How to Tax AI Profits
America should treat innovation the way Norway treats oil: celebrate success, capture part of the windfall, and turn it into a permanent national asset.
“You can’t earn a billion dollars.” Alexandria Ocasio-Cortez (AOC) recently shared her opinions about business. “There’s a certain level of wealth and accumulation that is unearned.” Anyone earning that much, she argued, must be abusing their “market power… break[ing] rules, abus[ing] labor laws,… pay[ing] people less than what they’re worth.”
During the same week, Jeff Bezos shared his views on government. “If we ran Amazon the way New York City runs their school system – your packages would take six weeks to arrive.” The Amazon founder added, “We’d have to charge you a $100 delivery fee. And then when the package did finally arrive, it’d have the wrong item in it anyway.”
The fight is not really about billionaires or bureaucrats. It is about what happens when a society produces enormous, concentrated wealth faster than its institutions can absorb it.
Bezos and AOC provide convenient caricatures of two important arguments.
Markets enable some people to accumulate too much power, and that power allows them to prevent others from achieving the same success or earning their fair share.
Government is inefficient, and increasing taxes on the private sector would only lead to more waste and dysfunction.
California is the poster child of both arguments and a microcosm of the US as a whole. It is home to some of the world’s most phenomenal companies and entrepreneurs. Its companies, VC market, and talent networks are the envy of the world. At the same time, it has high taxes and governments that spend a lot but struggle to provide basic services or to build and maintain infrastructure.
California’s triumph and dysfunction are not separate phenomena; they are two sides of the same coin. Extraordinary wealth creation and institutional decay often go hand in hand.
There is a rich literature on how societies struggle to absorb a rapid increase in wealth, especially when it is concentrated in one sector. Economists call one version of this problem the “resource curse”: societies that suddenly discover oil, gas, or minerals often become richer on paper while their institutions become weaker, more corrupt, or more dependent on a single source of wealth.
This tension is about to intensify. As sam lessin pointed out, the upcoming IPOs of SpaceX, OpenAI, and Anthropic will mint thousands of new multimillionaires and a bunch of new billionaires. Google and Facebook’s (Meta) IPOs minted far fewer millionaires, but even that was enough to make a noticeable impact on California’s state finances, income distribution, housing affordability, and broader economy. The next batch of large IPOs will have an even larger effect, against a backdrop of growing suspicion towards Big Tech and growing concerns about inequality and affordability.
Even that might only be the beginning. AI is the latest in a long line of technological changes that mess up the basic relationship between effort and reward. The more our economy depends on intangibles like software, networks, and content, the less fair or reasonable it feels. There are systematic reasons for this, but the point for now is that the AOC vs. Bezos debate is just warming up: Our economy will create more wealth and more unequal outcomes, and our government will become more eager to tax and more dysfunctional.
There will be populists supporting both sides of this divide. They will propose ideas that either kneecap the economy’s ability to create wealth or kneecap the government’s ability to address a growing list of challenges.
There is a better way, and it addresses the valid concerns of both sides. I mentioned the extensive literature on the adverse effects of rapid and concentrated wealth creation. This literature is focused on the discovery of natural resources such as gas and oil. But it offers solutions that apply to technology booms.
In essence, the US should treat innovation the same way Norway treats oil: encourage exploration, celebrate success, capture a share of the windfall, and put the proceeds into a fund that is insulated from short-term political spending and budget demands. The fund, in turn, invests the money for the long-term benefit of society, provides insurance for a rainy day, and can finance infrastructure and other public goods.
This does not require nationalizing AI companies or punishing founders. It could mean automatically dedicating a portion of capital-gains taxes, corporate tax windfalls, IPO-related receipts, and spectrum or data-center levies to a National Success Fund that operates under an independent, rule-bound mandate.
This arrangement addresses the two legitimate concerns represented by Bezos and AOC: It captures the upside and reinvests it in things that make everyone’s lives better, and it prevents the government from getting drunk on easy money. It gives higher taxes greater legitimacy and imposes greater discipline on politicians.
On its own, this solution will not solve all of America’s problems. But it should be one of the tools in our arsenal. And, beyond the specifics, it exemplifies the type of thinking we need to bring to the 21st Century: A synthesis that embraces economic growth and wealth creation AND acknowledges the importance of public institutions and the need for continued innovation on both fronts.
It’s time for the US to set up a National Success Fund. I wrote about this in 2023, but the need is more obvious and acute now. The choice is not between vilifying billionaires or vilifying government services. We can let the AI boom exacerbate our problems and tensions. Or we can use part of its upside to create a permanent national asset that strengthens America for generations to come.
Have a great week.
Best,
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