Sometimes following a train of thought can lead you to some distant places. Come along in this column as we mentally travel from technological innovation at Amazon to revamping the tax system that finances Social Security and other social insurance schemes.
Last month, the online retailer, Amazon, opened a brick and mortar grocery store called Amazon Go. It is located at the corner of 7th Ave. and Blanchard St in Seattle, WA. Amazon Go offers a range of grocery items from milk and bread to specialty foods. But what really sets the store apart is what the store does not have; no lines, no checkouts. Using a variety of technologies, customers with a free smartphone app and an Amazon account can walk in, select the groceries they want from the shelf, and simply walk out and go home. Amazon will send them a receipt and charge their account for the items they selected.
Many customers will appreciate the convenience and time-saving enhancement of these new technologies. But it is clearly bad news for thousands of checkout clerks across America. Job-killing technology is at their doorstep.
It is fitting that the first Amazon Go store is in Seattle. The Seattle City Council raised the minimum wage to $13 per hour (even more if you work at a large firm), going up to $15 per hour in two years. Companies will be very interested in new technologies that enhance customers experience and reduce labor costs.
Technological innovations are replacing humans in many areas of commerce, not just in low-skilled minimum wage jobs. Driverless vehicles may be reality in a few years, giving thousands of sleep-deprived truck drivers unwanted time to catch up on lost sleep. Warehouses and assembly lines are already populated with thousands of robots. Complex financial plans are customized for individuals by an online algorithm; no human contact required. Technology is reaching deeper into the production complex to replace the weak link in the process: the human being.
About a hundred years ago, Joseph Schumpeter, the Austrian economist, explained how economic freedom allows room for the flourishing of new technologies to improve productivity. He rightly described this organic phenomenon as unleashing forces of "creative destruction," whereby the new technology destroys the old. Think of the automobile replacing the horse and buggy. Or think of Amazon Go destroying checkout lines.
It is easy to be alarmist about technological innovations, as were the Luddites at the early stage of the Industrial Revolution. But that is a defeatist approach and leads to a dead end. We need a better approach which embraces the ability of technology to improve lives, yet also enables entrepreneurs and workers to change and adapt quickly to new opportunities. Fortunately, such a better approach has been tried and proven over the last two hundred years of technological innovation. It is called economic freedom.
It is a plain fact that there are countless unmet needs in America, and even more among the billions of people living outside America. It is beyond ridiculous to think that there are no opportunities for free, productive people to use their God-given creativity to profitably satisfy those needs and wants. An enlightened response to technological innovation is to focus like a laser on removing obstacles from the path of expanding business opportunities.
Examples of job-killing obstacles are easy to find; unnecessary license requirements for ordinary activities, lengthy permitting processes designed explicitly to be roadblocks to business development, excessive minimum wages (any required minimum is excessive in my minority opinion), and endless regulations flowing from the administrative apparatus that is government.
One very important job-killing obstacle that is usually overlooked is the payroll tax. The payroll tax kills more jobs by far than the minimum wage. While the minimum wage affects roughly 5% of the potential work force, the payroll tax affects the entire work force (excluding criminal activity and under-the-table transactions). The total cost varies a little by state; conservatively, payroll taxes add up to 22.8% of the worker's wage, adding up the total Social Security, Disability, Medicare, Unemployment and Workers Compensation taxes and costs. You don't have to be an economist to realize that when the cost of wages is increased by 22.8%, potential employers reduce the number of workers they choose to hire.
There are no payroll taxes paid to employ robots or labor-saving technology. This gives technology an important competitive advantage compared to the cost of productive humans. Payroll taxes are a self-inflicted obstacle to hiring workers. Moreover, off-the-books labor does not pay taxes, giving an unfair 22.8% price advantage to contractors and employers who work in the so-called underground economy. This is a fundamental cause of widespread resentment directed against illegal immigrants.
But wait. Payroll taxes are necessary to fund the important social insurance safety net. Yes, payroll taxes are used to fund the safety net, but there is an alternative. Social insurance programs such as Social Security, Medicare, Disability, Unemployment and Worker's Compensation, could be effectively funded by a dedicated national sales tax, also known as a Value-Added Tax or VAT. A value-added tax would increase the cost of goods and services by about 15-20% (depending on which basic goods are excluded or included in the VAT). You may think this is a wash; lower payroll tax and replace with a VAT tax. What's the difference?
Killing the payroll tax and replacing it with a VAT tax will have at least five significant advantages, and two disadvantages that need work-arounds.
First, consider the disadvantages. For retirees, it would increase their cost of living after a lifetime of already paying the payroll tax. The work-around is an increase in the monthly Social Security benefit to offset the expected higher cost of goods and services.
The second disadvantage is that Congress might be tempted to increase the VAT tax to pay for all sorts of other stuff, not just social insurance. The work-around here is to write the VAT tax legislation in such a way to make it extremely difficult for a future Congress to use VAT for anything but the social insurance programs listed above. Something like a two-thirds or three-quarters majority requirement to increase the VAT rate should be an adequate safeguard.
What are the five significant advantages of a VAT tax? First, thinking about the checkout clerks across America, A VAT tax instead of a payroll tax removes a competitive advantage that favors technology over humans. Technological innovation may still replace humans in many jobs, but at least humans will not be unfairly disadvantaged by the payroll tax in that economic calculus.
Second, removing the payroll tax in favor of a VAT tax removes an obstacle to hiring more workers. An employer's labor costs are reduced 22.8%. Some of that cost reduction will go back to workers who will want higher wages to offset increased costs of goods and services under a VAT tax. Some of the reduced labor cost will enable the employer to hire more workers.
Third, a VAT will preserve the government's tax base even as technology replaces labor. Imagine that Ford made cars with 10,000 workers and 100,000 robots while Chevy made the same number of cars with 100,000 workers and 10,000 robots. Under a payroll tax system of financing social insurance, Ford would pay far less in taxes to the social safety net than would Chevy. Under a VAT system, both Ford and Chevy would generate the same tax revenues to pay for social insurance. (This ignores productivity improvements from either company that get passed to the consumer via lower prices in a competitive car market).
Fourth, a VAT would broaden the tax base which finances social insurance. This would provide an opportunity to put Social Security and Medicare on a sound financial footing.
Finally, a VAT eliminates the 22.8% price advantage to off-the-books workers, whether they be illegal immigrants or shady operators. With a VAT tax, shady operators not only lose their unfair price advantage, but they pay into the social insurance system whenever they purchase goods and services.
There you have it. The end of the journey. We started with a news story about an exciting new way to shop for groceries, and we end with a proposal for a tax reform to solve the problems of Social Security and illegal immigration. I hope you found the trip worthwhile.