OECD Taxation Working Papers – Taxation and the future of work. How tax systems influence choice of employment form
Recent policy discussion has highlighted the variety of ways in which the world of work is changing. One development prevalent in some countries has been an increase certain forms of non-standard work. Is this beneficial, representing increased flexibility in the workforce, or detrimental, representing a deterioration in job quality driven by automation, globalisation and the market power of large employers? These changes also raise crucial issues for tax systems. Differences in tax treatment across employment forms may create tax arbitrage opportunities. This paper investigates the potential for such opportunities for eight countries. It models the labour income taxation, inclusive of social contributions, of standard employees and then of self-employed workers (with applicable tax rules detailed in the paper’s annex). The aim is to understand whether countries’ tax systems treat different employment forms differently, before approaching the broader question of whether differential treatment has merit when evaluated against tax design principles. This is OECD Tax Policy Working Paper No. 41. The annex to this paper is Tax Policy Working Paper No. 42, accessible here: DOI: https://doi.org/10.1787/6b20cce5-en. Recent policy discussion has highlighted the variety of ways in which the world of work is changing. In this regard, one recent development has been that many countries have seen increases in forms of non-standard work. This raises questions over whether such trends have been beneficial, representing increased flexibility and adaptability in the workforce, or detrimental, representing a deterioration in job quality driven by automation, globalisation, labour market deregulation and the increasing market power of large employers. These changes also raise crucial issues for tax systems. Labour taxes (i.e., personal income tax and social security contributions) are the largest tax category in an overwhelming majority of OECD countries. Tax differentials across employment types therefore have the potential to produce significant labour market effects, along with significant tax revenue consequences. This raises questions of the extent to which increases in some forms of nonstandard work are driven by tax considerations. Moreover, it raises questions of whether tax systems need to adapt to increases in non-standard work in OECD countries and, if so, how. Building on the OECD’s Taxing Wages framework, this paper analyses the labour (and, where relevant, capital) income taxation, inclusive of social contributions and non-tax compulsory payments, of different employment forms for a set of eight countries. The key question of interest is whether the tax treatment of self-employment differs from that of standard employment, as tax treatment differentials between these two groups may create tax arbitrage opportunities. This paper assesses whether differential treatment has merit when evaluated against accepted notions of good tax design. The main results are as follows: • Firms that contract labour from self-employed workers instead of hiring standard employees generally face lower tax burdens on a per-worker basis. In countries where this tax treatment differential is large (e.g., the Netherlands, the United Kingdom), the tax system may be a driver of increased self-employment. • The contract type that minimises the tax cost of labour may vary with the wage and other factors, such as bargaining power. For each country, the paper shows results for individuals earning a low wage through to those earning 250 percent of the average wage. In general, firms that contract labour from self-employed workers face a lower tax burden across the wage spectrum. • Firms may have the ability to further reduce their tax burdens by deducting labourrelated costs and other labour-related corporate income tax provisions from the corporate income tax base. As they can vary by employment form, deductibility rules are an important factor to consider in assessing which contract types tax systems may be incentivising.