Bill Gates believes artificial intelligence could transform the job market so extensively that governments will struggle to fund support for people displaced by technology, even as the economy becomes more prosperous.

"The incentive structure [in business] is wrong: It's 'hire the robot, fire the human and don't look back'," Gates told The Observer in an exclusive interview published Sunday, describing the financial logic that could drive companies to replace workers with AI.

The Microsoft Corp (MSFT) co-founder described the AI age as an "evolutionary event" in which humans are no longer the most intelligent things on the planet. He expects AI to replace almost all work skills: "skills of invention, skills of white-collar work and then with humanoids, the skills of physical human labor."

The Tax Problem AI Could Make Worse

The consequences could extend well beyond unemployment. Governments rely on taxes collected from workers and their earnings to finance public services and social support. If automation reduces employment and the associated tax base, funding assistance for displaced workers and programs to help them develop new skills could become more difficult.

Gates put the dilemma starkly: "The revenue for the safety net to help us through this transition will actually be reduced, even though overall prosperity gets better."

He wants to see taxes on AI use, perhaps through a "token tax," a levy tied to the amount of text and other content processed by AI models, an idea he outlined in an essay in August. He also believes billionaires should pay more tax. Gates told The Observer that he has paid $14 billion in tax over his lifetime but would have been willing to pay $40 billion.

"Governments [need to] figure out how to tax very wealthy people in a way that feels fair," he said. But he cautioned that this alone would not fix strained public finances. In many rich countries, including the U.S., the gap between government spending and tax collection has widened in recent years. "So at some point, more taxes will have to be raised, and some spending will have to be curbed," he said.

The challenge is ensuring that the gains from automation do not disproportionately benefit businesses and owners of capital while leaving workers struggling to adapt.

Research from the International Monetary Fund supports the concern that AI's economic benefits may be unevenly distributed. Its 2024 analysis of generative AI found that incomes could surge for most workers if productivity gains are large enough. However, labor income inequality could widen if AI mainly complements higher-paid workers, and rising returns to capital would increase wealth inequality. For advanced economies, the IMF identified helping workers move into new roles and protecting those adversely affected as policy priorities.

A 'Real Test' for Governments

Gates was keen to stress the potential upside of AI, such as enhanced drug discovery. But he warned that the technology will present a "real test of quality of government" at a time when developed countries are already fire-fighting on multiple fronts and geopolitical tensions are high. "You could say this isn't the best time to say, hey, rich countries, let's do the hardest thing you've ever done," he said.