Tax Cuts Won’t Save Growth in an AI Economy
Corporate tax cuts are once again being promoted as a solution to American growth. The familiar claim is that lower taxes free capital for investment, which then creates jobs, raises wages, and fuels consumption. But this logic depends on an assumption that increasingly no longer holds: that investment today expands labor rather than replaces it.
In reality, much of the capital freed by tax cuts is flowing into technology and artificial intelligence—sectors designed not to absorb workers but to reduce reliance on them. The McKinsey Global Institute estimates that up to 30 percent of hours worked in the U.S. economy could be automated by 2030, with the highest exposure in clerical, administrative, and office-support roles (McKinsey Global Institute, 2023). These are precisely the “pink-collar” jobs—office managers, paralegals, customer service workers, HR staff, and administrative coordinators—that once provided stable middle-class incomes, particularly for women.
This shift matters because the U.S. economy remains overwhelmingly consumption-driven. Roughly two-thirds of GDP comes from household spending (Bureau of Economic Analysis, 2024). Consumption depends not on corporate profits but on wages, job security, and expectations about future income. Yet AI-led investment increases productivity while shrinking the wage base. Firms may become more efficient and profitable, but fewer workers share in the gains.
The distributional evidence is already clear. Corporate profits as a share of national income remain near historic highs—around 11 to 12 percent of GDP, well above postwar norms—while labor’s share has declined over recent decades (Federal Reserve Economic Data [FRED], 2024). Corporate tax cuts amplify this imbalance by increasing retained earnings without changing incentives to invest in labor-intensive activity.
Supporters of tax cuts often argue that growth effects arrive with a lag—that profits eventually “trickle down” through investment. But in an AI economy, this mechanism breaks down. When investment substitutes for labor rather than complementing it, there is little to trickle. Wealth concentrates at the top, while aggregate demand weakens below. This is underconsumption theory updated for the digital age: productivity rises, but mass purchasing power does not.
The consequences extend beyond economics. Pink-collar work historically offered stability, benefits, and a pathway into the middle class. As these jobs are automated or degraded, insecurity spreads even among educated workers once considered insulated from technological disruption. Growth may still appear strong on paper—boosted by capital spending, asset inflation, and deficit-financed demand—but it becomes increasingly fragile, dependent on debt and speculative bubbles rather than broad-based income growth.
None of this suggests that technological progress should be resisted. AI has the potential to reduce drudgery and expand human capacity. But without countervailing policy, tax cuts accelerate a growth model that undermines its own foundation. An economy cannot sustain long-term expansion by subsidizing investments that erode the wage base on which consumption depends.
If policymakers are serious about durable growth, they must move beyond supply-side reflexes. In an AI-driven economy, prosperity requires policies that stabilize and expand household income: stronger labor protections, income redistribution, public investment in care and infrastructure, and universal services that reduce dependence on volatile labor markets. Tax cuts alone—especially untargeted corporate ones—will not deliver shared prosperity.
The central question is no longer whether tax cuts stimulate investment, but what kind of economy that investment creates. Growth in the age of AI will not come from rewarding labor displacement and hoping demand survives. It will come from aligning technological progress with human well-being, not just corporate balance sheets.
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References
Bureau of Economic Analysis. (2024). National income and product accounts. U.S. Department of Commerce.
Federal Reserve Economic Data (FRED). (2024). Corporate profits after tax. Federal Reserve Bank of St. Louis.
McKinsey Global Institute. (2023). Generative AI and the future of work in America. McKinsey & Company.
Art by Kate W 