Reshaping Taxes for the Age of Automation

By Revanza Almaas, a Directorate General of Taxes officer

Concerns that robots will replace human workers have been around for a long time, but the speed at which new technologies are being developed has intensified these anxieties. This rapid advancement has made the possibility of job displacement by automation seem more realistic and closer than ever before. We often ignore how taxes influence this. Existing tax structures in many countries, including Indonesia, actually promote automation even when it's not the most economical choice. Furthermore, the shift to robots will lower tax income for governments because there are fewer people working and paying taxes. So, any solution to address the rise of automation will be incomplete if it doesn't take into account the impact on taxes.

In 2017, Europe debated a proposed "robot tax" but European Parliament rejected it due to worries about hindering innovation. However, South Korea, in the same year, took a different approach, implementing what's considered the world's first "robot tax" by limiting tax incentives for businesses that make investment on automation. These examples show that discussions about tax policies and laws related to automation are just beginning.

Current tax system incentivizes companies to automate tasks, even in situations where a human worker might be a better choice. This is because automation lets companies avoid paying taxes on wages. These wage taxes fund important social programs, namely BPJS Kesehatan and BPJS Ketenagakerjaan. Essentially, companies only have to pay wage taxes on human employees, making automation financially attractive.

How Automation Helps Tax Avoidance

In Indonesia, companies can reduce their tax by claiming deductions (biaya yang dapat dikurangkan) for the cost of automation equipment. These deductions happen faster than they would for expenses like employee wages. Companies can't deduct the cost of paying wages as fast or easily as they can deduct the cost of buying robots. They generally have to pay the wage taxes as they go. So, the tax system is like giving a reward for buying robots (through deductions) that they don't get for keeping human workers (who generate ongoing wage tax expenses).

Automation even creates additional tax benefits beyond just avoiding wage taxes. Human workers buy things, which means they pay value-added taxes (VAT) and restaurant tax. Some economists believe that companies actually pay part of these consumption taxes indirectly, because they might raise wages to compensate for higher living costs due to these taxes. Since robots don't buy anything, companies can avoid these indirect costs associated with human workers. Perhaps most concerning, these policies result in reduced tax revenue for the government. That’s because most of out revenue comes from consumption and income taxes. When companies replace people with machines (or elect to automate with machines), the government loses the ability to tax workers.

Eliminating the Incentives

To mitigate the challenges posed by automation in tax collection, some alternative approaches can be implemented. Firstly, corporate tax deductions could be stopped for automation equipment. This would effectively eliminate the advantages companies achieve from choosing to automate over wage taxes, deduction timing, and indirect taxes. Secondly, a corporate “automation tax” could also be applied for companies that depend on automation. This tax would act as a substitute for the taxes a company would normally pay on wages for human workers. This is similar to how self-employed people pay taxes. They don't have an employer paying their social security taxes, so they pay a combined self-employment tax that covers both the employer and employee portions. The tax could be calculated based on the ration of how much profit a company makes compared to how much they spend on gross employee compensation expenses. Finally, a combination of both may be a good idea.

Eventually, making taxes the same for automation machines and people would be more efficient. Right now, tax laws favor automation, so companies might choose robots over humans for tax reasons, even if humans would actually do the job better. A neutral tax system would let businesses pick the most efficient option based on the work itself. This wouldn't solve the problem of reduced government tax revenue, though. To overcome that, we might need to think of a whole new way of taxing things, like capital vs. labor, or companies vs. employees.

Right now, a neutral tax system would be a good first step. It would let the market decide who does the work based on efficiency, like safety and innovation. And whether we should slow down automation at all is still a question that will keep coming up in debates as technology advances.

*) This article is the author's personal opinion and does not reflect the attitude of the agency where the author works.

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