Are U.S. Companies Overinvesting in Automation — And Underinvesting in People?

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Does the U.S. tax system incentivize companies to overinvest in automation—at the expense of jobs?

That’s the argument made in an intriguing new research brief by Daron Acemoglu, Andrea Manera, and Pascual Restrepo. Acemoglu is an Institute Professor in the MIT Department of Economics, Manera is a doctoral student in the MIT Department of Economics, and Restrepo is an Assistant Professor in the Boston University Economics Department. Their research brief, “Taxes Automation, and the Future of Labor,” was published recently by the MIT Task Force on the Work of the Future.

“In essence, the U.S. tax system encourages companies to buy machines while discouraging them from adding workers,” Acemoglu, Manera, and Restrepo observe in their brief. They note that in recent decades, the U.S. tax code has taxed capital—especially software and equipment—at a far lower rate than it has taxed labor through payroll taxes and income taxes. For instance, they write, depreciation allowances in the U.S. tax code “enable corporations to deduct capital expenditures from their tax obligations and have been a major factor in reducing taxes on capital.” These depreciation allowances, the authors point out, have become “much more generous” over the last 20 years.

Taxing capital at a much lower rate than labor, the authors argue, encourages companies to pursue more automation than may be beneficial to the economy. For example, companies may invest in what the authors call “so-so technologies” like retail self-checkout machines. Such investments substitute machines for people without offering many productivity-enhancing benefits to the economy.

According to Acemoglu, Manera, and Restrepo’s analysis, reducing the distortions produced by taxing capital much less than labor would have “major benefits” for employment growth and for labor’s share of the economy’s income.

That’s an important point, noted Barbara Dyer, Senior Lecturer and Executive Director of the Good Companies, Good Jobs Initiative at MIT Sloan. “This research suggests that the long-term consequences of lowering taxes on capital relative to labor are coming home to roost as people are being replaced by technology, even in nonproductive ways that Daron Acemoglu and his coauthors aptly call ‘so-so’ technology,” Dyer said. “But we want our economy to be better than so-so. For that to happen, we need workers who are energetically engaged in generating value while society in turn recognizes their value.  Tax policy is a reflection of a society’s priorities. Did we really mean to prioritize capital investments over investments in people?”