Capital v. Person Tax Neutrality

Since 2025, a business can deduct the full cost of equipment and software right away.¹ It can deduct a salary too, but only the paycheck carries a 15.3% payroll tax.² As AI spreads, that tilt shapes the choice between hiring a person and buying a machine. Congress should measure the tilt, offset it with a temporary credit on earnings, and pay for that credit in the open.

The Problem

The 2025 reconciliation law, under the heading "Boosting Domestic Investment," made 100% first-year expensing permanent for equipment and software and let businesses deduct domestic research costs immediately.¹ The Joint Committee on Taxation scored the expensing provision alone at $363 billion over ten years.³

Wages are deductible too. The difference is payroll tax: wages carry 15.3% for Social Security and Medicare, split between employer and worker, with the Social Security portion stopping at $184,500 in 2026. A server, a software license, or an AI subscription carries no such charge.² One widely cited study estimated effective tax rates of 25.5% to 33.5% on labor, against about 5% on equipment and software after the 2017 tax law, and concluded that the code promotes more automation than is socially desirable.⁴

The 2025 law also created income-tax deductions for tips and overtime, but those end after 2028.¹ Congress made the capital break permanent and the labor breaks temporary. Three problems keep the tilt in place:

1. No one measures the tilt. The figures above come from an academic model of 2018 law,⁴ and JCT's score of the 2025 provision measures revenue alone.³
2. Gains outrun paychecks. From 1980 to 2017, labor's share of nonfarm business income fell from 63% to 56%, and median real wages grew 16% while GDP per person doubled.⁴
3. Robot taxes miss. A tax on "jobs replaced" depends on employers admitting it: in the first year New York asked, none of the 160-plus companies filing mass-layoff notices attributed cuts to automation.⁵

Why legislation: Only Congress sets tax bases and credits, and the 2025 expensing was a deliberate, scored choice. This proposal keeps it and adds what is missing: an official measure of the tilt and an offset for work. JCT and Treasury have long estimated who bears business taxes,⁶ but no law requires anyone to report how the code weighs a worker against a machine. Tax neutrality is both a free-market principle and a pro-worker one.

The Solution

A three-step staircase: each step stands alone, and each step up adds commitment. Scope: federal income and payroll taxes on work compared with equipment, software, and purchased AI services; the proposal taxes neither robots nor AI use, and unlike a companion proposal to support displaced workers, its credit rewards all work.

Step 1 — Measure the tilt. Within 12 months, Treasury publishes effective tax rates for hiring, training, equipment, software, and purchased AI services, with distributional effects, international competitiveness, uncertainty ranges, and options to remove proven distortions. The comparison counts the Social Security and Medicare benefits that payroll taxes fund.

Step 2 — Credit the paycheck. Create a refundable credit of 5% on the first $20,000 of each adult's wages and self-employment earnings, up to $1,000, phasing out at 5% of income above $40,000 ($80,000 for joint filers) with an individual earnings cap; these figures are illustrative. Pay it from general revenue so Social Security and Medicare benefit credits are untouched, deliver it through existing earned-income-credit reporting, and exclude related-party wage inflation and capital income relabeled as pay. The market, not the tax table, should choose between a person and a machine.

Step 3 — Pay for it in the open. Before enactment, Treasury identifies capital-side and other financing options, and Congress either adopts an offset or explicitly authorizes the cost. The credit sunsets after three tax years unless renewed after an evaluation of work, wages, take-up, and investment.

Where to start: Step 1 is the floor; it asks only for numbers. Step 2 is the heart of the proposal.

Administration and enforcement: The IRS pays the credit from the first full tax year at least 12 months after enactment, using normal refundable-credit notices, audits, and appeals. Congress funds implementation and obtains a JCT revenue estimate before passage.

Risks and Mitigations

• Less investment: Taxes on capital also reach workers: JCT's published method assigns a quarter of the long-run corporate income tax to labor.⁶ That is why expensing stays in place and any capital-side financing must be an open, scored choice; the tradeoff remains.
• Payroll taxes buy benefits: Workers get Social Security and Medicare in return, so Step 1 counts those benefits and the credit leaves them untouched. Counting them will narrow the measured gap.
• Cost and gaming: Refundable credits invite errors and fraud, and any phase-out raises marginal tax rates for some earners. Reusing earned-income-credit definitions and third-party reporting limits both, but the parameters need distributional modeling before passage.

Similar Bills

Fit measures similarity to this proposal's mechanisms: High = direct precedent; Partial = useful component with material differences; Related = adjacent approach.

Federal

State

What this adds: Congress has pulled both levers, permanent expensing for capital and temporary deductions for some wages, without ever measuring how they combine. This proposal adds an official neutrality measure, a temporary credit on all work, and a rule that any capital-side financing be chosen in the open. A companion proposal supports displaced workers directly; this one changes the tax treatment of work itself.