Coffer stop: AI may shrink tax base

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1:40Hello and welcome to The Intelligence from The Economist. I'm Rosie Bloor.

1:50Today on the show, a surprisingly cheap way to cool buildings and remembering French reservist Stanislas Uten and the horrors he witnessed in Algeria.

2:05But first...

2:15Money is flying around the AI economy. In the past year, corporate earnings in America have grown by$1.2 trillion, a 30 % rise. Where there's money to be made, usually there are taxes to be paid. Yet Uncle Sam is seeing little of that benefit. There is a big question in economic circles right now about how to tax AI. AI is growing very quickly, as everyone knows. But the emerging evidence so far is that taxes are not following. Callum Williams is our senior economics writer. So there's something strange happening at the moment with American corporate taxes. Even as corporate profits are rising very quickly, corporate taxes in the US are falling very fast.

3:12Now, this is basically because of various provisions over recent years, such that companies doing AI investment can write off a lot of this investment against their tax bill. But this kind of phenomenon has opened up this broader question of what could happen to the tax system if AI becomes a really, really big deal. Callum, to the ordinary listener, it might sound like someone is trying to avoid paying taxes. What's really going on here and what is it that's upending tax systems in a broader sense? So that's absolutely right. The essential problem is that AI could create value in parts of the economy which governments tax quite lively, while at the same time destroying value in the more heavily taxed bits.

3:58and what that can mean is that the economy can grow very rapidly while leaving the government increasingly starved for funds so the crucial thing to bear in mind throughout this analysis is that governments get most of their tax revenues at present from taxing workers so for example in the u.s about three quarters of all federal tax revenue comes from taxing workers and so the risk is that if AI displaces workers or reduces their salaries, then that big tax base will fall. Assuming that you don't change anything and therefore you have fewer workers to tax, how big would the shortfall be in tax revenues?

4:39The shortfall could be very significant, actually. It will vary from country to country, but most countries do face quite a serious adjustment. So we looked at a situation, just very simply modelled it where basically labour income falls quite substantially. And you looked at which countries would suffer the most. And it's really the European countries, in particular, Italy, France and Germany, which as it stands, tax labour quite heavily. They stand to lose quite a lot of revenue as a result of this shift. And even the US is in this situation, although somewhat to a less degree, the US taxes labour much more heavily than it does capital.

5:20And so if you were to see a big labour market disruption associated with AI, the US federal government would see a big fall in revenue. What are government's options then? How are they going to raise the money? Okay, so there's lots of options for raising money in an AI world. Some economists favour taxing AI directly. So for example, you might have a compute tax, which would be levied on the computing power used to train models, or you might have a token tax on each use of the model. Lots of options there. So taxing AI directly could actually be pretty popular. And this is because, particularly in America, the public is very hostile to AI.

5:59The big problem, as we see it, is that it's not clear that there's enough of a tax base with AI to create a serious amount of revenue. So for example, at the moment, the US as a whole is spending about$700 billion on AI. That will probably increase over the years, but it's not clear by how much. Whereas the tax base for labour is on the order of like$15,$16 trillion. So there's like way more out there to tax. So there are other options that are floating around. One is taxing wealth, which is another tax that is actually reasonably popular. Wealth taxes do sound like they make sense. Is anyone going to go down that route, do you think?

6:37Potentially. In November, Californians are going to vote on a proposal for a one-off 5 % levy on the wealth of residents who are worth more than a billion dollars. And this has garnered a lot of interest across the country. Now, the history of wealth taxes is not very encouraging, mainly because people tend to relocate to another country to avoid the tax, or they stop working as hard, or they employ a bunch of other tax wheezes. there might be an argument that in an AI world the wealth tax could become more difficult to avoid because you could use you know super clever AI auditing techniques to make sure that people weren't avoiding the tax and that kind of thing but again the big problem here is twofold one is that it might not raise actually as much money as you think because really there just isn't as much wealth out there as you might think and the second thing is that most independent studies of wealth taxes do find quite significant effects on the macro economy.

7:31So you would be basically slowing the economy and as a result, again, not raising as much tax revenue as you might hope. Callum, you led with the fact that corporate profits are booming. Surely you just tax them. So there are two options here, I think. One is there is a world, an AI world, in which corporate profits reach truly astronomical proportions. And so yes, absolutely, you could imagine a policy that raised taxes on corporations. And indeed, we are already starting to see that in recent years, where governments are much less likely to be cutting corporate taxes and much more likely to be increasing them.

8:08I mean, ideally, you would be trying to target your taxes at what economists would call excess profits. So these are companies that are making very, very seriously high rates return. It's a good idea to tax those. A sort of related but not entirely similar form of taxes, capital gains taxes. And again, these could be very high in an AI world. If you were an early investor in Anthropik and Anthropik IPOs and you sell your stake in Anthropik, you're going to make a very large capital gain. And what's kind of interesting is that we are starting to see a movement towards taxing these capital non-labor incomes a bit more heavily.

8:42So there's just been a reform in Belgium, which has introduced a capital gains tax for the first time. Australia has just reformed its capital gains system to try and raise more money. And the Netherlands is doing something similar. So there is action taking place on this front. Elon Musk seems to think that AI is going to usher in an age of abundance. What about consumption taxes? Well, consumption taxes typically are economists' favourite taxes. Basically, this is because they are very difficult to avoid because you have to consume to live, and they can raise enormous sums of money. Now, the typical counter argument to consumption taxes is that they are very regressive.

9:22Now, there's sort of two answers to this. One is that as a share of spending, they are not regressive because if you have a perfectly flat consumption tax, everyone pays a fixed percentage of their consumption in VAT. In practice, they tend to actually be quite progressive because things that poorer households spend a lot of their money on, such as food, energy, children's clothing, that kind of thing, they tend to benefit from exemptions. So even when you look at spending, consumption taxes tend not to be regressive, but in fact, often quite progressive. But then what you could do is you could also say, well, we're going to introduce consumption tax, but we will also increase cash welfare payments to lower income households.

10:04And what you would do then is create a tax system that was very efficient, difficult to game, would raise loads of money and would be progressive. So this is basically why economists like it so much. And so what we can hope, whether it happens or not is another matter, what we can hope is that the AI disruption that's potentially going to come will be an opportunity for governments to improve their tax systems. Governments aren't known for reforming tax systems? Is any of this likely to happen? Honestly, probably not. I mean, the hope, and you see this explicitly said by policymakers, is that AI will prove to be such a boon for the economy that the economy accelerates.

10:44And as a result, the debt pile falls as a share of GDP. And people don't actually use their jobs, but wages go up a lot. And so labour income taxes zoom up. The only way I think you would get serious reform is if you had a big fall in labor income and you had some government that ended up in some sort of fiscal crisis. And only at that point would there be a realization in the political world to actually affect some serious change to the tax system. Callum, thank you very much. Thanks a lot, Rosie.

11:21And tax is also the theme of the most recent episode of Insider, our video offering, which gives you a glimpse of the debates taking place in our newsroom. This week, what is the right tax system for the 21st century? It's not just AI that's thrown a curveball. Tax systems across the rich world are unwieldy, unfair and riddled with strange incentives. We've got a crack team discussing what governments should do and why they really need to get on with it. If you're a digital subscriber, Insider is already part of your subscription. If you're listening free, I've put a link in the show notes, and you can watch extended clips.

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14:11When it comes to climate change, we often talk of the need for unified action. Big sweeping changes. A handbrake turn in how we live. But sometimes we have to sweat the small stuff. Cooling buildings with fans or air conditioning accounted for over 10 % of the world's electricity use last year. And something really, really mundane might actually help. A little bit surprisingly, paint can make quite a significant difference to the temperatures inside buildings and vehicles around the world. Nikita Ostrovsky writes about science. Roofs, for example, make up about a fifth of some American cities.

14:55And because most of them are dark, they absorb something like 90 % of the incoming sunlight. Something similar is true for vehicles. And so if you were to paint the roofs of these vehicles with a paint that reflects more sunlight than 10%, you can actually shed a lot of heat without using any extra energy. Nikita, that all sounds quite abstract. What do we see happening in practice? What's anyone doing? Here's a concrete example. So London's buses are famously red, right? Everybody knows that. What most people don't know is that the roofs of London buses are white. It started happening in 2004, and they were doing this for exactly the reason that I just said, that reflecting sunlight from the roof is a really good way to cool down the vehicles, particularly because on a bus you don't have as much energy or power coming in the way that you do with a building, and so it's harder to power the AC system, for example.

15:52It's much more important to shed as much heat as you can right from the outset, basically by reflecting sunlight. This has become more and more important over the last five, ten years. Global warming is making our summers hotter. And the number of complaints about heat in buses, unsurprisingly, has risen. In 2025, it was the highest it's ever been. So scientists and engineers and Transport for London are thinking about ways that we might improve matters. If you've already got roofs that are painted white, how might you improve matters then? Well, you would be surprised, but you can get a lot from small differences in paint.

16:29So I spoke to one group at the University College of London, who are currently working with TFL, Transport for London. They told me that they had painted two roofs with a new paint that they're developing and compared this to the existing white paint that TFL uses. And they found their paint is about 10 % more reflective than standard white paint. So standard white paint reflects something like 80 % of incoming sunlight. The UCL group has a paint that reflects about 94 % of sunlight. And this sounds like an academic difference. It's 14%. It's like, who cares? But actually, there's a simple arithmetic fact that makes this quite important.

17:09Objects on Earth at standard room temperature give off about 100 watts of heat, the heat that they give off through infrared radiation. The sun irradiates the Earth with 1 ,000 watts, about 10 times that much. And so if you can reflect 90 % of that incoming heat radiation from the sun, you can break even. You reflect as much as you absorb. And if you reflect more than 90 % of the incoming sunlight, which the UCL group manages to do, then you can actually drop below the ambient temperature of your surroundings. So for example, if it's 33 degrees outside, maybe you get down to 30 degrees without actually using any energy for AC or something like that.

17:49So what do you have to do to paint to make it more reflective? There's a whole bunch of clever material science that goes into this. And actually, this has been known since at least 2014. The Economist actually wrote about this at the time, there was a Stanford group that developed a paint which achieved some of what I've just described. It could drop below ambient temperature, even under direct sunlight. And they used some fairly expensive materials. And it also, because of the particular materials and methods that they used, the coating was highly reflective in the same way that a mirror might be.

18:23So the sunlight comes in, it comes out at the exact same angle. And if you imagine painting the roof of every vehicle and every building in your city with a mirror-like coating, you can imagine why. Maybe this isn't such a great idea. But the UCL group that I spoke to has found ways around that. They use aerogel, which is a sponge made out of silica, which is basically sand, sort of melted sand, in combination with polymer. Polymer is basically just glue. And this aerogel is pretty cheap by virtue of having been in the marketplace for a long time. And so the paint, when they put these things together is highly reflective because the aerogel balls, they basically use these little beads of aerogel inside the polymer, reflect sunlight in this random scattering way.

19:12Rather than reflecting it as a mirror would, this instead scatters the light. So it's still reflective, it still gets rid of almost as much energy as the Stanford group's material, but it scatters the light in lots of different directions. And so to the visible eye, it just looks white rather than reflective the way that a mirror might. So where could we use this other than the roofs of buses then? And how much of a difference could it actually make? You can use it on roofs of buildings, vehicles. People are thinking about using highly reflective paints to cover pavements and roads as well to get rid of a lot of the heat that dark tarmac would absorb.

19:48An interesting fact about all of these reflective coatings is that they are really getting rid of heat in a much more complete and comprehensive way than something like air conditioning. So air conditioning works by moving heat from inside a building to the outside of a building. This requires energy because it violates the second law of thermodynamics. The second law of thermodynamics says that you can't move heat from a cool place to a hot place without expending extra energy. All of these paints harness the second law of thermodynamics because they actually reflect heat to a colder place than they currently are.

20:23The hotter place is Earth and the colder place is outer space. And so the way that these paints work ultimately is reflecting incoming sunlight straight back out to space through basically a gap in the atmospheric absorption window. Wouldn't you just fry the people on top of a road if it was painted with reflective paint? Well, you know, if you stand in front of a white building, you don't feel hot. Really, I think about all of this a little bit like heat jujitsu. It's sort of using the second law of thermodynamics that is normally a real pain for people trying to cool down buildings to your advantage, radiating heat out to outer space, and in this way overcoming lots of the problems that are becoming increasingly salient in a warming world.

21:04The heat island effect caused by air conditioning units that dump heat into urban spaces, the fact that around the world hundreds of thousands of people are dying because of heat-related causes. All of this is only going to get worse and cheap, sustainable and widely scalable solutions like paint, counterintuitively enough, might really make a difference. Nikita, thank you so much. Thanks, Rosie. Who knew paint could be so interesting?

21:49Ann Wroe: Stanislas Uta couldn't quite understand what he was hearing that very cold night in January. Anne Rowe is The Economist's obituaries editor. It sounded like jackals, but they were too close and they went on and on. At one point, it sounded like a pig being slaughtered. he crept out of bed in his pyjamas and then he saw through a gap in his lieutenant's tent that there was a boy being tortured a ragged shepherd of the kind that he saw very often in northeastern Algeria where he was with the French army just a child really was 14 but looked 12 dressed in rags, barefoot and now he saw him wired up to the field generator.

22:48Ann Wroe: One wire on his earlobe, the other on his wrist, administering shocks that coursed all through his body. He was completely revolted by this scene and the next day he remonstrated with the lieutenant. But there was much else too that either he saw or his comrades saw going on in the camp.

23:13Ann Wroe: They participated in a lot more torture sessions and they reported to him that men were strung up by their feet and their heads were dunked in a bucket of water for a long time, that men might have their hands and feet tied behind their backs and be interrogated like that, that the famous field generator torture often was wired to the earlobe and the testicles, not to the wrist. And that people were sometimes shackled so hard by their ankles that the feet got gangrene and the prisoners died of that. There was another particularly cynical sort of torture where a prisoner would be told that he'd been freed.

24:03And as he turned his back and raced away, he was felled by a burst of machine gun fire.

24:10Ann Wroe: And this was called wood chopping duty.

24:18Ann Wroe: There was no appetite in France to hear about these things. And indeed, whatever atrocities happened in Algeria were more or less kept quiet until the 21st century. Even now, France has not apologised. The war in Nigeria was an attempt to hang on to France's prime colony in Africa, the most important one. It was considered part of the patrimony and administered as three French departments. And the political-military hierarchy in Paris was absolutely determined not to lose it. because in the mid-1950s they had already lost Indochina. So from 1954 to 1962 they fought to hang on to Algeria and this was what Stanislas Urtel found himself involved in.

25:19Ann Wroe: He made a very strange recruit. he had already done his military service. He'd done it in Madagascar, and there he had already been turned against the colonial policy of the French. He was supposed to be a machine gunner. He never actually fired it. He pretended to go to practice, but it registered that nothing at all had been fired out of it. His lieutenant thought he was a communist, and the other soldiers thought he was already fully a priest, which he wasn't. He was a Jesuit seminarian. But they suspected he was already thinking like a priest and so he would fraternise with the prisoners, he would be soft on them, he would take them bread at night.

26:11Ann Wroe: He only did a very short stint in Algeria, but it marked him so profoundly that when he came back he no longer wanted to be a priest. He wanted to work for the good of underdeveloped countries, especially in Africa and most particularly in Algeria. And a group formed in 2004 of reservists who had opposed the war and he joined that immediately and became a leading light in it. and he also never stopped speaking out in the schools about the horrors of what the French had done in Algeria. He hadn't only written testimony back from that country. He'd also taken photographs while he was there, prisoners when they'd been beaten, and also a portrait of the shepherd boy, the 14-year-old, whose cries he had heard in the night.

27:09Ann Wroe: This boy was called Saeed Boutou and his picture became the face of the Algerian conflict when more definitive critical histories came out. He was often on the front cover of them. In this picture, which was taken the day after the torture, the boy doesn't look particularly distressed, but he looks perplexed and puzzled. Perhaps by the things he has seen and the actions he has endured at the hands of men who thought they were more civilised than he was.

27:49Anne Rowe on Stanislau Uten, who has died aged 95.

28:11Tomorrow, the weekend intelligence is by me, and I wanted to find out, in an age when every fact is a click away, what's the point of human memory? I spent time with an eight times world memory champion, a woman suffering from early onset dementia, and artificial intelligence to find out what matters, the information itself, or the journey we take to retrieve it. You'll need to be a subscriber to listen.

28:42And that's all for this episode of our award-winning show, The Intelligence. Yes, I'm delighted to tell you that at the British Podcast Awards last night, which I like to call the Oscars of audio, we walked away with the coveted Gold Award, Best Daily Show, and Silver Best News Podcast. And this is the absolutely fantastic, hardworking and talented team behind those prizes. our editors are Chris Impey and Jack Gill our deputy editor is Sarah Larnu and our sound designer is Will Rowe with additional help this week from Mark Burrows our senior producers are Henrietta McFarlane Emily Elias and Alizé Jean-Baptiste our senior development producer is Rory Galloway and our senior creative producer is William Warren our producer is Anne Hanna and our assistant producer is Kunal Patel with extra help this week from Benji Guy award winners every one of them we'll all see you back here for the weekend intelligence tomorrow so Thank you.

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