There is a version of the future in which the AI will reshape the labour market and trigger an unemployment crisis.
In this not-so-distant future, many tasks and roles currently performed by humans, including in the fields of accounting, finance, tax and audit, will be carried out by AI, with a consequent surge in unemployment rates to unprecedented levels.
One of the most popular solutions is a universal basic income
As this worrying scenario looks increasingly likely (see the ACCA research in the AB article ‘AI fears are growing’), the debate on how to tackle such an enormous problem has recently gained traction. One of the most popular solutions currently under discussion is a universal basic income (UBI), which would take the form of an unconditional (ie not means-tested), periodical transfer of money by a central government to all citizens or residents of a country.
This, however, compounds the problem from a financial sustainability perspective. Not only will the main source of tax revenue for substantially all treasuries’ coffers around the world – taxes on employment income – reduce dramatically, but welfare spending will also increase exponentially if every adult receives a UBI.
The big question then becomes: can any current tax system cope with such seismic transformations and provide the resources governments need in an AI-dominated world?
Shortfalls
The answer is simple: not without huge changes. The UK tax system and the publicly available data on the UK tax revenues is a useful reference to explain the changes that would be required (as a minimum).
In the 2025/26 tax year, £528bn of employment taxes were collected by the UK tax authority, according to the most recent official figures: £380bn in income tax and national insurance contributions (NICs) paid by employees, and £148bn in NICs and the apprenticeship levy paid by employers.
The tax shortfall in today’s money will be roughly £266bn
If we assume that half of the population currently in work will be made redundant because of the widespread use of AI, the UK tax shortfall in today’s money will be roughly £266bn.
Then there’s the additional UBI spending to account for. Based on data included in a study for Economic Review magazine, republished by the Institute of Fiscal Studies, giving a UBI of £400 a month to every working age adult until their death could cost the UK Treasury approximately £200bn a year.
But with half of the population unable to find any work, a more realistic UBI would be £1,500 a month (at least), all of which should be untaxed. This would translate into £750bn of additional spending for the UK Treasury.
However, if the UBI were to replace every other welfare payment, including the state pension, the additional annual net cost of this UBI scheme would be about £450bn. Based on these assumptions, the total shortfall for the Treasury would therefore be £716bn.
VAT lever
To compensate for this huge shortfall, the UK Treasury has three levers to pull. First, it could make substantially all goods and services subject to VAT and double the rate from 20% to 40%.
According to the latest publicly available calculation by the OECD (which is dated 2022), the VAT revenue ratio (VRR) of the UK stands at 0.49, meaning that the UK’s VAT receipts are only half what they could be if standard-rate VAT were levied on all domestic supplies of goods and services.
Applying VAT universally at 40% would bring in another £543bn a year
A VRR of 1 would in principle double the UK VAT receipts from the current £181bn to £362bn, while doubling the VAT rate would take total VAT revenues to £724bn – a total net gain of £543bn per year.
The obvious objections here would be that such changes would be hugely inflationary and distort or rather depress consumer behaviour. However, in an AI-driven world the costs to produce and supply goods and services are expected to drop considerably, which would send prices tumbling.
In other words, the inflationary pressures caused by removing VAT exemptions and zero rating, along with doubling the VAT rate, could be compensated for by the deflationary effects of a broad AI rollout.
Corporate tax levers
The second and third levers to pull relate to business tax. A substantial increase in the UK corporation tax rate (while making all AI investment costs disallowable for corporate income tax purposes) could more than double the current annual corporate tax receipts in the UK from £101bn to well over £200bn, as taxable profits would surge (since a big chunk of corporate costs would no longer be deductible) and the rate applied to such profits would be higher.
The risk here is that some businesses may relocate to countries with more favourable corporate income tax rates, but if we assume that AI will have a lasting impact all around the world, then all countries, not just those in the OECD, could come together and agree a minimum corporate income tax rate.
No country is likely to be immune to mass unemployment caused by AI
This may be wishful thinking, but we should remember that no country is likely to be immune to the mass unemployment problem caused by AI and the consequent employment tax revenue shortfall. A global solution and a level playing field are needed.
Finally, any remaining tax gap in the UK could realistically be bridged by an expected increase in capital gains tax receipts driven by AI-fuelled gains on shares and investments.
And if these measures turn out to be insufficient in generating enough additional tax revenues, then we can always ask AI for a solution.
