 30 years since the last major overall of the U.S. tax code. In that time the world has been transformed - the Soviet Union collapsed, the Berlin Wall fell, dot coms boomed and busted, terrorism struck and launched the U.S. into the longest war in its history. A financial crisis shook the country and the world to its knees, and the rise of big data, artificial intelligence, genomics, new materials, cloud computing, blockchain, the sharing and gig economies, and many other new, advanced technologies and business models signaled the start of the Fourth Industrial Revolution.

In that time, tax law and accounting practices have struggled to keep pace with innovations, sometimes leading to a wild West free for all for businesses and consumers, some of who managed to profit while others lost or were swindled of their life savings. Even today tax laws still fail to address the issues that the Age of Computer and the Internet brought, such as the internet sales tax, which may be heading to the US Supreme Court in the next year or so. (1)

The business world is entering a period of disruption and change on a scale no one alive has experienced

As President Trump and the U.S. Congress are poised to pass and celebrate the passage of reforming the U.S. tax code for the first time in 30 years, missing from the discussion by both parties is how tax law and accounting principles should be altered to account for the realities of how AI, automation and the Fourth Industrial Revolution are reshaping businesses and the labor markets today and will continue to transform them in the years to come. Instead, the President and both parties in Congress are locked in a debate about policy issues 25 years in the past and projecting forward as it they are still tomorrow's issues. Instead, we need an open, honest raising of the issues of tomorrow and discussion and debate about how we want to respond.

I'd like to shine a spotlight on two issues in particular, though there are likely many more existing in the tax code or that should be addressed in the tax code but are not. The first is about how machines and people (capital and labor) are treated differently, and how that leads to a policy driven financial incentive to replace employees with robots and algorithms. The second is how to use taxes to as a response to what will be an increasing line of people who are displaced by machines and unable to find work.

The President and Congress suggest the tax proposals will spur economic growth and provide incentives for more jobs. The question is: Will those jobs be filled by humans or robots?

The first issue is a problem with the current tax code that will stay in place. Despite all the promises of how tax reform will spur job creation it could actually cost you your job while corporate profits and the stock market soar.

Labor, Capital, Taxes and Balance Sheets! Oh My!

The way capital (robots and algorithms) and labor (employees) are taxed and treated on corporate balance sheets has a built bias that was perhaps balanced well for the Industrial Age, but needs a renewed discussion today.

Should the tax code and accounting rules provide an incentive to replace people with robots and algorithms?

The issue has nothing to do with special tax credits or subsidies for research or the development of new technologies (though those may exist in addition). No, it's so basic and fundamental to the way business and finance are structured today we think as little about it as the sun coming up each morning. The capitalization, depreciation and amortization of assets.

Capitalization is the expensing of the costs of an asset over time, rather than incurring the cost of the expense immediately. When a firm buys a robot, the cost of that robot can be capitalized, spread out over many years. This has the effect of lowering expenses on the balance sheet, increasing profits -- and with it increasing the corporate valuations and stock price. Clearly a win for shareholders. Generally speaking the cost of labor cannot be capitalized (though in some instances it possible). All else equal this provides a cost advantage to robots and artificial intelligence.

Depreciation and Amortization are similar. Both are methods of spreading the cost of an asset over time. Depreciation is applied a tangible asset (a robot) and amortization is applied to an intangible asset (software like AI). Depreciation can also be accelerated to occur faster than using a straight line method (an equal amount each year). Depreciation and amortization essentially spread out the subtraction value from the balance sheet, again making profits, and by extension, stock prices higher. People's skills and knowledge are not depreciated or amortized even though there is a clear parallel between skills losing their value and machines losing their value over time.

Of course there are many details and nuances of these concepts that apply depending on the particular circumstances.

While it's not possible to say that 100% of the time tax and accounting rules favor machines over people, the question is: should they ever?

Capital vs Labor In the Tax Arena

Outside of an economics class we rarely seem to talk about capital and labor like we did years ago when workers fought for safe working conditions, reasonable work hours and fair pay for a fair day's work. This is unfortunate because we no longer examine policies from different perspectives to fully understand the impacts of policy decisions on people's lives.

To truly understand the issues, one must go beyond looking at the high profile marginal tax rates. Corporate tax rates, capital gains taxes, expenses and deductions all factor heavily. There are issues of whether expenses occur before or after taxes are calculated (you can see this on your own paycheck). You'll hear in the tax debate that capital gains are double taxed - first at the corporate tax rate on profits and then the capital gains rate for investors - which is "unfair." You don't hear debate about income tax being a double tax.

Ultimately, it's a question of the rules of how the game is played. What expenses can offset revenue, how do profit calculations affect employees and shareholders, and so on. They can be changed.

Robots, AI And Mass Unemployment?

Earlier this year Treasury Secretary Stephen Mnuchin's commented on robots, AI and automation dismissing it as an as issue. Donald Trump's first nominee for Labor Secretary, Andrew Puzder, was wide criticized for his comments on the superiority of robots over human workers. It should come as no surprise that the Trump Administration is not focused on how new technologies will destroy jobs and the likely increase income inequality.

"I think we're like so far away from that that not even on my radar screen" ~ U.S. Secretary of the Treasury Stephen Mnuchin

Mnuchin is not alone. Many people rightfully believe many jobs will be created by new technologies, perhaps even more than are destroyed. That's good right? We need look no further than today to see that even if that is true it will not be of any help to millions of people who lose their jobs and can't get a new job. Even today employers complain of a "skills gap" where they cannot find qualified employees to fill job openings, leaving many job openings vacant.

Age discrimination, simply preferring to leave position vacant rather than hire "over qualified" candidates, is still rampant. Sex discrimination, cultural views on the roles of women in the work place as well as sexual violence against women are a barrier to women filling many roles. Work and community environments that are seen as hostile to minorities prevent migration.

Some say more jobs will be created than destroyed by tech. We need look no further than today to see that jobs created are not jobs filled.

There are, however, many people and companies who disagree, including the people who are building the technology that will replace people. In fact, on the very same day the Secretary Mnuchin made these comments Big Four accounting and consulting firm PricewaterhouseCoopers release a report projecting that 38% of American jobs could be automated by 2030.(2) With an estimated 147,241,000 jobs in the U.S. in November 2017 (3) that would translate to about 56 million jobs lost. For context, the U.S. lost 8.7 million jobs during the Great Recession. (4)

Even within the last few months Deutsche Bank CEO John Cryan hinted and more job cuts to come, possibly even half of its current work force due to automation. In September 2017, he noted that the company's accountants "spend a lot of time basically being an abacus" and could be automated. (5)

Proposals by Congressional Republicans hope that by keeping corporate and capital gains rates low, businesses are able to grow - both generating more revenue and hiring more people. Whether this worked during the Industrial Age or not is a debate for another time. The principals the policy are based on are policy responses during typical economic cycles that occurred during the post-World War II era. It is not designed for the disruption of a new industrial revolution where machines replace humans across job functions and industries.

The question policy makers, businesses and voters need to be asking is about the future and how we will manage a transition like we haven't seen since the First Industrial Revolution nearly 200 years ago.

Earlier this year Bill Gates proposed that a robot tax should be considered. According to his idea if a robot replaced a human worker the robot would be taxed and the taxes used to fund areas like education and the elderly. (6) While the idea may sound appealing, one fundamental problem is there usually aren't one-to-one exchanges of people for machines. Tesla(R) offers a prime example with its electric cars. In building its highly automated plants, the robots didn't displace any jobs because there weren't any jobs before. However, as Tesla(R) production picks up, it's entirely possible that workers for other automotive companies will lose their jobs. But there is no discussion about a robot tax in the halls of Congress or the White House.

We are in the early stages of AI development and the Fourth Industrial Revolution. As a result there is a lot of excitement and tremendous investment and growth occurring. In these early stages of development, job growth is likely, but we shouldn't be fooled into thinking it will remain that way as the technologies evolve. What is important to recall is that many of these technological wonders were developed either to directly replace humans in the workplace, augment humans so that fewer are needed or disrupt existing business to the point of closing and putting hundreds, if not thousands, of people out of work.

What Should the Trump Administration and Congress Be Talking About?

Now is the time for President and Congress to be leading a public discussion, not hiding from, the economic realities of the Fourth Industrial Revolution. Even technological optimists who say more jobs will created agree that there will be disruption, perhaps long term disruption, to individuals' incomes.

If there is one point we should learn from the election of 2016 it's that people are angry about not having jobs and the threat of losing their jobs.

Recommendations:

1. Review all laws and regulations to identify areas where there are explicit or implicit favoring of robots over humans.
2. Discussions about robot taxes, Universal Basic Income, and other ways of ensuring the basic needs of our citizens are met during the transition. Options should be listed and analyzed, discussed and a final selection made.
3. National dialog about discrimination and hostile environments at the workplace and in communities. We cannot move forward and keep up with global competition of we hamper the willing people from participating and engaging in the workforce.
4. Develop economic contingency plans for dealing with mass unemployment. Much like banks stress test their balance sheets and must have contingency plans for a "capital event" all levels of government should similarly have a plan in place for responding to mass unemployment.

As a nation, and even a global community, how will we handle a tidal wave of employment disruption that could last a generation? It's time to acknowledge the issue and lead an honest discussion and policy debate. What are your suggestions?

References & Further Reading

(1) Feeley, Jef "Internet Tax Ruling Worth Billions Poised for Supreme Court Review", September 14, 2017.

(2) PricewaterhouseCoopers " Will robots steal our jobs? The potential impact of automation on the UK and other major economies", March 2017.

(3) Department of Numbers, "U.S. Employment and Jobs", accessed December 17, 2017.

(4) Center on Budget and Policy Priorities, "Chart Book: The Legacy of the Great Recession", updated December 14, 2017.

(5) Laura Noonan, Patrick Jenkins and Olaf Storbeck "Deutsche Bank chief hints at thousands of job losses: Cryan sees tech bringing lender into line with peers at 'half' its 97,000 headcount", November 8, 2017.

(6) Kevin J. Delaney "The robot that takes your job should pay taxes, says Bill Gates", February 17, 2017.

#TaxReform #Automation #ChangingIndustries #4IR #Disruption #Taxes

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About the Author

Larry Boyer helps people and businesses prepare for the changing and evolving economy of the 21st Century. He is both a Certified Business Economist (TM) and Associated Accredited Coach, providing a truly unique set skills to help his clients succeed. As a recognized leader in analytics, economics, future technologies and personal development he speaks, writes and consults on these topics and their impacts on businesses and people. His book "The Robot In the Next Cubicle: What You Need to Know to Adapt and Succeed in the Automation Age is available for preorder.

Follow Larry on Twitter @LarryBoyer and on BeBee

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