While income taxes are not meant to discourage work and employment, they can still have this effect. Payroll taxes can lead to similar shifts, and by design mainly affect people with low and middle incomes.20 They can cause organizations to move away from hiring additional domestic employees, and instead outsource work or make use of part-time contractors. As digital technologies keep acquiring new skills and capabilities, these same organizations will increasingly have another option: they’ll be able to make use of digital laborers rather than humans. The more expensive human labor is, the more readily employers will switch over to machines. And since payroll taxes make human labor more expensive, they’ll very likely have the effect of hastening this switch. Mandates like employer-provided health care coverage have the same effect; they too appear as a tax on human labor and so discourages it, all other things being equal.21

We bring up these points not because we dislike Social Security or health care coverage. We like both of them a great deal and want them to continue. We simply point out that these and other popular programs are financed, in whole or in part, by taxes on labor. This might have been an appropriate idea when there were no viable alternatives to humans for most jobs, but that is no longer the case. The better machines become at substituting for human labor, the bigger negative effect any tax or mandate will have on human employment.

So in addition to subsidizing work via a negative income tax, we also support not taxing work as much in the first place and reducing burdens and mandates on employers. Like so much else at the intersection of economics and policy, this is easy to say and extremely hard to enact. How else, if not by taxes on labor, are expensive, popular, and important programs like Social Security and Medicare to be funded? How is health care coverage to be provided if not by employers?