Government size and automation

Abstract

This paper explores the consequences of automation for public finance. We find that as the automation rate increases, the government size, measured as the fiscal revenues to output ratio, declines. This is due to the substitution of traditional inputs, which bear the burden of taxes, by the new automatic technology. These results are explained by the effects of automation on labor, where taxation of labor income (including social security contributions) represents the most important source of fiscal revenues in most advanced economies. The paper conducts two additional counterfactual experiments. First, we calculate how individual tax rates should be changed in response to automation in order to maintain constant fiscal revenues from the different sources of taxes. This experiment reveals that this fiscal policy would have significantly detrimental effects on output and labor, and indicates that a comprehensive reform of the current tax mix is necessary to counterbalance the effects of automation on public finance. Second, we calculate the tax rate on capital, without modifying the other tax rates, required to keep constant the size of the government, resulting in a capital income tax rate of around 0.77 for an automation rate of \(45 \%\).