At a time of rapidly changing industry, with potentially huge consequences for society, governments face a dilemma of how to incentivise entrepreneurship and innovation while at the same time ensuring that innovation benefits society as a whole.

According to new research published in The Economic Journal by Dr Maik Schneider of the University of Bath’s Department of Economics, innovative entrepreneurship and inclusive growth can be reconciled when governments invest in science and increase the taxes for both labour and profit taxes at the same rate.

Adapting to AI

The study, which also involved colleagues Professor Hans Gersbach and Dr Ulrich Schetter, considers new policies to adapt to the fourth industrial revolution where breakthroughs in technology are expected to yield major improvements in our lives, yet could do so while threatening jobs and also bringing dramatic and widespread societal changes. The fourth industrial revolution, characterised as the fusion of technologies and new cyber-physical systems like AI, is dubbed the most promising yet also the most threatening era of our time.

Their paper highlights how science is a pivotal factor to its success and how governments in the developed world plan to invest heavily in related research to place their economies in a leading position to harness the gains of the innovation that will accompany it. In 2018, the UK government, announced a £500 million investment in scientific research around artificial intelligence and robotics – the AI Sector Deal. Nonetheless, the private sector accounts for a large share of marketable innovations, and governments hope that entrepreneurs will draw on the results of scientific research in setting up new innovative businesses.

However, as a consequence of this, governments see themselves confronted with the dilemma of how they can incentivise entrepreneurship and innovation in the private sector while ensuring that innovation benefits society as a whole. As the fourth industrial revolution is underway, advancements in AI, machine learning, and robotics are projected to affect up to 50% of jobs, disproportionately low-skilled ones.

Ensuring future prosperity

They suggest that an innovative and inclusive society could be achieved if governments invest in science and increase the tax rates of both labour and profit taxes, maintaining the relative proportionality of the two. They suggest that maintaining the proportionality preserves the incentives for entrepreneurship. The higher level of both tax rates would provide funds to compensate those who would otherwise lose out from the technological changes. Such a scheme can take several concrete forms with one example, among others, being the much-debated universal basic income - something the University IPR has modelled.

Dr Maik Schneider of the University’s Department of Economics explained: “This study comes at a time when governments around the world are grappling with the challenges and opportunities the fourth industrial revolution presents. If we were to benefit from the technological advances in AI we have to make sure that it is not at the expense of certain parts of society who may otherwise feel left behind. We hope this study acts as a catalyst for governments as they navigate these complex policy challenges.