The tax shortfall of the robots

Start planning for the new economy

At a recent Friends of Europe roundtable on the 4th Industrial Revolution, Estonian MEP Kaja Kallas put her finger on one of the most alarming threats confronting Europe. It’s hidden from sight, but of profound importance. It’s not the eurozone, nor the EU’s widening north-south gap. In fact, it’s none of the problems making headlines today, but something far more fundamental and scary.

Kallas made the point with an almost century-old anecdote about industrialist Henry Ford and trade union leader Walter Reuther. Ford, showing off his newly-installed automated assembly lines, boasted of the huge boosts these would give to productivity, and therefore profitability.

“Yes,” replied Reuther, “but your robots won’t be buying your cars,” referring to Ford’s famed start-up policy of ensuring that all his employees could buy a car on advantageous terms.

Now, an ageing Europe needs to start planning for how artificial intelligence will change our industrial society – and find its own solutions to the rise of untaxable, non-consuming machines.

The implications of artificial intelligence (AI) and the robotics revolution are especially unsettling for Europe. Debate about the march of the robots has so far centred on whether or not they will destroy jobs and usher in an era of massive long-term structural unemployment. But we should instead be worrying about an opposite effect.

There will of course be disruption as machines take over mechanically routine tasks and even make inroads into sophisticated services currently performed by skilled technicians. The safest jobs probably range from the intellectually creative to the more humdrum, such as plumbers.

But far from there being too many workers, vulnerable to the robots or not, there won’t be enough of them. Robotics may well compensate for dramatic shrinkages of population and of workforces in almost all EU countries, but as Walter Reuther observed, smart machines won’t consume and nor will they pay taxes.

Europe’s demographic outlook is widely ignored. Policymakers tend to shelve ageing and shrinking as problems for tomorrow. But they are very real threats advancing on us at breakneck speed. Despite the attention justly paid to unemployment, especially among young people, Europe has a labour shortage that is rapidly getting worse.

The working age population of the EU, including the UK, is currently 240 million. Immigration, controversial as it is, isn’t keeping up with the rate of retirement.

If migrant job-seekers continue to arrive at their present rate, the European workforce will drop to around 207 million by the middle of this century. That means there won’t be enough people in work with taxable incomes to pay for retirees’ pensions. (And there will be just two workers per pensioner, not the four we currently have.)

No one can yet forecast with any confidence the impact of robots on industrialised societies. Perhaps they’ll help care for our aged populations, while also making us wealthier. But it’s hard to find silver linings to a cloud that consists of untaxable, non-consuming machines along with unstoppable waves of would-be immigrants who lack the skills needed to complement the robots.

The hole in governments’ finances that a reduction of more than 30 million taxpaying workers implies risks crippling Europeans’ cherished social welfare systems. Perhaps the robots’ profitability will fill some of the gap, but these machines will also be available to competitors worldwide. And that also makes it tricky to tax them directly.

On the brighter side, the AI revolution could be turned to advantage if policymakers quickly seize its opportunities. E-learning could teach skills that would transform the economies of developing countries – especially in Africa.

In Europe, where the stakes are so high, a revolution in education is needed to produce a new generation of IT-savvy workers. The first step is for the European Union to focus on this major shift in our industrial society and start planning for it.