Will AI bring an end to personal income tax?

There’s been a lot of discussion about the government’s failed attempt to raise VAT by two percentage points (which is a 13.3% increase).

There’s also discussion about the SA government’s relentless demands on a small pool of taxpayers. Rather than cutting back on state spending, the government taps taxpayers for more, as if this is going to solve the problem. International experience shows when you over-tax people, they move. It’s called tax arbitrage.

South African taxpayers are paying for services that government should, but don not, provide, such as schooling, security and healthcare. If you are middle class, you will likely send your kids to a private school, a private doctor and you will hire private security. Your taxes should pay for these services, but let’s not get ahead of ourselves.

We’re all taxed out at this point. We need smaller government. And here’s the problem. It’s not in the nature of governments to slim down, take a pay cut when times are hard, or relinquish control of a bureaucratic squid empire. These are self-perpetuating organisms that feed off the productive sector.

With the advent of AI, governments everywhere will be faced with a huge dilemma. AI will replace human workers, so income tax will fall.

“In a post-AI world, the idea of taxing incomes makes no sense anyways and we will be forced to substitute income taxes for consumption taxes,” says Chamath Palihapitiya, a Sri Lankan-born Canadian-American venture capitalist, entrepreneur, and tech influencer.

Consumption taxes incentivise you to work hard, gain success and consume only what you really need or truly want. It allows those that want to, to succeed and get ahead. Income taxes, instead, arbitrarily take from your hard work irrespective of how hard you work or how you live your life.

Whether you spend or save, the government takes from you equally. “Income taxes incentivise mediocrity and is a headwind to getting ahead.” - Chamath Palihapitiya.

This is an argument for consumption taxes like VAT. It’s a “voluntary” tax that you pay only when you spend. That means the poor who spend everything they have pay disproportionately more – except when food items are zero-rated.

The AI dilemma for governments

The trajectory of AI is rushing up faster than many predicted. Income taxes may have to go.

No problem: governments will start taxing capital generated by AI instead. They are already floating the idea of taxing unrealised profits. A 15% minimum global tax has been agreed by 140 countries.

Bill Gates has been pitching the idea of taxing AI and automation to fund retraining or a universal basic income.

The IMF says 60% of advanced-economy jobs could be hit by AI, with half facing lower demand. This shrinks the income tax base—fewer workers, less taxable income.

Governments won’t easily give up on personal income taxes but at some point they might, provided they have another source they can tax.

Where this is all leading is going to be interesting. Tax arbitrage will become massive in the global battle for investment.

The takeaway: AI or not, productive people will be less attached to the countries of their birth and simply move somewhere else where governments are better behaved.

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