Field Notes: Bill Gates on Poverty and Prosperity

Bill Gates discusses the trends in the U.S. labor market during a conversation on poverty and prosperity with the American Enterprise Institute's Arthur Brooks.

During a sweeping conversation about his philanthropy work, Gates took time to give his thoughts on how technology is impacting labor prospects and why the United States should pivot away from taxing labor to a consumption tax. What follows is an excerpt; you can find the full interview transcript here and the video here.

MR. GATES: I do think tax structures will have to move away from taxing payroll because society has a desire to have employment. Of all the inputs, you know, wood, coal plastic, cement, there’s one that plays a special purpose, which is labor. And the fact that we’ve been able to tax labor as opposed to capital or consumption, you know, just shows that demand for labor was good relative to other things. Well, technology in general will make capital more attractive than labor over time. Software substitution, you know, whether it’s for drivers or waiters or nurses or even, you know, whatever it is you do–(laughter).

MR. BROOKS: We wonder that too sometimes. (Laughter.)

MR. GATES: It’s progressing. And that’s going to force us to rethink how these tax structures work in order to maximize employment, you know, given that, you know, capitalism in general, over time, will create more inequality and technology, over time, will reduce demand for jobs particularly at the lower end of the skill set. And so, you know, we have to adjust, and these things are coming fast. Twenty years from now, labor demand for lots of skill sets will be substantially lower, and I don’t think people have that in their mental model.

MR. BROOKS: So aligning the incentives in our economy to move away from taxing labor, moving to something like a progressive consumption tax is just a smart thing to do to stimulate – To have an economy that’s better aligned?

MR. GATES: Well, I think economists would have said that a progressive consumption tax is a better construct, you know, at any point in history. What I’m saying is that it’s even more important as we go forward because it – the distortion – I want to distort in the favor of labor. And so not only will we not tax labor, things like the earned income tax credit, you know, when people say we should raise the minimum wage, I think, boy, you know, I know some economists disagree. But I think, boy, I worry about what that does to job creation. The idea that through the income tax credit you would end up with a certain minimum wage that you’d receive, that I understand better than potentially damping demand in the part of the labor spectrum that I’m most worried about.

MR. BROOKS: So something like a guaranteed minimum income for people who are working full time through an expansion on the EITC or a wage subsidy seems like the right way to go.

MR. GATES: Yeah, one of my favorite AEI papers – I didn’t get time to look it up last night –

MR. BROOKS: He’s going to give us his top 10 list here. (Laughter.)

MR. GATES: No, it’s the – looking at consumption instead of the income. Because income’s complicated. If I’m a student who’s, you know, making no income, but I’m investing in my capabilities – OK, my income looks funny. If I’m a trader who had a bad year, my income looks funny. Consumption really is what you care about. So when people say, hey, Mr. Gates, you should feel guilty because you have so much money; well, it’s not that I have money. It’s my consumption I should – you know, if I’m supposed to feel guilty, it’s my consumption. (Laughter.) The part that is going to philanthropy really is in a sense in the pocket of the poorest, assuming that we’re smart about getting it to benefit them. And the idea that consumption should be progressively taxed, I think that makes a lot of sense. People have tried to do that by doing particular taxes on luxury goods, some things like that. That’s very – not very effective. It’s sort of picking favorites type things.

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