How will AI affect government tax revenues as labour markets shift?

AI's impact on labor markets, including potential job displacement, wage suppression, and shifts in labor income share, could reduce government tax revenues from personal income taxes as employment and wages decline, particularly in cognitive and entry-level roles [1][2][9][11]. For instance, models suggest AI reduces the employment scale and wage levels, lowering the labor income share, which may necessitate optimal taxation policies like taxing AI capital once it substitutes human cognitive tasks to maintain revenue incentives [1][9]. Additionally, broader economic effects on growth and productivity could influence federal budgets, with calls for income tax overhauls to address job loss fears and inequality, potentially reallocating productivity gains through policy reforms [4][6][7]. However, AI may also boost overall productivity by around 15% in developed markets, potentially increasing corporate and other tax revenues if growth offsets labor market disruptions, though sector-specific enhancements rather than widespread replacement could limit uniform revenue impacts [5][12]. Sources indicate that without coordinated policies like safety nets and regulations, inequality effects might exacerbate revenue challenges [3].