Don’t tax productivity

In the late seventeenth century, England’s King William III tried to fix his budget by taxing windows.  It wasn’t completely illogical, wealthier citizens had bigger homes with more openings.  But not surprisingly, this led to dark rooms as people made the obvious decision to board up their windows.  England was, quite literally, taxing the sun.

We can laugh, but today there are similar and serious discussions going on around the world about taxing AI, risking companies boarding up the very productivity we now urgently need.  As governments grapple with budget deficits, they are worrying about jobs being displaced by technology, particularly AI, and are pre-emptively looking to new sources of income.

Last year in “Demographics is not destiny”, I argued that a housing crisis was the unexpected consequence of poor productivity growth combined with an ageing population.  A failure to embrace automation in a misguided attempt to protect jobs could add new regressive taxes to the mix as well.

Every politician knows that you get elected by creating jobs.  But they are worrying about the wrong problem.  Over the next 25 years, the share of the global population in the workforce is projected to fall from 64% to 57%.  To simply maintain today’s standard of living, productivity will need to rise by 12% just to offset this demographic shift.  That’s before we even consider the additional gains required to fuel economic growth that we’ve all come to expect.

In Japan and Germany, the demographic shift is already well underway.  Germany faces the same global 2050 trend in as little as 10 to 15 years while Japan will need to lift productivity by even more in the same timeframe just to stay still.

Countries like the US and Australia are sidestepping their demographic issues through immigration.  This is often hiding per capita declines in economic growth.  Worse, the most productive immigration (that is bringing in the best skills) comes at the expense of the source countries that are giving up these highly sought-after workers.  Immigration is a great thing, as former US Secretary of State, Dr Condoleezza Rice, has said “Globalisation is a fact, not a policy”.  But any country that relies on it to cover a failure to prepare for the future is setting itself up for future intergenerational harm.

Politicians have to stop worrying about the number of jobs and worry about their quality instead.  In a digital world, work falls into three types: for the machines (such as delivery drivers dispatched by apps), with the machines (such as clinicians advised by AI) and on the machines (including programmers, engineers and anyone training the algorithms).

Job satisfaction, financial rewards and productivity are all aligned with moving up this value chain, working “on” the machines rather than “for” them.  AI is actually making it easier to make this shift, with low and no code solutions becoming readily available to codify insights and strategic direction in almost every field.  And in a world of constant change, skills can’t be front-loaded in early life, they must be updated continuously through lifelong learning.

This is a major shift in the way we educate our population.  A decade ago I wrote about the disruption of universities.  What was important then is critical now as we have to adapt to new ways of working shaped by technology and driven by productivity and demographic pressures.

Which brings us back to incentives and taxation.  Far from creating unemployment, AI and technology-enabled automation mitigates our global demographic crisis.  That’s why we should resist calls from the EU parliament, Bill Gates, or Anthropic CEO Dario Amodei, for taxes on robots or an AI token tax.

We don’t need new taxes, we need smarter use of the existing ones.  A progressive income tax system can capture rising wages from more productive workers, maintain government revenue, and still reward employers who invest in automation.  Governments can maintain income tax revenue if the reduced pool of workers is each earning more.  Individuals are motivated to maintain their skills if they can see the rewards flow through to their hip pockets.  And employers are still benefiting in this balanced future from reduced labour bills as a result of automation.

This ideal future is achievable, but it demands smart policy in a time of dizzying technology change.  In fact, change doesn’t happen at a constant pace, it comes in waves.  During surges governments need to hold on for the ride and use periods of consolidation to recalibrate, finding the balance between tax revenue, rewarding workers and shareholder returns.  Let’s hope today’s policymakers show more wisdom than a king who taxed the windows and darkened his nation’s future.