AI-Fueled Job Displacement Anxiety Triggers Tax Code Scrutiny

Renewed Congressional interest in artificial intelligence’s impact on jobs is spurring new hope that lawmakers will address concerns that the tax code favors automation.

Senate Majority Leader Chuck Schumer (D-N.Y.) has scheduled a series of briefings on AI as lawmakers attempt to understand the technology’s developments and capabilities, and find ways to regulate its use.

But some economists say the tax code can also serve as a guardrail against bad effects on the workforce, as a recent Goldman Sachs report shows that AI could expose as many as two-thirds of US occupations to some degree of automation. Republicans, though, are looking to bolster a tax incentive that some Democrats and academics warn is accelerating automation.

The disparity between how the US taxes workers compared with machines has economists sounding alarms about the country stimulating automation just as a boom in AI technology is creating fears of massive job displacement.

A research brief for the Massachusetts Institute of Technology from 2020 shows that workers have cost employers a 25% tax rate, while the rate on software and equipment has stood at around 5%. This lopsidedness in tax code gives employers more reason to invest in automating goods like machines and computer software instead of workers, the paper said.

“Why do you get a tax credit if you buy a computer, but if you train two human beings to do better you don’t get any of the same benefits?” asked Sen. Mark Warner (D-Va.) in an interview, noting that businesses can write off those costs with research and development tax incentives, among other capital breaks in the code.

But House Republicans are proposing to boost incentives for capital investment in a tax package Ways and Means Republicans advanced Tuesday. Bonus depreciation, which the MIT study authors recommend eliminating, would increase under the legislation.

The tax provision allows business owners to deduct 100% of costs for short-term investments—such as machinery, equipment, and buildings—in the first year they make the purchases, which some say only reinforces automation’s favoritism in the tax code.

“They want to take a problem and make it worse,” Massachusetts Democrat Sen. Elizabeth Warren said in a brief interview.

Bonus Depreciation Conundrum

Full bonus depreciation was first enacted in the 2017 Trump administration tax package. Since then, more companies are taking advantage of the deduction and writing off expenses related to automation, said Daron Acemoglu, an economics professor at MIT and an author on the 2020 report.

“Part of the reason why marginal taxes imposed on capital and automation have come down so much is because those bonus depreciation allowances have become more aggressive,” said Acemoglu.

The measure began phasing down this year after lawmakers failed to come to a tax deal at the end of last year, meaning companies can only take deductions for 80% of the costs in 2023. If lawmakers don’t act, bonus depreciation will be completely phased out by 2027.

Republicans have been pushing to make 100% bonus depreciation permanent, though the newly released tax package only extends the provision until 2025 when most of the 2017 tax law expires. Some Democrats have also supported the tax break, but refuse to revive the rules unless the GOP agrees to expand the Child Tax Credit.

Full bonus depreciation makes it easier for businesses to shift to automation and save more cash. Julie Masser Ballay, the vice president of Pennsylvania potato farm Sterman Masser Inc., said the tax break helped her company mechanize hard-to-fill positions during the pandemic.

Certain bag-filling and palletizing functions are labor-intensive and difficult to fill, Masser Ballay said at a recent House Small Business Committee hearing on the tax code. Bonus depreciation was key in helping the company install those machines, she said.

“By taking advantage of bonus depreciation, we have been able to redirect cash back into our business so that we can improve employees’ work environment, increase our efficiency, and continue to remain competitive in the marketplace,” Masser Ballay said at the hearing. “With a tight labor market in our region, we are always looking for ways to improve the work environment for our employees, improving safety and efficiency.”

Bonus depreciation helps workers do their jobs better—it doesn’t replace them, Sen. James Lankford (R-Okla.) said in an interview.

“Most of what is invested in bonus depreciation actually helps humans be more efficient at it,” Lankford said. “It’s not taking away from humans. It’s actually allowing them to be safer, be more productive, be more efficient in what they’re doing.”

AI’s Possibilities

The quick developments in artificial intelligence have caught many in Washington by surprise, and many in academia are still figuring out the scope and scale of the consequences of the technology on the workforce.

Warner said he has been warning about the asymmetry between human and physical capital in the tax code for years, working with accountants to develop ways to level the playing field for workers. But he admitted he “failed miserably” to get some legislative movement.

“That debate may get some fresh legs now,” Warner said.

AI technology is moving so fast that it will be hard to measure the impact it will have on jobs, said Northeastern University Professor Christoph Riedl. Previous predictions have missed AI’s ability to fill creative roles, he added, with capabilities like ChatGPT showing the potential for use in legal professions as well as in screenwriting.

“We don’t really know yet what the most effective use cases of that kind of technology are, let alone make predictions of what effect it will have on jobs, or replacement of jobs, or automation of jobs,” said Riedl, who co-authored a policy brief on AI for the Brookings Institution.

Lawmakers are proceeding with caution, recognizing AI’s capabilities and at the same time the need for human jobs.

“No one is quite certain where AI will rework parts of our economy, but the possibilities of AI are causing people in Congress to pay far more attention to this set of issues than ever before,” Warren said.