AI should lead policymakers to reduce taxes on capital income and corporate income, not to increase them.
This is a minority view. A few weeks ago, Roll Call reported that Massachusetts Senator Elizabeth Warren proposed an excise tax on data center energy usage; that Representative Greg Casar of Texas, chairman of the Congressional Progressive Caucus, has called for a tax on AI use; and that Senator Ron Wyden of Oregon may be exploring taxing tech companies to create a wage-security program for workers. Senator Josh Hawley, the Republican populist from Missouri, also seems warm to the idea of taxing AI companies.
Meanwhile, Wall Street Journal columnist Greg Ip accurately reports that “one policy response” to potential AI dynamism that is “drawing growing support, at least among economists if not legislators,” is to “stop taxing capital more favorably than labor.” Big surprise, Senator Warren is in favor of raising taxes on corporate and capital income.
These names are a sample of the politicians, along with economists and analysts, who think that the appropriate response to AI is to raise taxes on businesses and the returns to household savings.
This is the wrong response. If more revenue is needed, policymakers should tax consumption, not capital or corporate income. One reason is sufficient: Moving to a consumption tax and away from an income tax would increase long-term prosperity.
From my latest Financial Times column:
If your goal is to slow down AI-related dynamism by increasing the tax burden on business investment, on the financial returns to households from equity investment, or on AI use, then a consumption tax isn’t for you.
This is a feature, not a bug. AI will quickly make most people better off, and over time the productivity increases it enables will raise wages and living standards throughout the economy. It will also lead to new and better medical treatments, higher-quality education, and new consumer goods and services. Policymakers should not erect ill-advised obstacles — AI-specific taxes, or higher capital and corporate taxes — to its development, adoption, and use. A rising tide does not lift all boats immediately or at the same pace — but it does eventually lift all boats.
And:
The tax code should not target the sources of long-term growth. Addressing AI-related disruption should occur on the spending side of the budget, not the revenue side. And economic policy should be directed towards advancing long-term prosperity. It should not be burdened by excessive anxiety about dynamism — or the future.
Check out my column for my full argument.