They took our 'jerbs'.

I like the theme of this post by Karl Smith. But it got me thinking on a different topic altogether - tax policy. We've got to seriously start thinking about how to preserve basic human welfare in a world where human labor becomes gets increasingly substituted by cheaper and better machine labor, and progressively wider swaths of the population become unnecessary for employers. How exactly do humans survive under these conditions? Where is the money going to come from?

At the outset, let's dismiss (1) the idea that every human is going to own a robot who will go to work for some company in lieu of his human owner (who'll presumably be sitting on the couch watching TV) and bring home the cash, or, for that matter, (2) the idea that every human will own enough robot servants to take care of all of his/her needs. Long before anything like that becomes possible, a 20%+ unemployment rate will be a grim reality that we will need to deal with. In addition, if history is any guide, machines tend to be owned by fairly large businesses more so than individuals, becuase (A) large businesses can afford a large capital outlay in exchange for years of improved productivity and (B) machines we make tend to be specialist and not generalists - subsituting humans at a given task or two, rather than replacing the whole package (like in iRobot books) - and this is likely to continue becuase that's how you get maximum marginal product for the lowest cost.

I see two possible models of society that could cope with the problem:

1. A universal ownership society - in which virtually every human owns either a part of a large business or a natural resourse that generates sufficient income to survive. Robots/machines do all the work, while humans reap the benefits of ownership - sounds nice, but also rather utopian given where things stand now.  It's just hard to see how you can get those currently destitute (of which there are plenty) to "wealthy" without some steps in between.   A small-business idealist might propose to somehow dramatically improve the odds of starting your own shop that does something, but I've yet to see an idea that would offer a dramatic improvement over the status quo. More fundamentally, small business as a concept is going to get exponentially more difficult as production of any kind becomes more capital intensive and less and less labor intensive. In other words, when Starbucks replaces even barristas with machines that operate at a fraction of the marginal cost, but cost a lot to buy up front, it will be even tougher for a coffee-shop startup and its owner to compete with Starbucks and survive.

2. A welfare state, that takes care of the unemployed and the destitute with tax revenues. This finally brings me to the core of the argument: where are sufficint tax revenues going to come from, if employment income of human beings is constantly falling? We can't continue taxing income and hope for solvency. We need a re-think and start increasinly relying on tax revenues from large enterprise, because that's where the money is going to be. So rather than lower corporate income taxes, we need to at least keep them where they are, but maybe think about lowering payroll taxes to lower marginal cost of employing humans (though this would only delay the reckoning) and make evasion exceedingly diffucult. A VAT would perhaps be even better, becuase this tax does not care about whether value was added by a human or a machine. U.S. needs a VAT, the sooner the better.