Increasingly Automated World Demands Modern, Fairer Tax Code

Artificial intelligence is fundamentally altering who generates investment returns. Consider the rise of “agentic AI” in finance: autonomous programs that analyze markets, devise strategies, and execute trades without human intervention.

When an algorithm, not a person, drives investment returns, the argument for taxing those gains preferentially over human labor crumbles. Policymakers should modernize our tax code by lowering the top rates on earned wages to match the rate on capital gains—and fund this revaluation of labor by eliminating the stepped-up basis. Doing so would help Americans who work for a living, rather than preserve special treatment for unearned wealth and the growing share of AI-driven gains.

A fundamental imbalance is enshrined in our federal tax code. If you earn a paycheck, your wages are taxed at federal rates up to 37%. But if you make money through long-term investments, that passive income is taxed at preferential rates, topping out at 23.8%.

The result is absurd: A high-earning doctor or engineer pays a significantly higher tax rate compared with a passive investor realizing the same income in capital gains. The historical justification for this special treatment—to encourage investment—is collapsing.

The landscape of stock ownership has radically changed in the past six decades. The share of US stock in taxable accounts reportedly has plummeted from 81% in 1965 to 28% in 2022, as most shares are now held in tax-advantaged retirement accounts. This shift undercuts the effectiveness of preferential tax rates as an investment incentive.

A study released this year by researchers from Stanford University and Boston College analyzed data between 1990 and 2020 finding that professional fund managers generated an average of $2.8 million above the quarterly market benchmark. When the researchers’ “AI analyst” readjusted the human managers’ portfolios using only publicly available information, it generated an incremental gain of $17.1 million per quarter.

The study concluded that AI would have generated returns six times higher than 93% of managers over the 30 years. One of the researchers noted, “The technology raises serious questions about the role of human workers when many of these tasks that are not just routine, but actually quite complicated, are being automated.”

This irreversible disruption demands a tax code that reflects the true economic and societal value of work.

Policymakers have long butted heads over raising taxes on capital gains. It’s an approach that consistently fails to gain political traction and misses the fundamental economic shift underway. The new goal should be to elevate human labor, not punish capital. Therefore, to incentivize human contributions in a time when AI use is only increasing, policymakers should lower the higher marginal rates on earned wages to be no greater than the tax rate on long-term capital gains.

Critics could argue that this benefits the “working rich.” That is true—and it is by design. Doctors, lawyers, and the other 13.2% of taxpayers in a tax bracket of 24% or higher would see their tax burden fall. This strategic policy establishes a vital principle for the 21st century: No American’s paycheck should be taxed at a higher rate than an algorithm’s investment returns.

So how do we pay for this timely revaluation of US work? We start by closing a tax provision that disproportionately benefits inherited wealth: the stepped-up basis.

This inheritance loophole allows heirs to inherit assets such as stocks or real estate and essentially pretend they bought them at the current market value, not the original purchase price—wiping away a lifetime of capital gains taxes. It’s a privilege for those who inherit, not those who build.

Ending this loophole would generate substantial revenue. In its most recent report on Deficit Reduction Options from December 2024, the Congressional Budget Office projected that taxing unrealized gains at death could raise between $197 billion and $536 billion over 10 years (2025–2034). It is worth remembering that reform can be designed with boundaries, such as the $2.5 million per-couple exemption in former President Joe Biden’s proposed tax plan for 2022, and provisions protecting family farms and small businesses.

Ending a policy that allows wealthy heirs to dodge capital gains taxes would help modernize the tax code and preserve fairness. The meteoric impact of AI demands a reckoning with how our federal government values human labor.

The question for policymakers is simple: Modernize our tax code to champion Americans who work for a living, or preserve special treatment for unearned wealth and the growing share of AI-driven gains?

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Peter Gariepy is a CPA and serves on the Ladue School District’s Board of Education.

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