Robot Tax (No), Sovereign Wealth Fund (Yes)


Let’s talk for a minute about Robot Tax. Recently, it’s been a quick fix concept, espoused by Bill Gates and others. In San Francisco and South Korea, there is already talk of implementation. It’s the wrong idea, unless The United States truly wants to hinder robot implementation, in which case let’s hope the rest of the world agrees at the exact same moment to the exact same policy.

The idea of a “robot tax” comes from the fear of Technological Unemployment. Machines replacing human workers at many jobs, without an offsetting number of replacement jobs. I find this fear to be very reasonable as I have argued here:

I also recognize that not everyone thinks that Technological Unemployment is a problem. However, there is one thing I do know. If Tech Uneployment is not a problem, then we will end up in a good place with minimal risk and an economy that has grown more efficient, creating many high paying jobs. If however, Tech Unemployment does come to pass, then we will be faced with some major societal challenges. Upside gain = POSITIVE, down side risk = VERY NEGATIVE. So with my risk management hat on, this blog post attempts to deal with the downside risk of Technological Unemployment, by tackling the issue of “robot tax” and introducing an alternative solution - a United States Sovereign Wealth Fund (USSWF).

To begin, let’s examine some key assumptions for how Technological Unemployment may occur, recognizing that this is not a certain outcome. There are those who even argument that it won’t happen at all.

  1. Technological unemployment will be a process that takes years if not decades.
  2. We don’t know how and when people will become displaced. This is true at a company level, a sector level and across the economy as a whole, which I discussed here
  3. We don’t know what new jobs will be created
  4. There is an implicit concern about rising income inequality as the owners of capital reap the rewards of automation, while labor receives a decreasing share — approaching zero
  5. There is a belief that technological unemployment will be a byproduct of significant growth in economic production and subsequent wealth attributable to the implementation of AI and Automation.

Technological Unemployment, as discussed in detail by Oxford (2013), PwC (2016), Mckinsey (2017) and referenced directly by the White House report on AI and Automation (October 2016) is estimated to result in as much as 30–40% unemployment. Many people believe that this possibility is real and as a result they are concerned about supporting the unemployed. This is the genesis of the “robot tax” concept. Here are some concerns about the idea:

  1. It picks winners and losers based on how easily things are automated
  2. It creates a huge competitive advantage for countries/jurisdictions that do not tax robots. Most companies competing in AI and Automation are global in nature. Machine implementation will simply be shifted to other jurisdictions where the tax impact is minimized, so will the wealth creation associated with that machine implementation. Apple is a perfect example with nearly $250 billion dollars in cash overseas. Nearly all of that offshore cash is a function of tax issues. This point is not debatable, it is a corporate responsibility to minimize taxes legally, just as Apple has done. There is significant tangible history of corporations shifting production to jurisdictions where the tax is favorable. A robot tax punishes companies for innovating and will drive wealth creation out of the United States.
  3. Bureaucracy, companies rarely “flip the switch to automation” on a Friday and asks a set of employees to stop coming in on Monday. Therefore, identifying human replacement by machines will be difficult and policing a “robot tax” implementation would require significant manpower. If you are like me, when you see something is difficult to police, you probably also imagine a large bureaucracy trying to police it. Therefore, imagine the IRS, do we really need an IRTS (Internal Robot Tax Service) too? I suspect that is something most people would like to avoid. Taxes are difficult to implement on all companies public and private.
  4. Timing and measurement mismatch — Another problem with the “robot tax” concept is timing. For example, Company A automates Person A out of a job and therefore is subject to a tax. So Company A has its profit and capital reduced to pay the tax, but if this happens tomorrow, it is reasonably likely that Person A finds another job. Now the tax has reduced the capital allocation capability of the growing company and wasn’t put to good use supporting Person A who didn’t require the funds. Instead, it sits with the government, which is surely an inefficeint allocation of capital.

On top of all of this, no one has layed out the entire structure of a “robot tax”. Some have suggested banning the replacement of jobs by machines. Others have suggested a tax without much detail. In South Korea, where reports came out that they had enacted the first “robot tax”, it turned out to be all hype. The actual implementation was the decrease of tax INCENTIVES for the makers of automation.

In the end I suspect a Robot Tax is simply a reflexive action being suggested by people who are rightfully concerned but have no other alternatives to address their concern. Ideally this paper and the USSWF addresses those issues and proves to be a better tool to tackle the challenges.

Look I get the theory, if you want to grow your company and make more profits for yourself by automating, let’s tax those profits because you are removing jobs from the workforce. However a tax is punitive and redistributional. Why not participate with the company in their wealth creation, on behalf of that displaced worker. Practically speaking, if a worker were to be laid off by Google, Amazon or Apple, but compensated in stock for their termination. There is a decent chance that the capital gains of the stock may offset the lost wages.

If you believe the concerns about Technological Unemployment and that a significant amount of work will be replaced by automation, we do need to prepare for higher, permanent unemployment. So what should be done. The answer, from my perspective, is a series of solutions listed below (of course, this is no small challenge and requires many policies to try to mitigate the risks). This list amounts to a comprehensive AI, Automation and Tech policy for the United States (where I have covered them previously, I will show the links), but for the rest of the piece, we will concentrate on point #5:

  1. Lifetime learning to ensure we have the most nimble and current workforce available
  2. A laissez-faire, regulatory environment (as discussed by Andrea O’Sullivan and others) that encourages leadership in the area of AI and Automation, (one could argue, this exists today, but is unlikely to remain so lenient, which may eventually hinder the expansion)
  3. Independent, market-driven audit oversight on key inputs to AI and Automation, such as ethics, standards, safety, security, bias and privacy. A model, not dissimlar to credit ratings
  4. A plan for shifting current welfare and Social Security into a Universal Basic Income, coupled with an increase in taxes on the wealthy to make the UBI funding budget neutral. In the future, NOT TODAY.
  5. Finally a Soverign Wealth fund for the United States (USSWF) designed to maximize the benefits of the growth and expansion on behalf of all US citizens equally.

Since this post is introducing the Sovereign Wealth Fund as a means towards maximizing the benefit of the comprensive Technology Policy listed above, we will remain focused on it and the other elements of the policy remain open for debate elsewhere.

Returning to the idea of Technological Unemployment, we can all agree it would be a process and would take some time to occur. During that process, there are few things that the United States should prefer to have happen. Here is a list of those positive outcomes:

  1. We want the United States to capture/create the maximum amount of the wealth creation from this process
  2. We want to be in a position to protect displaced workers immediately when they are no longer relevant to the workforce
  3. With regards to cutting edge skills, we want citizens of the United States to be in a position to posses the requisite skills for new age work.
  4. We want to begin to build a warchest of resources for the time when significant unemployment becomes more permanent (Sovereign Wealth Fund)
  5. As a country we want to be rewarded for create a favorable climate for automation and artificial intelligence

So with those goals in mind. We can examine how a sovereign wealth fund can help to achieve those goals and maximize benefits to all citizens from the expected increase in AI and automation.

To be clear, the funding for a US Soverign Wealth Fund (USSWF) is effectively a tax, so this is somewhat of a sematic argument, but the asset based funding and goal-orientation of the USSWF is what will differentiate it from the current discussions about a “robot tax”.

Sovereign Wealth Fund implementation, some of the highlights

  1. The USSWF immediately receives a 1% common stock issuance from every company in the S&P 500. Followed by a .25% increase each year for 16 years.
  2. Every new company admitted into the S&P 500 must immediately issue this 1% common stock into the fund and begin the annual contributions
  3. All shares included in the fund are standard voting shares with liquidity available from the traditional markets trading the underlying company common stock
  4. The USSWF is overseen by the US Congress
  5. The USSWF is controlled by a panel of 50 commissioners, one from each state, appointed by the governor of each state. The commissioner must be from a political party that the governor is NOT a member of. These are attempts to depoliticize the body and to identify citizens to serve the country.
  6. The USSWF exists for the benefit of all Americans equally, with a primary concentration of providing welfare/basic income support to US citizens
  7. The USSWF is a lock box and not part of the US Federal Govt budget. The US Federal Government may appeal to the USSWF for funding associated with the mission of the USSWF
  8. Simplicity — implementation is easy, automatic and systematic

Now, if this concept seems foreign to you, then you are clearly an American. Here are a list of the world’s largest Soverign Wealth Funds over $100 bil.


Notice that much of the oil rich world has already created a Sovereign Wealth Fund. Norway’s fund is the gold standard, providing a capital asset value of $192k per person. At 5% income stream, that is nearly a $10k payment per person with capital preservation. That payment can go a long way towards supporting a population. That is the concept we are trying to achieve with the USSWF, a bulwark against future challenges, such as technological unemployment. But instead of oil, or a single resource, the citizens of the US should benefit from the entirety of the economy. A genuine justification of our consumer-oriented mentality and laissez-faire regulatory environment.

As we try to capture the entirety of the US economy, we must find a liquid, tradeable proxy. I have suggested the S&P 500 as the right proxy for the US market. To avoid picking winners and losers directly. Automation and technological advances will happen in all industries and all markets. The best way to be comprehensive is to use a benchmark of the whole economy. The S&P 500 is widely regarded as the best proxy for the US large capitalization economy. Constituents of the S&P 500 are the most liquid stocks in the world and will result in the most minimal of impact from USSWF ownership. By having participation in all companies, the USSWF is in a position to reap the benefits of US economic growth, as represented by the stock market, on behalf of the citizens of the US.

There is also the opportunity to have the USSWF funded in additional ways, whether that be from oil royalties, carbon credits or other mutually beneficial societal resource dividend. These discussions are merited, but are beyond the scope of this paper today.

Some features and benefits of a USSWF:

  1. The intial funding is a tax on the wealthy (holders of stocks), which is consistent with a goal of redistribution and tempering the rising income inequality in the US. In some ways, it becomes a tax on foreign investors as well, which is an ancillary benefit.
  2. Keep capital in the hands of capital allocators and away from the government until needed
  3. It increases participation in the US economy as measured by the stock markets. All US citizens would have a share of the stock market up from the estimated 52% today.
  4. It creates a dynamic pool of assets which has an opportunity to track the expected wealth creation resulting from AI and Automation. Therefore the USSWF is well aligned with the goal of rewarding citizens for the possibility of having their jobs displaced
  5. A Sovereign Wealth Fund is far from new and has many precedents both foreign and domestic (public pension funds) upon which to build a robust program designed to maximize the benefit to US Citizens
  6. Alignment instead of antagonistic taxation. If the company wins, the country wins and even the displaced workers win.
  7. Compound return. Because the USSWF will not have a current cashflow demand, it will be allowed to grow for a pre-determined period, maybe 20 years. This will also maximize the benefits available to all current and future US Citizens

Some areas of concern (these points will be discussed further below):

  1. Dilution. This is immediate dilution on the value of existing shareholders and the equity markets are not likley to be happy about it.
  2. Commingling of corporate and government interests
  3. Reliance upon capitalism and equity market growth to fund future challenges. This is both a risk/reward area of concern and an idealogical area of concern for some.
  4. Bureacracy/control of the USSWF
  5. Increase in income inequality

Let’s tackle a few of these. Dilution, will be a concern and in a vacuum, one could expect the stock market to make a significant move backwards on this announcement. However, one could argue that the establishment of a long term, pro-automation policy and the avoidance of a “robot tax” might be equally as beneficial offsetting the expected dilution. Additionally, there is the benefit to the market as a whole from proactively addressing a pressing concern.

Commingling of government and corporate interests. These interests have been commingled since the formation of the country, however the US has had an active policy to not become shareholders of corporations and this would change (unlike most other countries). At the 5% max level, I don’t see government being excessively influential in a shareholders meeting. But it may be the implied result that is concerning. The implied result is that the government is now “pro-business” and thus must be anti-citizen or anti-worker. I recognize the concern, and this blends into point #3 Reliance upon Capitalism and equity markets. Unless we are prepared to change the nature of this country immediately, we are already firmly entrenched in capitalism. We ought to maximize its effect in this endeavor. Capitalism has an excellent track record of wealth creation, but sometimes at the expense of some who are left behind whether through income inequality or lax worker safeguards. In the case of the USSWF, at least the worker is better positioned to profit from capitalism than she would be otherwise. It is my belief that any other solution is too far afield from the current wishes of the population.

Finally, bureaucracy and control. The USSWF involves a good deal of assets and that means it is powerful. That will attract bureaucracy and politicians who will look to control the USSWF. A 50 person panel is more than sufficient expertise on hand to make quality, non-political decisions in the interest of the American people, especially if they are deemed fiduciaries by the legal definition. Any attempts to associate a large staff with the USSWF should be met with great skepticism as the mandate is the operation of an Index fund tied directly to the S&P 500. It is a pool of assets, designed to represent the US economy, not to create a target return. Any return associated with the assets is a function of economic growth or broad stock market appreciation only.

Increase in income inequality. As a result of trying to maximize the United States’ share of growth due to automation, much of those rewards will accrue to the wealthy. This is a result of the reliance on capitalism and maximum capital allocation efficiency at the corporate level. This of course benefits the USSWF, but it benefits the owners of capital more (95% versus 5%) in the short run. To mitigate this problem, a crucial piece of the Tech, AI and Automation policy is a significant increase in taxes on the wealthy. Universal Basic Income, which currently is the only means by which the massive amount of unemployed are able to survive, must be funded from somewhere. The USSWF would be in a position to provide a solid foundation for this payment, but it will be insufficient to meet the full demand. The owners of capital MUST recognize that their windfalls from reaping the benefits of a laissez-faire regulatory and tax regime will be called upon to benefit displaced workers.

No plan is perfect, but the USSWF is better than a “robot tax”, whatever that might turn out to be. The key to success with the USSWF or any other solution aimed at protecting US citizens from technological unemployment is to participate in the wealth creation. Other ideas along those lines would be welcome additions to the discussion. I hope that you will think deeply on these points, challenge the theories, make suggestions and further this debate.