National News

What the Tax Bill Fails to Address: Technology’s Tsunami

Posted December 20, 2017 2:25 p.m. EST

Let’s pretend you have just been picked to run a small island nation. Congratulations!

But don’t settle in to your throne quite yet. A potential catastrophe looms on the horizon. A huge tsunami is coming your way.

Fortunately, there’s hope. Yours is a wealthy island. You can’t prevent the tsunami, but you can prepare your people for the onslaught, and perhaps even mitigate its worst effects. So you make an executive decision — the island will use a huge share of future income to equip each resident with the best-known defense against tsunamis: Every islander gets a parachute.

Wait, how would that work?

The above situation exactly describes the puzzlement among some people in Silicon Valley at the $1.5 trillion Republican tax bill that was approved by the House and Senate this week.

To those who study how tech is altering society and the economy, the bill looks like the wrong fix for the wrong problem. The bill (the parachute) does little to address the tech-abetted wave of economic displacement (the tsunami) that may be looming just off the horizon. And it also seems to intensify some of the structural problems in the tech business, including its increasing domination by five giants — Apple, Amazon, Microsoft, Facebook and Alphabet, Google’s parent company — which own some of the world’s most important economic platforms.

These giants will see immediate and broad benefits from the tax bill. Multinational corporations with a lot of money parked offshore — Apple, Microsoft and Alphabet collectively hold about a half-trillion in cash — get a windfall from the bill. Under the new plan, offshore cash will be taxed at a one-time rate of 15.5 percent, a substantial break from the 35 percent the companies would have had to pay if they’d brought the money back to the United States under current law.

There has been some debate about whether the bill might actually hurt tech giants in the long run, because it introduces a 10.5 percent tax on future foreign profits, thus reducing some of the benefits of the offshore accounting wizardry these companies have engaged in over the last decade.

But Gabriel Zucman, who studies taxes and inequality at the University of California, Berkeley, pointed out that the 10.5 percent rate would still be much lower than the rate paid by potential startup rivals that mostly make their money in the United States (the corporate tax rate on domestic earnings in the new bill is 21 percent). This difference, Zucman said, “creates an uneven playing field, where big monopolies will pay lower taxes than new entrants, which could reduce innovation.”

Apple, Google and Microsoft — which, like other large businesses, significantly expanded their lobbying efforts to push for tax reform — declined to discuss the effects of the bill.

But some in Silicon Valley think the giants misplayed their hand in the legislation. In pursuing short-term tax advantages, they missed a chance to advocate policies that might have more broadly benefited many of their customers — and improved their images, too.

“Silicon Valley’s failure to engage in the tax reform debate was a serious failing of long-term strategy,” said Greg Ferenstein, a writer and researcher who studies economic and social issues related to the tech business. “They had a real opportunity to use tax reform as a way to address inequality — and as a result of this bill, inequality may increase, and public backlash against the tech industry may increase.”

This gets back to that looming tsunami. Though many of the economy’s structural problems predate the last decade’s rise of the tech behemoths, the innovations that Silicon Valley has been working on — things like e-commerce, cloud storage, artificial intelligence and the general digitization of everything and everyone around you — are some of the central protagonists in the economic story of our age.

Among other economic concerns, these innovations are implicated in the rise of inequality; the expanding premium on education and skills; the decimation and dislocation of retail jobs; the rising urban-rural divide, and spiking housing costs in cities; and the rise of the “gig” economy of contract workers who drive Ubers and rent out their spare bedrooms on Airbnb.

Jed Kolko, the chief economist of the job-search site, said technology is changing work in a few ways. First, it’s altering the type of work that people do — for instance, creating a boom in e-commerce warehouse jobs in large metro areas while reducing opportunities for retail workers in rural areas. Technology has also created more uncertainty around when people work and how much they’ll get paid. This happens in gig jobs like ride-hailing, but also at fast-food restaurants that use scheduling software, which gives workers unpredictable hours and little chance to live life outside work.

In the long run, there’s also the question of whether there will be enough work for everyone — or whether, as some have speculated, automation may replace large numbers of workers altogether. But the Republican plan largely ignores these issues — even though economists and techies have lately become more interested in policy fixes for many of the economic problems arising from tech.

For instance, Timothy D. Cook, Apple’s chief executive, has said that Apple has a “moral responsibility” to look out for job growth in America. Some tech luminaries have become obsessed with the idea of universal basic income — giving a paycheck to everyone to stave off trouble if the robots do take over. There’s rising interest in new models for unemployment insurance, skills training and other policies that address short-term job displacement caused by tech.

And U.S. Rep. Ro Khanna, a Democrat who represents a portion of Silicon Valley — he won his seat last year with the support of a number of tech bigwigs — has outlined a plan for vastly expanding the earned-income tax credit to support those left behind by the tech boom. The plan aims to compensate the bottom 20 percent of earners for economic stagnation going back to the late 1970s.

“Anyone who could earn $12,000 a year driving part time for Uber would get a matching $12,000 from the government,” Ferenstein, who was involved in crafting Khanna’s plan, wrote recently.

It’s true that many of the policy ideas to address the economic effects brought about by tech would be expensive. Khanna’s plan, for instance, is projected to cost $1 trillion to $1.5 trillion over a decade.

In other words, it would cost as much as much as the Republican tax bill. But unlike that one, this plan might actually address the tsunami.