Consumption-oriented Taxes Are A Better Option Than Those On Labour Or Potentially Robots

I was having dinner with three of my best friends a few years ago when one of them pulled out his phone to show us the just-released ChatGPT , the large language model artificial intelligence application. It was amazing. All of our jaws dropped. “And this is just the beginning,” he said.

He was bang on. The rapid pace of AI applications is truly astonishing. Since that day in November 2022, I have been very interested in how AI can help me become more efficient in my work — and it has.

Accessing quick answers to difficult questions, using it as a search engine replacement and coming up with ideas have been game-changing. In the professional realm, I routinely use AI applications such as Ask Blue J to help with my tax research. ChatGPT, Ask Blue J, Grok and others have transformed how I conduct tax research and they’re very good overall on the accuracy scale — not perfect, but very good.

I often get asked if AI will replace tax advisers such as me. My usual answer is a qualified “no.” AI has, to date, made my job more efficient, but experience and empathy still count for something. But we’re not very far away from AI replacing human beings for repetitive tasks such as bookkeeping and preparing financial statements.

Ditto for tax administration. It is conceivable that a lot of the assessment functions, audits, reassessments, collection matters and other routine Canada Revenue Agency functions could be replaced by AI at some point soon. Yes, I’m aware of the data risks.

From an overall jobs perspective, as in the tax realm, AI will likely replace repetitive jobs. For example, have you seen Tesla Inc. ’s Optimus robots that are in the testing phase? Truly amazing technology.

Will the job losses triggered by AI result in a shifting of jobs to where human beings are truly needed (such as personal or health care) rather than a permanent loss? Of course, the pace and permanence of these losses remain unknown, but economic history leans toward reallocation over obliteration.

What does the proliferation of AI mean from a tax policy perspective for our country? Well, like most countries, Canada heavily relies on taxing the labour of our residents. Of the $459.5 billion that our federal government collected in revenues in 2023-24, $217.7 billion — 47.4 per cent — was from personal income taxes.

Historically, wages and salaries account for about 60 per cent of personal income tax revenue. Accordingly, if AI were to significantly erode that 60 per cent of taxation revenue, the government could lose billions.

For example, if AI takes the job of a factory worker who earns, say, $80,000, there is less personal tax revenue for the government if that job loss is permanent. If that worker finds a similar-paying job in another industry, then there’s no net loss in taxation revenues. Some, however, are convinced that the job losses will be permanent. If so, then the taxation revenues will also be permanently reduced.

Bill Gates and other left-of-centre thinkers have advocated that if such job losses are permanent, then some form of “ robot tax ” needs to be introduced in order to replace the lost taxation receipts. The concept is interesting, but I struggle to see how such a concept is practical. A country is going to tax the productivity gains resulting from replacing a human being? Not sure how you would track that.

Instead, this issue should be part of an overall broader tax reform . If countries such as Canada have the potential to experience significant job losses — and reduced taxation receipts — as a result of AI efficiencies, then this is an opportunity to think big about how we want our future tax system to look, especially since our tax system is in dire need of reform to begin with.

Perhaps this is the opportunity to shift away from our heavy reliance on taxing labour and personal income and move more heavily towards consumption taxes such as the GST/HST. Economist Jack Mintz has long advocated for a greater role for consumption taxes.

An income tax penalizes earnings and savings, but a consumption tax only kicks in when money is spent, which encourages investment and growth. A well-designed consumption tax, such as the GST, applies across the economy, which includes human workers, robots, corporations and individuals, and since it taxes output, not inputs, there is no need to distinguish between AI’s productivity and a human’s.

Since our GST also applies broadly to a large variety of goods and services, apart from the necessities of life such as food, clothing, most homes, health care and education, and offers credits to low-income Canadians, it is fairer with the regressiveness significantly reduced.

A well-designed consumption tax is also simpler to administer, resulting in better efficiencies. A simpler tax system means fewer barriers for success and provides competitive advantages.

Do we need a robot tax? Nope. Instead, we need to stop punishing people for working hard. The proliferation of AI is a significant wake-up call to make bold and positive reforms that modernize the tax base so that it’s fit for the 21st century and beyond. Less reliance on taxing labour and a shift to relying more on a consumption tax would be a great proactive move, resulting in better neutrality and efficiency.

• A 1% tax cut isn't tax reform
• Growing government expenditures mean more taxes

AI certainly has the ability to greatly impact our country’s finances. Accordingly, let’s not waste this moment to finally build a tax system that’s fair, simple, sustainable and built to last. If AI ends up replacing us all, well, I just hope it picks up the tab the next time I’m at dinner with my friends — with an increased consumption tax.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.

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