How to handle the robot invasion of human labour?

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Automation is gradually displacing human beings from their jobs. At the same time, taxing robots may discourage innovation. How soon is too soon for government and public policy to start thinking about how best to find a balance?

Robots will steal your jobs, but it can be OK if we safeguard loss of tax revenue and human employment. | Reuters

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Headlines such as “iPhone manufacturer Foxconn plans to replace almost every human worker with robots” or “Chinese factory replaces 90% of human workers with robots; production rises by 250%, defects drop by 80%” are a common sighting. We often read of factories becoming automated on a large scale and many losing their jobs. These seem to be problems of a distant land, far away from India. But this isn’t the case anymore.

Raymond Ltd., one of the major textile-manufacturers in India, is planning to replace one third of its labour force with machines in the next two years. That is almost 10,000 people losing their jobs across the country. GreyOrange, an Indian robotics company estimates its robots and smart conveyor belts could replace anywhere between 60-80%  of the warehouse workforce. This could change the way e-commerce and logistics companies operate. The World Bank is of the view that automation threatens 69% of the jobs in India. Sectors that were considered areas of job-creation will soon be areas of major job losses.

 

Why are companies automating?

While the government is trying to promote manufacturing in the country and inviting companies from around the world to set up shop here to take advantage of our labour, many of the existing firms cite labour as one of the biggest problem areas. The Ease of Doing Business Report published by IDFC and NITI AAYOG found that firms in labour intensive sectors find it difficult to deal with labour-related problems. Strikes and lock-outs also impact production. And as the cost of automation falls, we could see more firms being able to afford robots. The efficiencies that robots bring in outweigh their costs.

The Government’s Challenge

There is little doubt that automation will exacerbate the existing inequalities in the country. This would happen through job loss on the one hand and increase in wage differentials on the other. Lower-level jobs could witness a decrease in wages as more people compete to land a job while higher levels could experience an increase as the skill-sets required would fetch a premium.

One of the outcomes in such a scenario is the increase in the welfare role played by the state. Welfare measures such as Universal Basic Income (UBI) are gaining popularity as countries expect unemployment to increase with technological advancement and proliferation. But governments are faced with their own challenges. As government finances are already stretched out, there is very little the government can do without raising additional revenue. Automation could affect the government’s revenue as jobs and incomes are affected. The jobs that are being displaced include those that fall within the tax bracket. Income tax, one of the most important source of revenue to governments, could see a fall in its base as fewer people are employed. Governments would be in a situation where their expenditure far exceeds their revenue.

Taxing Robots?

 

One solution being considered to raise revenues is to levy a tax on robots that take up human jobs. A member of the European Parliament, Mady Delvaux, presented a draft report to the parliament on taxing robots. This view was endorsed and popularised by Bill Gates.

So how does the government start to think about raising revenue from robots? What would such a tax look like? Would such a tax be detrimental to the manufacturing sector in the country? These are some pressing questions.

There are two crucial tools in the tax design — the tax levy itself, and tax rebates/credits. The first tool of the tax might manifest itself in the form of a percentage charged on the output produced by the robot, or a flat rate. While this may seem straightforward, it is anything but. The conceptualisation and operationalisation of such a tax or levy is fairly complex.

Taxation is guided by various canons laid out by different economists to ensure it are efficient. There are nine canons as proposed by economist Adam Smith, such as equality, convenience, certainty, simplicity, etc. Such a tax would violate many of these canons. Issues such as computation of the tax and equality come in as they wouldn’t be easy to compute nor would a flat rate be equitable. There is also the element of the tax incidence. It is not so straight-forward a suggestion that a robot be taxed commensurate with the human worker it replaces. Such a tax would cause a double burden on the firm — a robot tax would have to be paid by the firm in addition to corporate tax, whereas an income tax is paid by individual employees. While the demand for firms to pay is fair as the element of savings caused by the robot remains with the firm in the form of surplus, the efficiency of such a tax is also an issue. Such a tax could cause ‘distortions’. When a tax is levied, there are two possibilities.

 

In the first, the firm passes on the tax to the end consumer. This could range from passing on the full amount or just a tiny portion. The second is that the firm completely absorbs the tax increase. Which of these two finally happens depends on factors such as substitutability of the good, competition in the market, nature of the good, etc. Nevertheless, in all situations, there will be a change in the demand and supply dynamics. As the price is affected, the demand dynamics will change. The profitability of the firm will be affected if it isn’t able to pass on the full extent of the tax to the customer. A portion of the profits that the firm could have used for expansion or producing more goods or other productive uses ends up being paid to the government as tax. This affects the supply side dynamics as well. In all, this may not be a good place to start.

The Political Economy of The Tax

India has derived a competitive advantage from its low labour costs — among the skilled as well as unskilled. Our demographic dividend is an advantage. The rise of automation would require us to rethink notions of this competitive advantage as, with automation at play, the cost of manufacturing certain items would be rendered almost the same on a global level. For example, a country might well find it cheaper to 3D-print a certain good domestically than import it from a country like China or India.

 

We must start thinking about public policy in light of the new industrial revolution. The government should start engaging various trade and industry bodies to create consensus and enable a smooth transition. This will undoubtedly be a long process

As automation proliferates all sectors, the factors that determine competitive advantage in international and domestic trade will change. In such a scenario, increasing tax rate or taxing the method of production would be a big deterrent for industries or manufacturers. Make In India, the flagship program of the government is seeing many multinationals showing interest in the country. A significant uptick in the cost — or even a whiff of such a tax — would see them relocating to areas that woos them with more attractive terms and is likely to be more stable in the medium term. Such moves will also discourage domestic entrepreneurs from expanding their operations beyond a point. Firms will organise through trade and industry and put pressure on the government to completely avoid such a move.

It is also important to note that while robots are taking over manufacturing plants, automation will, in the long term, affect all sectors of the economy — agriculture, manufacturing and services. The service sector is the dominant sector in the economy. Software-service exports account for nearly 45% of total services. The service sector already has a large level of automation without using robots in the conventional sense. Algorithms are slowly replacing the human element while at the same time doing things which no human has ever done before. How does one approach such a problem?

Automation in the agriculture sector is making headway. With labour being one of the top problems, large farmers with the right conditions will be quick to adopt machines if they become economically viable. Agriculture has been a no-tax zone for a very long time. How might this be addressed?

In this whole scheme, there would also be elements of differential taxation depending on the sector (textile, automotive, etc.). As we start working towards bringing robots into the ambit of taxes, we would need to modify the existing structure.

A Starting Point

 

A good starting point would be the second tool, that of tax credits and rebates. Tax credits given to automation related capital investments could be reduced or completely removed. Another way is to link tax credits or rebates to wage levels, thereby ensuring people don’t get paid less. South Korea introduced a similar move recently to limit the tax incentives provided on investment in automated machines. Tax credits and rebate would be a good place to start in the near future.

The policies that would be required and the outline proposed above may seem to be in contradiction with today’s policies (increased ambit of tax credits for capital investment, aims to cut corporate tax, etc.). However, they will be required in the not so distant future. Perhaps even rethinking corporate tax rates once automation reaches a particular level would also be on the table.

It also important to start the debate around a public policy approach to this technological revolution. While the event of all pervasive automation is far off, it is a certainty unless the human race is wiped out before such an event or there is no more technological progress (both of which are very unlikely). We must start thinking about public policy in light of the new industrial revolution. The government should start engaging various trade and industry bodies to create consensus and enable a smooth transition. This will undoubtedly be a long process — the GST was agreed upon, in principle, in 1999, but finally implemented only in 2017. Such a change, therefore, will be time-consuming. It is imperative we start thinking about it now as there maybe not be enough time to respond when the time comes.

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