Brookings Papers on Economic Activity

ABSTRACT:

We argue that the US tax system is biased against labor and in favor of capital and has become more so in recent years. As a consequence, it has promoted levels of automation beyond what is socially desirable. Moving from the US tax system in the 2010s to optimal taxation of capital and labor would raise employment by 4.02 percent and the labor share by 0.78 percentage point and restore the optimal level of automation. If moving to optimal taxes is infeasible, more modest reforms can still increase employment by 1.14–1.96 percent, but in this case it is also beneficial to impose an additional automation tax to reduce the equilibrium level of automation. This is because marginal automated tasks do not bring much productivity gains but displace workers, reducing employment below its socially optimal level. We additionally show that reducing labor taxes or combining lower capital taxes with automation taxes can increase employment much more than the uniform reductions in capital taxes enacted between 2000 and 2018.