Luxembourg’s system ‘fragile’ to AI shocks, warns researcher

According to the leaders of tech companies at the forefront of the AI revolution, like Elon Musk and OpenAI CEO Sam Altman, we will all soon be living in some sort of utopian future where having a job will be unnecessary.

Reality may prove rather more stark. “While Luxembourg is wealthy, its current system is ‘fragile’ to AI shocks,” Nizamul Islam from the Luxembourg Institute of Socio-Economic Research (Liser) told the Luxembourg Times.

Together with Turin University professor Ugo Colombino, Islam published a paper in 2024 – Lost jobs, new jobs and optimal tax-transfer reforms – that suggests that some form of Universal Basic Income (UBI) or Negative Income Tax, coupled with a flat tax rate, would provide the necessary resilience to those AI shocks.

Simple UBI-style model wins

Similar research by Colombino and Islam in 2018 concluded that Luxembourg’s existing social security system was working well, thanks to the country’s stable economy. That made it an outlier compared to countries like the UK and Ireland, which would have benefitted greatly from some sort of tax transfer reform, according to the researchers.

Fast forward to 2024, however, and the researchers found that Luxembourg, too, would benefit to some extent from General Negative Income Tax and Universal Basic Income schemes, what they call “social welfare superior”.

“This means that when we account for everything – incentives to work, poverty reduction, and economic output – the simple UBI-style model wins,” Islam said.

Liser’s Nizamul Islam says that some form of UBI or Negative Income Tax, coupled with a flat tax rate, would provide the necessary resilience to AI shocks © Photo credit: Liser

“This means that when we account for everything – incentives to work, poverty reduction, and economic output – the simple UBI-style model wins,” Islam said.

Current systems to assist the less well-off via tax breaks or social security are “categorical and complex and try to fit citizens into specific boxes”, he said, whether they are unemployed, students or low-income earners, for example. “Our research explains that as automation and globalisation make the labour market more unpredictable, these complex systems will fail. They create ‘welfare traps’ and are too rigid to handle the disruption caused by AI,” Islam said.

While Musk discusses UBI as a survival tool, our research proves it is an efficiency-enhancing tool that helps the labour market adjust to new technology

Nizamul Islam 

Liser

“While Musk discusses UBI as a survival tool, our research proves it is an efficiency-enhancing tool that helps the labour market adjust to new technology,” he added.

As recently as December, Musk was telling Indian entrepreneur Nikhil Kamath in a podcast that in the future working will be optional. “People will have any goods and services that they want,” he said.

It was not the first time that the tech boss had mentioned what he calls Universal High Income rather than UBI. Musk has cited a timeline of 20 years for this to become reality but suggested that it could even be as soon as 10 or 15 years.

Quick glossary

Negative income tax (NIT) is an alternative to welfare suggested by economist Milton Friedman in Capitalism and Freedom. It is system of taxation in which the government provides payments to households with an income below a certain threshold.

Universal Basic Income (UBI) is a flat payment provided to all citizens. Unlike traditional welfare systems based on economic status and level of income, it is unconditional.

A flat tax rate (FT) imposes the same tax rate on all taxpayers, regardless of income level or assets.

Musk is not alone. In a podcast with Theo Von in July last year, Altman said he would like people to have an ownership share in whatever AI creates. “That I feel like I’m participating in this thing that’s going to compound and get more valuable over time,” he said. This would amount to “universal basic wealth – better than universal basic income,” he said. “And I think I don’t like basic either. I want, like, universal extreme wealth for everybody.”

More recently, UK minister of state for investment Lord Stockwood also suggested that his country could introduce a universal basic income to protect workers whose jobs are threatened by AI. People in government “are definitely talking about it,” he told the Financial Times.

Tax reform a move in right direction

The Luxembourg government is not currently discussing universal basic income, as it is “not part of the 2023-2028 government programme,” a spokesperson from the finance ministry told this newspaper.

However, its decision to introduce a tax reform starting in 2028 – including moving to a single tax class and doubling the tax-free allowance – is already a move in the right direction towards being “robot-proof”, according to Islam.

The proposed tax reform builds on the foundation of simplicity, he explained. “Our research suggests that the next step is to simplify the benefit side to match. By adding a universal floor, we can guarantee security for every citizen.”

Others are not so convinced. Marc Wagener, an advisor to the LCGB trade union and member of the European Economic and Social Committee, thinks UBI would create more inequality. “A basic income seems to be a very popular idea, but in the end, someone has to pay for it – which would be the workers through taxes. And the danger is that it would create a gap in society between those working and those not working.”

He is also concerned about the impact universal basic income would have on future generations. “What would be their future if they are relying solely on basic income? Young people should have a project for their future and a career; our societies are based on that,” he said in an interview in January.

The LCGB instead is advocating for a tax on the profits of the use of AI, with the receipts being used to finance the additional social security payments that will inevitably rise from the job replacement impact. “I think it would be more suitable to reduce working time if there are huge productivity gains and there were less work available for everyone,” Wagener added.

It isn’t just a social project; it is economic infrastructure for an automated world

Nizamul Islam 

Liser

Konstantinos Tatsiramos, a professor of labour economics at the University of Luxembourg, also noted that much of the debate surrounding UBI originates from the United States, where there is much less social support.

“In Europe, in almost all countries, social security programmes are much more developed. There are unemployment insurance schemes, you have employment protection legislation, there are active labour market policies. Different countries have a different mix of those, whereas in the US you have more poverty schemes. But in Europe I don’t think there is a silver bullet solution, because every country is different,” he said.

But, according to Islam and Colombino, evidence from their study of eight European countries showed that a simple Negative Income Tax model – essentially a UBI paired with a simple tax rate – created the best results for everyone.

“It isn’t just a social project; it is economic infrastructure for an automated world,” Islam concluded.