Taxing artificial intelligence differently from any other business is a terrible idea. Adam Michel explains in detail at the Cato Institute why taxing AI to punish it for being capital-intensive rather than labor-intensive is not a great idea. Michel writes:
Suppose you believed that this time is actually different and workers are about to be displaced by machines, without any offsetting new jobs. Economist Brian Albrecht concludes that “a compute tax is about as bad as a tax can be.”
First, a tax on inputs to the AI process, such as graphics processing units, power generation, and data centers, is a tax on intermediate goods. Because AI is increasingly an input into other firms’ production, taxing AI’s inputs raises costs before any final good or service is produced. Those higher costs then pyramid through downstream products. The result is a hidden, arbitrary tax on final outputs that varies with the number of production stages and rewards firms for minimizing taxable inputs rather than for producing efficiently. These types of intermediate taxes are some of the most economically damaging ways to raise revenue.
Second, most of the inputs to AI that could be taxed are capital, and capital taxes are notoriously shifted from owners to workers through lower investment, slower productivity growth, and, ultimately, lower wages. As Albrecht notes, “The features of AI that people worry about (easy substitution between capital and labor, mobile capital, self-replicating infrastructure) are exactly the features that make capital taxation counterproductive.” For workers to succeed in an AI economy, they will need more investment in newer and better tools, not less. Taxing the capital behind those tools would slow the very process that can raise wages and expand opportunity.
Third, the AI capital tax base is too small and too elastic to raise significant revenue. Beyond punishing the AI technology directly, proponents often frame the taxes as raising revenue for new programs or tax cuts for impacted workers. One optimistic scenario projects $1.4 trillion in AI spending next year. Even at a 100 percent tax rate, with no behavioral effects, the revenue wouldn’t even cover the current federal budget deficit, let alone new income support programs, additional redistribution, or tax cuts for workers. And anything near 100 percent tax rates would dramatically shrink projected AI spending and, thus, expected revenue. AI development wouldn’t stop; it would just shift offshore. The result would be less domestic investment and fewer American workers building and using the next generation of productivity-enhancing tools.
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