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Call from Parliament tax committee chair for Articifical Intelligence levy
The Chair of the EU Parliamentâs Subcommittee on Tax matters this week called for proposals to tax Artificial Intelligence (AI). Pasquale Tridico, MEP, said: âIA is a source of income (âŠ), thatâs why it needs to be taxed. We need to carry out investigations and research, and find a wayâ.Â
He was raising the revenue-generating issue in the context of an ageing population, and AI displacing many manual roles â and therefore salary taxes â of the available workforce. âArtificial intelligence is a source of income-generating output, like a worker, like capital, so thatâs why it needs to taxedâ added Tridico.
Aside from the threat to labour-related tax revenues, the issue of massive consumption of electricity by AI technologies is raising environmental issues. In June, the International Monetary Fund called on governments to evaluate both the fiscal and environmental threats AI will pose. The IMF pointed out that, unlike previous technological change, AI is already spreading much faster into the economy.
Artificial Intelligence replacing employment means dangerous drops in government revenues.
Taxing AI isnât the solution.
Whether as a labour efficiency tool or complete displacement of workers, Artificial Intelligence (AI) is set to undermine the established economic model. At stake is lost income, or even jobs, putting huge strains on public finances and risking public unrest. Itâs not like this is a new story: ancient Romeâs slave labour replaced employment for the working classes (âfree to be poorâ). The welfare bill â bread and games â to keep the proletarii subdued, and resulting tax rises, helped bring down the Empire.
Ironically, the earliest AI adopters are tax authorities themselves looking for tax evaders.
But Governments are now anxious about the prospect of shrinking income tax receipts from as AI suplants workers. In most modern economies, labour taxes are now the largest single source of receipts â in the EU is accounts for 53% of tax receipts. So governments are now exploring how public spending can continue even as the pool of taxable income from human workers shrinks. Â This includes taxing AI. But how?
A number of AI taxation frameworks have already been proposed. But the practicalities of their application, negative effects on productivity and ease of avoidance, may undermine any of these. Any new tax model must meet the accepted tests of good taxation: Â neutrality; simplicity; certainty; flexibility and efficiency.
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Failure to meet the tests of good taxation and fear of stifling innovation may sink tax proposals
But other jurisdictions are slower to react as itâs not clear how to design a sound taxing framework. The main challenge is documenting AI activities within the wider manufacturing or service provision. One of the key components of any tax is a clearly definable supply.  And also how to calculate the taxable benefit â a further basic requirement of any tax. Would the tax be transactional, like VAT, and therefore charged on the customer? This all means taxing AI would fall at the basic simplicity and certainty tests for a new tax.
Even if the nature of the taxable activity or transaction could be defined, it would be hugely complex to legislate for all the various business models and their future variations to prevent easy avoidance or even evasion. Â This would create a huge compliance burden and costs on businesses and policing tax authorities, undermining the efficiency and cost-benefit of such taxes. And any heavily codified laws would lack flexibility to adopt to emerging business modes.
Introducing unilateral taxes would also threaten to make countries uncompetitive, and scupper home-grown innovation. And could be easily avoided by multi-nationals relocating work or digital processes abroad. These two factors would mean any tax measure would fail the neutrality test of taxation. This sets the principle that taxes should do as little as practical to distort business behaviour, and apply consistently between traditional and digital commerce.
Fiscal levies for adopting AI would also dissuade improvements in productivity that power countriesâ growth. Again, this would be highly unattractive for governments and businesses anxious to adopt and develop new technologies.
Tax wonât fix the AI income gap
It is clear that governments will have to invent new revenue sources as AI undermines their current tax revenues. But simple taxes on providers or users will not be to practical. Hence why numerous proposals in the past five years have failed any serious interrogation.