IMF warns that AI will bring long-term unemployment and calls for applying redistributive taxes

“Generative artificial intelligence (gen AI) has immense potential to boost productivity growth and improve the delivery of public services, but it also raises deep concerns about massive labor disruptions and growing inequality,” said the latest report published by the International Monetary Fund (IMF) entitled “Expanding the benefits of generative AI: the role of fiscal policies.”

On its official website, the organization highlights that the report seeks to analyze how to apply “fiscal policies to guide technology and its implementation in a way that best serves humanity and, at the same time, cushion the negative effects on the labor market and distribution to expand gains.”

Preparing for disruption

The report is blunt in its warning: “Given the great uncertainty about the nature, impact and speed of advances in generating AI, governments should adopt an agile approach that prepares them for both routine and highly disruptive scenarios.”

Within this framework, the study urges governments to adopt strategies focused on providing a new social safety net to protect the newly unemployed, in an era of advancing generative AI. In this sense, the crucial task of rulers is highlighted, who with their policies and decisions “will shape the evolution of AI in the coming decades.”

It is essential that the priority be “to ensure that new technologies widely benefit society, taking advantage of AI to improve areas such as education, health and government services.” At the same time, “due to the global reach of this new and powerful technology,” countries must work together.

Changes in fiscal policy

“Fiscal policy can help expand the benefits of AI for humanity,” says the IMF study, prepared by Fernanda Brollo, Daniel García-Macia, Tibor Hanappi, Li Liu and Anh Dinh Minh Nguyen. Specifically, the organization highlights that “the transition to AI will require stronger social safety nets, investment in education and tax systems that support human workers and mitigate inequality,” which such progress will bring.

The survey highlights the immense potential to boost productivity and improve the delivery of public services that new generative AI technologies have, while warning of massive job losses. In this context, to prepare for possible “highly disruptive” scenarios, the organization emphasizes that “fiscal policy has an important role to play in supporting a more equitable distribution of the gains and opportunities of generative AI. But this will require significant improvements in tax and social protection systems around the world.”

Painful transition: renewing policies

The report focuses on the measures necessary for governments to renew social protection policies in the face of disruptive technological changes that will inevitably be generated by the accelerated development and advancement of AI. The study highlights that while AI “could eventually boost employment and wages in general, it could also leave large sectors of the workforce out of work for prolonged periods, which would cause a painful transition.”

Among the measures that the IMF is promoting to prepare for this complex scenario, it highlights that based on “the lessons from past waves of automation suggest that more generous unemployment insurance could cushion the negative impact of AI on workers, allowing those displaced to find jobs that better fit their skills.”

In addition, the study highlights that governments should also focus on “sectoral training, apprenticeship programs, and upskilling and reskilling programs,” since “they could play a more important role in preparing workers for jobs in the AI ​​era.” The authors of the report stress that “comprehensive social assistance programmes will be needed for workers facing long-term unemployment or a reduction in local labour demand due to automation or the closure of industries.”

New fiscal balance: Tax on AI?

The organization also considers whether it is necessary to implement a tax on AI, whether it is necessary to tax the activity “to mitigate labor market disruptions and pay for its effects on workers.” Along these lines, the organization points out that “it is not advisable to impose a specific tax on AI, since it could reduce the speed of investment and innovation, stifling productivity gains. It would be difficult to implement and, if not properly targeted, would do more harm than good,” the study said.

The report points out that governments have the challenge of maintaining a new balance of fiscal policy in the era of AI. The organization highlights that in recent decades, some developed countries have expanded corporate tax exemptions on computer software and hardware, to boost innovation. But it warns that this type of incentive “tends to encourage companies to replace workers through automation.”

The report therefore stresses that taxes that discourage automation “can be distorting, preventing investment” and hindering the inclusion of these countries in “the new global AI economy.”

Greater tax burden

With this situation in mind, the IMF points out that governments must find a way to design redistributive taxes aimed at compensating for the growing inequality caused by the advance of AI. The authors of the report admit that generative AI, like other types of innovation, “can lead to greater income inequality and wealth concentration.” Consequently, as the organization's experts explain, “taxes on capital income should be strengthened to protect the tax base against a further decrease in the labor share of income and compensate for the growing inequality of wealth.”

They point out the importance of this point, since “greater investment in education and social spending to expand the benefits of AI will require more public revenue.” The study emphasizes that “since the 1980s, in advanced economies the tax burden on capital income has steadily decreased, while the burden on labor income has increased.” The way to reverse this trend could be to “strengthen corporate income taxes”

The report notes that “the global minimum tax agreed by more than 140 countries, which sets an effective tax rate of 15% for multinational companies, is a step in the right direction.” It also highlights that “a supplementary tax on excess profits, other stronger taxes on capital gains and better enforcement of the law” could be included.