AI’s displacement of workers necessitates ‘ambitious fiscal innovation’, says US think tank
Governments will need to undertake “ambitious fiscal innovation” in response to the widespread impact of artificial intelligence, a leading US policy think tank has said.
The Brookings Institution report Public finance in the age of AI: A primer, says that – as AI becomes more prominent – policymakers worldwide are “grappling with how to adapt systems of taxation and public finance for an automated future”.
AI threatens traditional tax bases by reducing demand for human labour, the authors Anton Korinek and Lee M. Lockwood warn. Common proposals to respond to this include taxing robots and computing power, to levying fees on AI-generated tokens and digital services.
“Yet without a coherent framework for evaluating these options, we risk implementing policies that could hinder innovation and undermine competitiveness while failing to address the fundamental fiscal challenges ahead,” the authors caution, arguing that “smart AI taxation requires distinguishing final services from productive capital investments”.
The report sets out a framework for “a path to finance government during the AI transformation while maintaining competitiveness”, taking the view that by shifting from a “primary reliance on labour taxation to consumption taxes, policymakers can generate revenue without hampering innovation”.
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Global Government Finance’s AI & Data topic section
‘Clear need to design tax systems for AI’
The technical working paper, which was published earlier this month, highlights that “the fiscal challenges of an AI-driven economy may soon become tangible, but proper planning can help prepare for them”, adding that “by adapting proven principles of public finance to new circumstances, we can maintain fiscal sustainability while ensuring that the gains from AI are broadly shared”.
The authors warn: “The choice is clear: design tax systems that harness AI’s potential for broad-based prosperity, or watch fiscal frameworks buckle under technological change.”
The report makes five main recommendations.
As well as shifting from taxes on labour as a government’s primary source of revenue to taxes on consumption, the recommendations are to: modernise consumption tax systems for digital and AI retail services; avoid taxing AI capital assets in the short term “to avoid distorting infrastructure development”; build administrative capacity; and “maintain flexibility for future adaptation of a tax on AI-related resource accumulation if AI entities become the primary drivers of value creation in the economy”.
Global Government Finance’s Public Financial Management topic section
International coordination ‘crucial’ to progress
The authors say that government should be making certain reforms now, as AI is starting to displace labour, while others could undermine efficiency and would be counterproductive until AI systems become far more autonomous, and should therefore come later.
“Understanding this distinction is crucial for policymakers seeking to manage the economic transition and maintain fiscal sustainability while fostering the innovation that will drive future prosperity.”
The authors highlight data from a US Congress report (‘Overview of the Federal Tax System in 2024’) that about three quarters of all US federal tax revenue comes from labour (individual income taxes contributing about 49% of federal tax revenues and payroll taxes comprising about 36%); and OECD data (‘OECD Consumption Tax Trends 2024’) that consumption taxation only has a minor role at a US federal level, unlike in many other advanced countries that have extensive value-added tax (VAT) system. But consumption taxation has a significant role in the form of sales taxes at a US state level.
“AI threatens to erode […] taxes on labour […] by reducing demand for human labour across many occupations,” the authors write. “While the extent and timing remain uncertain, even modest labour displacement could significantly strain public finances at a time when funding for social safety nets may be needed most.”
They also point out that international coordination is “crucial” because “AI services cross borders effortlessly”.
“The nations leading in AI development could drive efforts to harmonise digital taxation frameworks that prevent both tax avoidance and double taxation,’ they state. “This supports their technological leadership by ensuring robust tax frameworks become models for international adoption.”
About Ian Hall
Ian is Global Government Finance editor. He has formerly held roles including UK director of Euractiv (2011-2018), editor of Public Affairs News (2007-2011) and news editor of PR Week (2000-2007). He was shortlisted for ‘Editor of the Year’ at the British Society of Magazine Editors (BSME) Awards in 2010. He began his career in the Balkans at English-language weekly the Sofia Echo (Bulgaria: 1998-1999).
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