Does automation erode governments’ tax basis?

09 March 2021

Kerstin Hötte, Angelos Theodorakopoulos, Pantelis Koutroumpis
View Journal Article / Working Paper

Decomposing taxes by source (labor, capital, sales), we analyze the impact of automation (1) on tax revenues, (2) the structure of taxation, and (3) identify channels of impact in 19 EU countries during 1995-2016. Robots and Information and Communication Technologies (ICT) are different technologies designed to automate manual (robots) or cognitive tasks (ICT). Until 2007, robot diffusion lead to decreasing factor and tax income, and a shift from taxes on capital to goods. ICTs changed the structure of taxation from capital to labor. We find decreasing employment, but increasing wages and labor income. After 2008, robots have no effect but we find an ICT-induced increase in capital income, rise of the services, but no effect on taxation. Automation goes through different phases with different economic impacts which affect the amount and structure of taxes. Whether automation erodes taxation depends (a) on the technology type, (b) the stage of diffusion and (c) local conditions.