We use a model of automation to show that with the current U.S. tax system, a fall in automation
costs could lead to a massive rise in income inequality. This inequality can be reduced by raising
marginal income tax rates and taxing robots. But this solution involves a substantial efficiency
loss for the reduced level of inequality. A Mirrleesian optimal income tax can reduce inequality at
a smaller efficiency cost, but is difficult to implement. An alternative approach is to amend the
current ...
We use a model of automation to show that with the current U.S. tax system, a fall in automation
costs could lead to a massive rise in income inequality. This inequality can be reduced by raising
marginal income tax rates and taxing robots. But this solution involves a substantial efficiency
loss for the reduced level of inequality. A Mirrleesian optimal income tax can reduce inequality at
a smaller efficiency cost, but is difficult to implement. An alternative approach is to amend the
current tax system to include a lump-sum rebate. In our model, with the rebate in place, it is
optimal to tax robots only when there is partial automation.
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