Curious how a robot-only business would work under current tax law

Factual Questions
1

Let’s suppose someone happens to inherit 100 million dollars. They decide to start a business. The year is 2025.

So they find a market niche. Blue widgets are in demand. Newly available automation can make blue widgets without human labor.

So they invest 100 million dollars in buying some empty warehouse space and set up a factory inside. They rent a bunch of new robots and they rent engineering services to adapt the machine learning robots to make blue widgets.

The factory runs really efficiently with just 10 human employees. All the accounting and sales is all automated, and the materials are brought by automated truck and unloaded by auto-unloaders. The human employees are only rarely needed and work part time from home.

All the profits are reinvested in making other color widgets. 10 years later, in 2035, the factory makes all the colors of the rainbow in widgets. The owner sells it for 1 billion dollars.

Under current tax law, since all the profits are being reinvested and no one is being paid as an employee, wouldn’t this business pay nothing in taxes, save a tiny amount on the payroll for the 10 part time employees? Oh, and sales taxes on the sale of the widgets to the end consumers.

It would be subject to tax on the land, but the business owner could probably scam a local government into not charging the normal real estate taxes by promising to ‘bring jobs’ with the factory. Same as data center owners do now.

And then, once the business is sold, wouldn’t the only tax on the 900 million dollars that was made be long term capital gains tax, which is 20%?Long-Term Capital Gains Tax Rates in 2017 | The Motley Fool

Human employees, on the first $1 they are paid, are taxed 15%.

This might be why there are tax proposals to “tax the robots”. The current government funding scheme would collapse if automation took over the majority of the economy. The 990 human employees this hypothetical widget factory isn’t employing who are living in poverty are costing the government various welfare, medicaid, housing and utility assistance, and prison costs, while the government isn’t getting anything in return.

2

I’m no accountant, but the company seems profitable even if it is reinvesting those profits. It may have to pay some taxes on the profit.

The corporate taxes woudl be the same if it had 10 part time or 100 full time employees. (other than the employer’s share of the social security/medicare tax.)

In Washington State, by the way, businesses pay taxes on gross sales (regardless of profit) It’s call the Business and Occupation tax, and is philosophically opposed by many.

3

I don’t think so. Each year, let’s say it’s bringing in 100 million over the cost to run the robots. But 100 million dollars in more robots are being rented or land is being leased.

With rented/leased assets, you get to deduct the lease/rental cost directly from the bottom line. So 100-100 = 0. No taxable income. Then, the last year, someone else is buying it, at a much higher rate because it now has a huge amount of capital.

(the capital would be the brand/IP, intangible assets.) I see a mistake. In reality, a factory doing this well wouldn’t be leasing, they’d be buying assets. But they can depreciate some of those, but yeah, it’s gaining assets with each year.

4

I’m no accountant, but if they are really buying capital with the $100 million, then they don’t actually have a profit. But unless the business is growing so fast they need that many more robots, the owner would be shooting himself in the foot. The robots would need storage space, and power if turned on, and maintenance. If not turned on they would be losing value. So odd are the company would be paying taxes.

5

If my business makes $1M after expenses and I buy a building or equipment, I have to capitalize it. If I spend that $1M, I may only be able to write off 20% of the cost each year. So in year 1, I made $1M, invested $1M, wrote off $200K as an expense, and paid income tax on the remaining $800K. In years 2-5, I take $200K off my bottom line which may put me into a loss position.

6

You said there were profits that were reinvested. If they are profits, they are subject to corporate income tax and are taxed. It is irrelevant whether those profits are used to rent more robots for the next year. That rental expense is only deductible against the revenues generated in the next year which those robots were used to produce.

If you purchase new robots, that payment cannot even be expensed immediately. It’s a capital expense and must be deducted as depreciation over several years.

7

The robot rental company presumably pays taxes, yes?

8

As far as I can see, the involvement of the robots is a giant red herring in the OP.

The key sentence is this one:

You could ask the same question of any business with a small number of employees which does not distribute its profits, couldn’t you?

The answer to the question is obviously going to depend on the tax laws of the place where the business is taxed, but generally the answer is going to be “no”. If the business is conducted by a corporation, corporations generally are liable to tax on their profits whether or not they distribute them to shareholders. If the business is conducted by an individual or a group of individuals, then he is or they are liable to tax on the profits of the business, which are his or their income. This is true whether the business pays wages to humans to produce widgets, or rent to the providers of automated machinery which makes widgets. Either way, that cost is deductible in calculating the profits of the business (and is taken into account in calcuating the income of the workers/the people who hire out widget-making machinery), but it doesn’t affect the business’s liability to tax on those profits, when calculated.

There may or may not be some tax deduction or credit available for reinvesting some or all of the profits in, e.g., buying more plant and equipment, but this would be equally available whether the business employed many workers, few workers or no workers at all.

9

That’s not how sales taxes work.

Companies collect them, and remit them to the state.

10

Totally incorrect, I just realized. Ok, year 0, day 1, the company has 100 million dollars in robots. It leases the land. That year, it can depreciate between 20% and 50% of the value of those robots. So if the company makes under 50 million dollars, it pays zero taxes that year.

Each year thereafter, it’s making more money and buying robots with it all. Each year, it depreciates enough of it’s growing pile of capital equipment to pay no taxes.

The owner then sells the combined business, with up to 500 million in asset value, to cash out as capital gains taxes. Which are 20%, or less than the income taxes a person working fast food pays.

11

Are you, the company owner, paying yourself a salary, or capitalising in any way from your spectacularly successful business?

If so, you’re paying taxes. If not, it’s surprising that you bother running a squillion dollar business.

12

Sure. You borrow money against the value of the company. No taxes on the borrowed money. Then repay the loans with income through capital gains taxes. Probably could borrow many millions of dollars at rock bottom rates if a company worth hundreds of millions of dollars is used as collateral.

13

That’s fine. But it can do that by buying any plant or machinery, not just robots. And it can do that whether it employs may workers, few workers or no workers at all in the trade that it carries on.

Is your question “can a company incur so much capital expenditure through the purchase of business assets that it reduces its tax liability to nil”? Yes, it can (unless the jurisdiction in which it operates limits or denies deductions for capital expenditure). But it can do that whether the expenditure is on robots or on other capital items, and it can do that regardless of the number of workers it employs.

What stops it doing that are factors already pointed to; the shareholders would like a dividend now and then.

Plus, the continued acquisition of every-increasing numbers of robots for the manufacture of widgets, regardless of the market for widgets, the profitability of manufacturing widgets, etc, may not be a sound business strategy. Ultimately the object of running a business is not to avoid tax but to enrich the owners of the business. The more widgets you make, the harder it is to sell them all. And if your only way of extracting value from the company is to sell it, you don’t want it to grow larger than the optimal size for a widget-manufacturing company. Nobody is going to pay top dollar for a company which has invested all its reserves in tooling up to flood the market with widgets in volumes which must cause a crash in the price of widgets.

But, bottom line; if you’re not concerned about extracting an income from your business but instead want to reinvest profits to increase the size of the business, can you do that? Yes, you can. Can you reduce the business’s tax bill by doing that? Yes, potentially. Does this have anything to do with whether you use robots in your business, or employ many or few workers? Not really.

14

Exactly. This could be Joe’s rental real estate business or Fred’s investment fund. The robots are irrelevant, except that the difference between rental real estate and product manufactured and sold is slightly different. You could take the rental income, pay down the mortgage, invest any accumulating profit into more real estate, etc. I’m imagining the hassles of maintaining a couple of thousand mechanical devices is comparable to maintaining several dozen large apartment buildings… and in both cases, you could contract out the operation to someone else.

the 1% do this all the time - figure out ways to convert earnings into capital gains so as to pay less taxes. Warren Buffet famously pointed out he pays a much lower percentage in taxes than his secretary. he buys and sells stocks and collects dividends.

However, as others point out - there are associated expenses incurred that generate taxes regardless. Sales taxes and accounting for them. The truckers delivering, the maintenance companies, the electricity and water bills. All these operating expenses are going to pay other companies who them must pay wages and taxes.

I had noted that in the 1980’s through the 2000’s the hotels in various cities seemed to be perpetually changing names/brands. I assumed the logic was that say, Best Western bought the hotel from Hilton with a mortgage. They paid down the mortgage with operating revenue - so no taxable profit. When the mortgage was done, sell to Holiday Inn for a nice price (original price plus real estate appreciation) and voila! Your last 10 years’ operating profit is a capital gains instead.

15

This is the basis of VAT taxes (like Canada’s federal GST). Any VAT taxes you paid are deductible. So Joe spends $100,000 on supplies to make widgets. he pays 5% - $5,000. He sells the widgets for $300,000. he has to collect 5% sales tax also -$15,000. However, he can deduct the taxes he paid from the tax he must remit. So he only has to remit $10,000, since he had to pay $5,000 in tax already. *

The plus side of this, if someone is cheating and not collecting the tax - well, he paid taxes on supplies etc. so not all the tax potential is lost (unless it’s mainly a service business with low supply needs, like accounting or landscaping). The minus - if you think about it, it’s essentially a labour and profit tax, since you don’t pay your employees GST on their paycheques. But then, all business is essentially labour costs and profits. Materials are ultimately bought from another company who produced them for labour cost and profit.
*OK, there’s some complex “if it’s capital” crap mixed into that…

16

Oh. So in the OP case, the robot factory owner can take the 20% taxed money he got from the last robot factory, use some of it to pay the debts for his living expenses the last 10 years, and then buy another robot factory from someone else with the profits. Then 10 years later, sell again. Essentially, a shell game, where none of the robot factory owners ever pay any income taxes.

17

Except for the detail where the market becomes saturated with widgets and any other robotically produced products; or there are no consumers with income to buy them. Then you have to figure out a steady state version of the business. (I suggest the one I mentioned above for the hotels. I’ll sell you my factory, you sell me yours. Capital gains all around…)

This is the same game played by WalMart or McDonalds, for example. Walmart moves in and steals all the business from mom and pop, closing Main St. and devastating the town. The profits pay for the next store. But now, there are Walmarts everywhere, and except for luddite hold-outs like Manhattan, nowhere to add to the store count. McDonalds has done the same to local greasy spoon diners. Except, now there are almost no new locations waiting for the clown. To keep expanding, they have to find different businesses. (Sams Club to compete with Costco…)

18

Yes, subject to the caveats that md2000 has pointed out.

Plus, financing his lifestyle with debt for 10 years means that, in order to reduce his tax rate to 20%, he’s paying a lot of interest (which wouldn’t itself be a deductible expense).

And, as already noted, no robots need to be harmed in the creation of this tax avoidance mechanism. What he wants is a business that reinvests all its profits in the acquisition of more business assets. It doesn’t matter what the business assets are.

19

Just to clarify, the 20% rate is the maximum rate on individual capital gains. Corporate capital gains are taxed the same as corporate ordinary income. And to add to the confusion, corporate capital losses can only be offset against corporate capital gains.

Plus there is the issue of depreciation recapture.

But. if you as an individual. owned all of the shares of the corporation and somehow managed to get someone to buy all of your shares for a $900 million profit, then you as an individual would pay the 20% maximum rate. Oh, and the Additional Medicare Tax and the Alternative Minimum Tax.

But I have to ask, why would anybody pay you a billion dollars for a factory full of old worn-out robots that you spent a billion dollars on over the last 10 years? Are you sure there won’t be more modern robots that can churn out more widgets for half the price? And will anybody still need your old robots when Widget 2.0 hits the market?

20

This is quite a serious problem. If we really are about to have the ability to have factories making most any product with about 10 actual employees, who would buy this flood of products?

It’s a world where you could make 7 billion medium quality electric cars, no problem, but only a few hundred million people can afford to buy them. (costs would shrink, but buyers have to have some job, robotic factories aren’t free)

You could click a mouse and solve all the problems with people dying in floods in Bangladesh, heat in india, or lack of water in Africa. Just manufacture a widget to solve the respective problem. But none of those people can pay you for the widget.

Even in the first world, if half the populance can’t do anything the robots can’t do…