Policymakers in Washington are banking on artificial intelligence to generate the kind of economic expansion needed to manage the country's mounting debt burden. However, this strategy echoes an earlier promise from the Reagan administration—that tax reductions would essentially pay for themselves through growth. According to Eduardo Porter's analysis published in The Guardian, the mathematics underlying this bet do not hold up.

Even if AI supercharged the economy, its impact on the government's finances would be muted

Eduardo Porter, The Guardian

Growth the US has rarely seen

Treasury Secretary Scott Bessent is counting on artificial intelligence to enable annual economic growth of 3%, a threshold the United States has seldom achieved during the past two decades, Porter noted in his piece.

The Committee for a Responsible Federal Budget, which monitors fiscal policy, has crunched the relevant figures. Bringing the deficit down to 3% of gross domestic product by 2036 would require yearly growth of approximately 4.4%. Eliminating the deficit entirely would demand growth near 7.2%.

The watchdog's own projections for how much artificial intelligence might boost growth are considerably more modest. The Congressional Budget Office forecasts that AI will contribute roughly 0.1 percentage points annually to economic growth.

Winners don't pay as much tax

Porter contends that an artificial intelligence-driven economy would redistribute income away from wage earners toward those holding capital assets. Within the American tax system, capital gains face taxation at roughly half the rate applied to labor income, meaning government revenues would decline relative to the growth generated.

Competition for investment capital presents another headwind. Technology companies are taking on substantial debt to finance data centre construction at a moment when American government debt has exceeded 100% of GDP.

The payback problem

The technology sector itself faces pressure to demonstrate that artificial intelligence investments will generate returns. Economists Jared Bernstein and Ryan Cummings have calculated that the largest cloud computing firms will need between $13.1 trillion and $18.7 trillion in additional revenue over the next decade to justify their capital expenditures.

Should these projections fall short, Porter warned, the consequences could worsen the already precarious position of American government finances.

Source: The Next Web