Optimal taxes and basic income during an episode of automation: a worker’s perspective

Abstract

Abstract Motivated by distributional concerns raised by recent breakthroughs in AI and robotics, we ask how workers would prefer to manage an episode of automation in a task-based model, which distinguishes between automation and traditional technical progress. We show that under majority voting with the option to implement a “partial” UBI (as transfers to workers) it is optimal to tax capital at a higher rate than labor in the long run to fund the partial UBI. We show that, unlike traditional technical progress, automation always lowers the labor share in the long run, justifying distributional concerns. A quantitative analysis of an episode of automation for the US economy shows that it is optimal from the workers’ perspective to lower capital taxes and transfers over the transition. Nevertheless, this policy increases worker welfare by only 0.7% in consumption-equivalent terms, compared with a 21.6% welfare gain to entrepreneurs, because the welfare gains to workers from lower capital taxes are second-order, while the gains to entrepreneurs are first-order.