The Software Society

How digital technology is changing our culture and economy

It’s time to talk about an automation tax

Apple is in the news for its creativity again, but unfortunately for creative tax avoidance. Most of our tax laws were written before the digital age. A software application, unlike a car, can be downloaded from almost anywhere, making it more difficult to identify where a company selling the product resides.

Selling digital products also usually generates high profits with fewer employees. As I noted in The Software Society, Apple had about 70,000 employees worldwide in 2012, and the company was running at a revenue rate of about $40 billion per quarter. With about the same revenue, GM had about 200,000 employees worldwide. This translates to 1.8 employees per million dollars of revenue for Apple and 5.0 employees per million dollars for GM. GM required almost three times as many employees as Apple to generate a million in revenue.

As I noted in The Software Society and an earlier post in this blog, companies are replacing employees through full automation rather than improving productivity through innovations that make employees more productive and generate well-paying jobs. I proposed an “automation tax” that is designed to encourage hiring people rather than computers.

Let me describe the principles of the automation tax briefly (with the caveat that it is discussed and justified in much more detail in the book). The tax is based on the revenue of a company in the country and the number of employees of the company in the country in which those revenues are generated. (Apple claimed in a statement that it “does not move any taxable revenue from sales to US customers to other jurisdictions in order to avoid US taxation.”) The tax is higher for a company that uses a lower number of employees to generate a million in revenues than one that uses more employees to do so. Employees come with costs like payroll taxes and medical insurance, and the automation tax could be considered a penalty for “hiring computers” that makes that choice less attractive.

The tax can be revenue-neutral, in that the companies with more employees per million in revenue could get a tax credit, while those at the other end of the spectrum pay more taxes. However, I believe that corporate taxes should be higher, so I would prefer that the tax generate additional government revenue to avoid the need to raise individual taxes. An article on the Apple tax situation in the New York Times noted that, in 2011, individual income taxes contributed $1.1 trillion to federal coffers, while corporate taxes were only $181 billion. Much of the cash from highly profitable companies like Apple is otherwise simply parked and generates little economic growth.

Most criticisms I’ve heard of my proposed automation tax simply say it’s not going to happen given the present political situation, largely because passing a new tax isn’t likely, whatever the purpose. Perhaps the clear need for tax reform created by the Apple controversy will make a logical discussion of alternatives more feasible.

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2 thoughts on “It’s time to talk about an automation tax

  • Kyle Lyles says:

    The USA already has the highest corporate tax rate in the world; hence, Apple’s holding their offshore earnings outside of the USA.

    Taxes should not guide corporate policy, yet because the rate is so high here in the USA, they are doing just that.

    The main difference between GM and Apple is NOT automation. Apple outsources a tremendous amount of their manufacturing, including assembly, while GM’s percentage rate is only 54%. http://www.heardny.org/autoworkers.htm Furthermore, the layers of bureaucracy at GM is legendary, even after the government’s illegal seizure from bondholders.

    So Bill, you’re trying to say that our broken corporate tax “plans” (unintended consequences……) should push US HQ’d companies to be less efficient? I should start buying up corporate real estate in the Cayman Islands; there will soon be a rush of American corporations moving their HQ to save their futures.

    • Kyle, your point is valid, in that corporations do react to tax law. I’m hoping we can change tax law to encourage productivity by giving people better tools rather than replacing them. I can’t fully reply to your points here, but I believe the book addresses your concerns. I note in the book that the “automation tax” could be called an “outsourcing and automation tax,” since it also penalizes outsourcing. As to moving to the Cayman Islands, I suspect that few of Apple’s Silicon Valley employees would do so, and it is up to well-designed tax laws not to make simply moving corporate headquarters somewhere a way to avoid taxes.

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