The Taxation of Non-standard Work

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Presentation transcript:

The Taxation of Non-standard Work Conference on Policy Responses to New Forms of Work 7 November 2018 Anna Milanez Economist, OECD Centre for Tax Policy & Administration

The Taxation of Non-standard Work: Project Overview This project considers the role of tax in influencing employment form It takes stock of the employment forms that exist in a country and analyses the tax treatment of each, inclusive of social contributions Two perspectives: Individuals’ choice of organisational form Firms’ choice of which labour contract to extended to workers Eight countries: Argentina, Australia, Hungary, Italy, the Netherlands, Sweden, the UK and the US To be published as an OECD Tax Policy Working Paper in January 2019

Tax Design Principles Applied to Employment Form Equity: Tax should be “fair” for all taxpayers Horizontal equity: individuals carrying out similar activities and deriving similar income from these activities should face the same tax liabilities => employees and the self-employed should be taxed similarly However, fundamental differences between employees and the self- employed warrant departures from horizontal equity Benefit entitlements: if a self-employed worker is not entitled to the same future benefits as an employee, he/she should pay less tax Efficiency: Tax should not distort behaviour Evidence that tax affects choice of employment form, how to take income Opens avoidance opportunities and requires rules to police boundaries

Tax Treatment & Employment Form: Stylised Cases Standard Employee Firm An employee is hired under a standard employment contract. She/he is typically liable for: Personal income tax Employee social contributions A firm hires a worker as a standard employee. Labour cost typically consists of: Wage Employer social contributions Case 2 – Unincorporated Self-employed Contracting Firm An unincorporated self-employed worker is hired as an independent contractor. She/he is typically liable for: Personal income tax Social contributions paid on own behalf A firm hires an unincorporated self-employed worker as an independent contractor. Labour cost typically consists of: Wage No employer social contributions Case 3 – Incorporated Self-employed Contracting Firm An incorporated self-employed worker is hired as an independent contractor. She/he is typically liable for: Personal income tax On labour income & distributed profit Social contributions paid on own behalf Corporate income tax & any taxes on capital income A firm hires an incorporated self-employed worker as an independent contractor. Labour cost typically consists of: Wage No employer social contributions

New Information Collected & Methodology This project collected information on the tax treatment of non- standard work via a questionnaire sent to OECD delegates1 Using this information, we model, for each country: The total employment cost to a firm of employing a worker of each type that exists in that country The net take-home pay of an individual organised as a worker of each type The results are summarised by the payment wedge A measure of the net amount that government receives as a result of taxing labour income, inclusive of social contributions It is also the difference between (1) and (2), expressed as a percentage of (1) 1 The questionnaire was sent to delegates of OECD Working Party No. 2 on Tax Policy Analysis and Tax Statistics.

Example: the Netherlands Decomposition of Total Employment Cost by Employment Type

Payment Wedge by Employment Form & across Countries

Payment Wedge by Employment Form & across Countries

Payment Wedge by Employment Form & across Countries

Indicator of Extent to Which Tax Treatment of NSW Differs (% Diff Indicator of Extent to Which Tax Treatment of NSW Differs (% Diff. between Payment Wedge of NSWers & Payment Wedge of Employee)

Conclusions Across the eight countries considered, the tax treatment of non- standard work differs from that of standard employment Firms that contract labour from self-employed workers are not liable for social contributions on their behalves While this is true is most countries, some countries (e.g., Italy, US) require the self- employed to make social contributions at higher rates Others differences include rules governing tax credits, differential tax rates applied to labour versus capital income Rising shares of non-standard work could be partly tax-driven Individuals’ choice of organizational form is known to be highly responsive to changes in effective tax rates

Policy Considerations & Next Steps Large tax differences between employment forms are unfair and inefficient Are they justified by differences in benefits or employment rights? Entrepreneurial risk does not in itself justify favourable tax treatment Need to define what policymakers want to support, e.g., innovation, start-ups Across-the-board lower taxation of self-employed is likely poorly targeted Linked to existence of tax loss arrangements for the self-employed Next steps Extend analysis to 16 additional countries Integrate analysis of benefit entitlements

Contact Details Anna Milanez Centre for Tax Policy and Administration 2, rue André Pascal - 75775 Paris Cedex 16 Tel: +33 1 45 24 82 58 Anna.Milanez@oecd.org   || www.oecd.org/tax

Taxonomy of Non-standard Work   Non-standard work: Own-account workers / self-employed Unincorporated Incorporated Free professionals Artisans, traders, farmers Other Argentina Contractors, sole traders Australia Incorporated contractors Hungary Sole traders Quasi-self-employed Owner-managers Italy Artisans or merchants Continuous and coordinated workers CIT-paying firms Netherlands Incorporated self-employed Sweden United Kingdom Workers United States Sole proprietorships; S corporations C corporations “Other” employment forms (e.g., quasi-self-employed, continuous and coordinated workers, and workers) introduced to give vulnerable categories of self-employed workers some rights and benefits