Optimal Taxation in the Automated Era

Nakatani, Ryota (2024): Optimal Taxation in the Automated Era.

Abstract

Using the consumption equivalent welfare gain as social welfare and assuming an automation technology shock, we derive the optimal tax rates for various tax policy instruments in the steady state of the model economy calibrated for the U.S. We find that the optimal capital income tax rate lies between 22 percent and 23 percent under realistic technology shocks, while the tax rate could be higher if the elasticity of substitution between automation-related capital and unskilled workers becomes greater. Another finding is that the optimal labor income tax rate for unskilled workers is lower than that for skilled workers, although the social welfare gain from such optimal labor income tax reform is very small. We also find that the optimal tax rate on automation-related capital is zero due to its large economic distortion in the long run. Furthermore, the redistributive mechanism of the optimal consumption tax depends on the elasticity of substitution between automation-related capital and unskilled workers. Finally, we find that Pareto-efficient optimal tax reform is a combination of raising the capital income tax rate and lowering the consumption tax rate from the status quo. When automation-augmented technological progress is rapid, it is even optimal to rely solely on the capital income tax rate hike as a redistributive tax policy tool.

• Item Type: MPRA Paper
• Language: English
• Keywords: Automation; Optimal Taxation; Capital Income Tax; Labor Income Tax; Consumption Tax; Robot Tax; Tax Mix
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C68 - Computable General Equilibrium Models; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E25 - Aggregate Factor Income Distribution; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O30 - General; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

References

Acemoglu, D. 2023. Harms of AI. in Justin B. Bullock, and others (eds), The Oxford Handbook of AI Governance The Oxford Handbook of AI Governance.

Acemoglu, D., & D. Autor. 2011. Skills, Tasks, and Technologies: Implications for Employment and Earnings. Handbook of Labor Economics 4B: 1043-1171.

Acemoglu, D., A. Manera, & P. Restrepo. 2020. Does the US Tax Code Favor Automation? Brookings Papers on Economic Activity, Spring 2020: 231-285.

Acemoglu, D., & P. Restrepo. 2022. Tasks, Automation and the Rise in US Wage Inequality. Econometrica 90 (5): 1973-2016.

Atesagaoglu, O., & H. Yazici. 2021. Optimal Taxation of Capital in the Presence of Declining Labor Share. CESifo Working Paper 9101.

Afonso, O. 2023. Inflation, Technological-Knowledge Bias, and Wages. Research in Economics 77 (1): 91-103.

Atkinson, A., & J. Stiglitz. 1976. The Design of Tax Structure: Direct versus Indirect Taxation. Journal of Public Economics 6 (1–2): 55-75.

Barkai, S. 2020. Declining Labor and Capital Shares. Journal of Finance 75 (5): 2421-2463.

Berg, A. E. Buffie, & L. Zanna. 2018. Should We Fear the Robot Revolution? (The Correct Answer is Yes). Journal of Monetary Economics 97: 117-148.

Chamley, C. 1986. Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives. Econometrica 54 (3): 607-622.

Chetty, R., A. Guren, D. Manoli, & A. Weber. 2011. Are Micro and Macro Labor Supply Elasticities Consistent? A Review of Evidence on the Intensive and Extensive Margins. American Economic Review 101 (3): 471-475.

Costinot, A., & I Werning. 2023. Robots, Trade, and Luddism: A Sufficient Statistic Approach to Optimal Technology Regulation. Review of Economic Studies 90 (5): 2261-2291.

Dahan, M., & M. Strawczynski. 2000. Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates: Comment. American Economic Review 90 (3): 681-686.

DeCanio, S. 2016. Robots and Humans—Complements or Substitutes? Journal of Macroeconomics 49: 280-291.

Diamond, P. 1998. Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates. American Economic Review 88 (1): 83-95.

Dixit, A., & J. Stiglitz. 1977. Monopolistic Competition and Optimum Product Diversity. American Economic Review 67 (3): 297-308.

Domeij, D. & J. Heathcote. 2004. On the Distributional Effects of Reducing Capital Taxes. International Economic Review 45 (2): 523-554.

Ernst, E., R. Merola, & D. Samaan. 2019. Economics of Artificial Intelligence: Implications for the Future of Work. IZA Journal of Labor Policy 9 (1): 1-35.

Greenwood, J., Z. Hercowitz, & G. Huffman. 1988. Investment, Capacity Utilization, and the Real Business Cycle. American Economic Review 78 (3): 402-417.

Gasteiger, E., & K. Prettner. 2022. Automation, Stagnation, and the Implications of a Robot Tax. Macroeconomic Dynamics 26: 218-249.

Gueorguiev, N., & R. Nakatani. 2021. Sharing the Gains of Automation: The Role of Fiscal Policy. IMF Blog, November 18. https://www.imf.org/en/Blogs/Articles/2021/11/18/sharing-the-gains-of-automation-the-role-of-fiscal-policy

Guerreiro, J., S. Rebelo, & P. Teles. 2022. Should Robots Be Taxed? Review of Economic Studies 89 (1): 279-311.

Guimarães, L., & P. Gil. 2022. Looking Ahead at the Effects of Automation in an Economy with Matching Frictions. Journal of Economic Dynamics and Control 144: 104538.

Havranek, T., R. Horvath, Z. Irsova, & M. Rusnak. 2015. Cross-Country Heterogeneity in Intertemporal Substitution. Journal of International Economics 96: 100-118.

Heer, B., A. Irmen, & B. Süssmuth. 2023. Explaining the Decline in the US Labor Share: Taxation and Automation. International Tax and Public Finance 30: 1481-1528.

Jaimovich, N., I. Saporta-Eksten, H. Siu, & Y. Yedid-Levi. 2021. The Macroeconomics of Automation: Data, Theory, and Policy Analysis. Journal of Monetary Economics 122: 1-16.

Judd, K. 1985. Redistributive Taxation in a Simple Perfect Foresight Model. Journal of Public Economics 28 (1): 59-83.

Judd, K. 2002. Capital-Income Taxation with Imperfect Competition. American Economic Review 92 (2): 417-421.

Krusell, P., L. Ohanian, J. Ríos-Rull, & G. Violante. 2000. Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis. Econometrica 68 (5): 1029-1053.

Merola, R. 2022. Inclusive Growth in the Era of Automation and AI: How Can Taxation Help? Frontiers in Artificial Intelligence 5: 867832.

Mirrlees, J. 1971. An Exploration in the Theory of Optimum Income Taxation. Review of Economic Studies, 38 (2): 175–208.

Naito, H. 1999. Re-Examination of Uniform Commodity Taxes under a Non-Linear Income Tax System and Its Implication for Production Efficiency. Journal of Public Economics 71 (2): 165-188.

Nakatani, R. 2016. Twin Banking and Currency Crises and Monetary Policy. Open Economies Review 27(4): 747-767.

Nakatani, R. 2022a. Productivity Drivers of Infrastructure Companies: Network Industries to Maximize Economies of Scale in the Digital Era. MPRA Paper 115531.

Nakatani, R. 2022b. Optimal Fiscal Policy in the Automated Economy. MPRA Paper 115003.

Nakatani, R. 2023. Productivity Drivers of Infrastructure Companies: Network Industries Utilizing Economies of Scale in the Digital Era. Annals of Public and Cooperative Economics 94 (4): 1273-1298.

Nakatani, R. 2024. Multifactor Productivity Growth Enhancers Across Industries and Countries: Firm-Level Evidence. Eurasian Business Review, forthcoming. https://doi.org/10.1007/s40821-024-00265-8

Nakatani, R. Berg, A., Gueorguiev, N., Moriyama, K., Zanna, L., Miyamoto, H., & Bounader L. 2022. For the Benefit of All: Fiscal Policies and Equity-Efficiency Trade-offs in the Age of Automation. SSRN Electronic Journal 4305790.

Peralta, A., & A. Roitman. 2018. Technology and the Future of Work. IMF Working Paper 18/207.

Prettner, K. & H. Strulik. 2020. Innovation, Automation, and Inequality: Policy Challenges in the Race Against the Machine. Journal of Monetary Economics 116: 249-265.

Stern, N. 1976. On the Specification of Models of Optimum Income Taxation. Journal of Public Economics 6 (1-2): 123-162.

Stiglitz, J. 1982. Self-Selection and Pareto Efficient Taxation. Journal of Public Economics 17 (2): 213-240.

Stolper, W. & P. Samuelson. 1941. Protection and Real Wages. Review of Economic Studies 9 (1): 58-73.

Straub, L., & I. Werning. 2020. Positive Long-Run Capital Taxation: Chamley-Judd Revisited. American Economic Review 110 (1): 86-119.

Thuemmel, U. 2023. Optimal Taxation of Robots. Journal of the European Economic Association 21 (3): 1154-1190.

Tuomala, M. 1984. On the Optimal Income Taxation: Some Further Numerical Results. Journal of Public Economics 23 (3): 351-366.

Van Hoorn, A. 2022. Automatability of Work and Preferences for Redistribution. Oxford Bulletin of Economics and Statistics 84 (1): 130-157.

Tyers, R., & Y. Zhou. 2023. Automation and Inequality with Taxes and Transfers. Scottish Journal of Political Economy 70: 68-100.

Zhang, P. 2019. Automation, Wage Inequality and Implications of a Robot Tax. International Review of Economics & Finance 59: 500-509.