Tax systems must keep up with the shifting shape of employment

This issue is thrown into sharp relief by major trends in many economies. Stable, long-term employer–employee relationships are being replaced by more flexible and fluid arrangements — roles that once would have been taken by employees are now filled by people who are classified as self-employed service providers. This shift naturally reduces employers’ liability for labour taxes because self-employed workers are not entitled to all of the statutory benefits available to employees. And as self-employment has spread, the new breed of gig economy workers is developing relationships with multiple organisations, hugely complicating the job of recording their income and calculating overall tax liability. 

One of the key challenges these changes create for governments is the complexity they introduce into the system. Governments find it far easier to track incomes and collect taxes when there is a smaller pool of employers than to do so by dealing directly with millions of self-employed individuals, each of whom may have multiple sources of income. 

This pattern may help to explain the drive by some governments to reconsider the classification of employment relationships between employed, self employed and other forms of employment and to clarify how these classifications are enforced. For tax authorities, there are often benefits in classifying individuals as employed; this will usually increase social security contributions from employers and employees compared with self-employment, and it makes the taxes easier to collect. Individuals are likely to benefit from greater employment rights. Companies may experience increased costs and greater uncertainty if they are held solely liable for any incorrect classification of employment relationships.

Other trends are also having a major impact. Big increases in average life expectancy over recent decades have greatly extended the time many people spend in retirement. Although governments are pushing up state pension ages, higher life expectancy naturally increases the cost of providing state pensions, reinforcing the imperative to ensure that the tax system that pays for them remains sustainable. This can result in efforts to raise more money, for example, by increasing pension contributions of people who are still of working age. 

Another emerging threat to that sustainability comes from the spread of intelligent automation — principally AI and robotics — that could see millions of jobs replaced by machines over the next few decades. In some analyses, of the roles most under threat from automation are middle income jobs, which are among the biggest tax contributors. As tech adoption hollows out these sections of the economy, governments will have to ensure major retraining programmes are put in place so the people displaced can retain their earning capacity and rejoin the workforce at similar levels of income. All this requires resources. 

Automation increases the pressure on tax systems for other reasons as well. When companies replace human workers with machines, they naturally depress the government’s tax take because rates of corporation tax — which will apply to profits from increased productivity and potentially lower costs — tend to be lower than rates of tax on income that workers would have paid. And this effect is difficult to counteract. Given that capital is mobile, the simple expedient of raising corporate taxes to recoup the potential loss risks encouraging companies to shift their activities to lower-tax jurisdictions. 

Considering the pace and scale of the changes we are witnessing in labour markets, it is clear that reforms to labour taxes and laws will continue to be pressing issues for governments all over the world.

Tags

• Employment tax
• Tax
• Technology