Automation and inequality with taxes and transfers

Abstract Declines in low‐skill labour shares are reviewed, and a stylised model is constructed to examine their determinants and future implications. A retrospective analysis of US shocks suggests that technological change has contributed more to raising income inequality and the wealth to GDP ratio than other changes. An anticipated future twist away from low‐skill labour toward the capital, combined with population growth, risks high unemployment rates. Productivity growth at twice the pace since 1990 limits this, though inequality persists. Analysis shows that a generalisation of the US ‘earned income tax credit’ system with consumption tax outperforms alternatives of the ‘universal basic income’.