How AI can increase government investment in education and more

Dabla-Norris Era, Ruud de Mooij

NEW generative AI technologies have huge potential to boost productivity and improve public service delivery, but the sheer speed and scale of the transformation are also raising concerns about job losses and greater inequality. Given the uncertainty surrounding AI’s future, governments should adopt an agile approach that prepares them for highly disruptive scenarios.

A new IMF paper argues that fiscal policy has an important role to play in supporting a more equitable distribution of the benefits and opportunities from generative AI. But this will require significant improvements to social protection and tax systems around the world.

How should social protection policies be redesigned in the face of AI-driven technological disruption? While AI may ultimately increase overall employment and wages, it could put large swaths of workers out of work for longer periods of time, leading to a painful transformation.

Lessons from previous waves of automation and IMF modeling suggest that more generous unemployment insurance could mitigate the negative impact of AI on workers by allowing the unemployed to find jobs that better match their skills. Most countries have significant scope to expand the coverage and generosity of unemployment insurance, improve portability, and consider forms of wage insurance.

At the same time, sector-specific training, internships, and upskilling and reskilling programs can play a larger role in preparing workers for AI-era jobs. Comprehensive social assistance programs will be needed for workers who face long-term unemployment or reduced local demand for labor due to automation or industry closures.

Reducing the shock of working in AI

Employment, training and skills support can help mitigate the initial increase in unemployment caused by automation.

Of course, there will be important differences in how AI affects emerging and developing market economies—and therefore how policymakers should respond. While workers in such countries are less exposed to AI, they are also less protected by formal social protection programs, such as unemployment insurance, due to the larger informal sectors in their economies. Innovative approaches that leverage digital technologies could help expand the reach of social welfare programs in these countries.

Should AI be taxed to mitigate labor market disruptions and pay for its effects on workers? In the face of similar concerns, some have advocated a robot tax to discourage companies from replacing workers with robots.

But an AI tax is not advisable. Your AI chatbot or copilot would not be able to pay such a tax—only humans can. A specific AI tax could instead reduce the rate of investment and innovation, stifling productivity growth. It would also be difficult to implement and, if poorly targeted, would do more harm than good.

So what can be done to rebalance tax policy in the AI ​​era? In recent decades, some developed countries have increased corporate tax breaks for software and hardware to encourage innovation. However, these incentives also tend to encourage companies to replace workers through automation. Corporate tax systems that inefficiently promote the rapid replacement of human jobs should be reconsidered, given the risk that they may exacerbate AI-induced displacement.

Technology-minded

Some countries offer corporate tax incentives for assets that replace human labor.

Many developing and emerging market countries tend to have corporate tax systems that discourage automation. This can be distorting in its own way, preventing the investments that would enable such countries to catch up in the new global AI economy.

How should governments design redistributive taxation to offset the rising inequality resulting from AI? Generative AI, like other types of innovation, can lead to greater income inequality and wealth concentration. Capital income taxes should therefore be strengthened to protect the tax base from further declines in the labor share of income and to offset rising wealth inequality. This is crucial because greater investment in education and social spending to extend the benefits of AI will require greater public revenues.

Since the 1980s, the tax burden on capital income has been steadily declining in advanced economies, while the tax burden on labor income has been rising.

The Growing Gap

The tax burden on labor has increased but has decreased on capital income.

To reverse this trend, strengthening corporate taxes could help. The global minimum tax agreed by more than 140 countries, which sets a minimum effective tax rate of 15 percent for multinationals, is a step in the right direction. Other measures could include an additional tax on excess profits, stronger capital gains taxes, and better enforcement.

The latest breakthroughs in AI are the result of years of investment in basic research, including through publicly funded programs. Similarly, the decisions policymakers make today will shape the evolution of AI for decades to come. Ensuring that applications deliver broad benefits to society, using AI to improve outcomes in areas such as education, health, and government services should be a priority. And given the global reach of this powerful new technology, it will be more important than ever for countries to work together.

• Dabla-Norris and Mooij are IMF employees

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