Part 1 | Putting Tax to Work: Tax Policy and the Changing Nature of Work

Context

KPMG International hosted a roundtable discussion in November 2023 to explore how tax policies can adapt to meet the changing needs of labour markets, business, economic and social needs. This discussion, one of two initial scoping roundtables, the other covering the Global South (add link when available), sought to illuminate some of the critical issues and questions at play regarding work and tax before a series of deeper dives in specific areas in 2024.

This conversation, focusing on the Global North, looked to discuss the set of intersecting challenges including an ageing population and retirement security, hybrid, remote and cross-border working, the complexities of the ever-expanding gig economy and AI disruption.

Can the design and practice of tax approaches play a significant role in adapting to the changing demographic landscape and ensuring a stable fiscal foundation? What part has tax to play in facilitating lifelong skills training? Can tax frameworks be engineered to incentivise responsible AI deployment while protecting workers from potential job displacement or income loss?

The conversation was held under the Chatham House Rule (which means nothing can be attributed to attendees) and was attended by thirteen expert participants (see below for a list of attendees). The write-up below summarises the personal views of participants and does not necessarily reflect the view of any particular organisation, including KPMG.

Executive Summary

• Tax reforms should be designed to level the playing field around different ways of taxing employment and self-employment and to address the challenges presented by higher levels of self-employment, remote or hybrid working and cross-border working.

• An ageing population is a key area for future exploration – discussions should focus on retirement security, participation rates and activation in the labour market.

• National insurance is generally not too high within OECD countries but targeted measures are needed at the lower wage level to encourage work participation

• Incentives – whether through tax or subsidies – to encourage innovation should be considered but need to be targeted and monitored to avoid unnecessary complexity and unintended consequences.

• Measures should be considered to align the taxation of earned income with gains and income from other sources, such as assets, against the backdrop of increasing wealth inequality and the rising cost of living.

• The political dynamic is vital in terms of how to reduce short-termism and promote better public debate when it comes to labour market and tax policies.

Ways of Working
Higher levels of self-employment, remote or hybrid working and cross-border working.

Contributors to the discussion highlighted the tax differences between employees and the self-employed as an area for exploration. There has been a blurring of the boundaries between employment and self-employment with the increase of part-time work, zero-hours contracts and the gig economy. As companies increasingly take on self-employed people it creates distortions in the market particularly around contributions such as national insurance (in the UK for example).

There is also a question about the administration of tax as more people shift into self-employment. Pay As You Earn (PAYE) has been an efficient way of collecting revenues in the UK and elsewhere and governments should consider how people can engage with self-employed systems in a way that works for them in an administratively efficient way.

It was suggested that current discussions in the UK around an ‘Engagers Levy’ 1 - a tax charged to the fee paid by a client when engaging a freelancer or contractor, calculated as a percentage of the freelancer’s rate (be it an hourly, daily or project fee) – could help to raise revenues though some concern was expressed regarding the impact this will have on the employability of freelancers.

When proposing new tax systems, there is a fear of abuse by revenue authorities. Roadmaps are needed to address how governments will address these trends for taxpayers.

The growth of cross-border working is also a challenge. From an employer's perspective, there is competition for talent and companies often want to allow employees to work remotely overseas – even if only on a temporary basis. But this can lead to issues with creating a permanent establishment for corporation tax purposes and so both a cost and compliance burden. For tax authorities, there is a concern that remote workers will be paying personal income tax abroad and not in their home country.

Therefore, there is a need to address what can be done in tax terms to allow agility and competition for talent at a global level, particularly in light of low wage growth. How can we create a tax system that doesn’t hinder the benefits of remote working for both employers and employees? And how can this be done without encouraging a race to the bottom where countries compete to attract mobile workers?

Ageing Population
Retirement security, participation rates and activation in the labour market.

In the conversation, the work of the OECD was also discussed concerning ageing populations (generally) in the Global North. The OECD has measured the costs of ageing in terms of pensions and higher health care costs adding 5-7% of GDP in extra expenditure.2 An ageing population will also have a huge impact on the revenue side with fewer social security contributions and less income tax.

It was noted that greater work participation was often suggested as a solution. However, it was suggested that there was generally no need to reduce NIC in OECD countries but targeted measures to reduce barriers to workforce entry should be considered – e.g., to incentivise low-income or low-skilled workers who have a weak attachment to the labour market or to enable second family members or older people to back into the workplace.

One participant noted that the labour shortage in developed countries is not so much due to participation rates, but the number of hours worked. Addressing what is behind the decline – such as difficulty in combining care and work – and the tax policy to address these factors will also be key. Another area to consider is increasing the reward from work in comparison with retirement to incentivise longer participation in the workforce.

Encouraging Innovation
Overcharging labour, technological advances, over-automation, tax credits or grants?

It was suggested that the current way of overcharging labour and technological advancement seems to have led to an over-automation of jobs. While not necessarily reducing employment, this has led to jobs in the market commanding lower wages and this coupled with little effect on productivity growth, is an area to be investigated further.

The upskilling of the labour market was also highlighted as a key area for tax policy reform. It was suggested that current incentives are not sufficient to promote the scale of retraining required. Could incentives be devised to encourage the retraining of those who have obsolete skills?

It was suggested that a ‘Skills Tax Credit’ might be a part of the solution - with businesses claiming it through their tax returns. It was questioned whether this is too complex and also any benefit is only received 18-24 months after the expenditure has been made as it comes in the form of reduced tax payments. Therefore, a grant-based system might allow businesses to receive the benefit sooner, thereby encouraging greater participation. Another participant noted that incentives are open to manipulation and a better approach may be ensuring the marginal rate of tax is as low as possible.

Participants agreed that any measures to stimulate innovation must be judiciously implemented and reviewed to ensure they are not abused. A 3-4 year window to evaluate whether a policy is hitting its objectives was suggested as one measure to combat potential abuse.

Taxing Earned and Unearned Income
Wealth inequality, the cost-of-living crisis and reform of Capital Gains Tax.

A key theme of the discussion concerned the way in which earned and unearned income is taxed. It was suggested that, for example, the UK taxes working for a living more than other unearned income. Given the growing wealth inequality, this is something that requires attention. It was pointed out that the traditional wisdom that capital should be taxed less than income because capital is more mobile than employment came from an earlier age. Today there is excess capital in the world looking for good investment opportunities while labour has become more mobile. Therefore, the rationale for having a lower rate of tax on capital or capital income than on earned income needs revisiting.

It was also noted that traditionally it was easier to hide capital wealth offshore than employment income. When the Common Reporting Standard was introduced – providing for automatic exchange of information on certain passive income flows between tax authorities – it was thought this might lead to a global increase in the tax rates on capital. This has so far not happened and may be low hanging fruit.

Moving to a consumption taxation, it was suggested, would help resolve some issues. While indirect taxes are often considered to be more regressive than direct taxes, a switch from taxing employment to indirect taxes could have a progressive effect as it would stimulate work, particularly at the lower end of the pay scale. Some countries, such as France, have moved to consumption taxes because it’s easier to manage and they generally are less contentious than income taxation changes.

Considering the historic squeeze of living standards, stagnating wages and economies and the need for increased revenues it was suggested that tax reforms should consider sources which don’t increase the burden on ordinary people or burden the economy. Reform of Capital Gains Tax was highlighted as an area for future conversation.

The Problem of Politics
Stealth taxes, short-termism and better public debate

There was a sense from some that long-term strategic proposals need addressing There are big public debates around long-term care, taxation of capital, and inheritance and wealth taxes but the political constraints make debate very problematic.

It was pointed out that in the UK, for example, due to political problems concerning raising income tax, the decision has been made to freeze allowances. This, it was argued, is a ‘stealth tax’ and does nothing to further public or political debate on these issues.

We welcome ideas about areas of focus for this Work and Tax programme, please get in touch and let us know your thoughts: becky.holloway@jerichochambers.com

Contributors to the conversation included:

• Bert Brys, Senior Tax Economist, OECD

• Bill Dodwell, Former Tax Director at the Office of Tax Simplification and Editor in Chief at, Tax Adviser Magazine

• Ekkehard Ernst, Chief Macroeconomic Policy Unit, International Labour Organization

• Becky Holloway, Programme Director, Jericho

• Neal Lawson, Partner, Jericho

• Paul Lewis, Journalist, Financial Times and Presenter, Money Box on Radio 4

• Chris Morgan, Head of the KPMG Global Responsible Tax Project, KPMG International

• Andy Scott, Principal Tax Adviser on the Economic Policy Team, CBI

• Nicola Smith, Head of Economics and Employment Rights, TUC

• Will Stronge, Co-director, Autonomy

• Grant Wardell-Johnson, Global Tax Policy Leader, KPMG International

• Lindsey Wicks, Senior Technical Manager, Tax Policy, ICAEW

• Sarah Wulff-Cochrane, Tax Policy Lead, UK Finance

Footnotes

1 How a new tax on your clients could end the IR35 nightmare | IPSE

2 Ageing and productivity growth in OECD regions: Combatting the economic impact of ageing through productivity growth? | Ageing and Fiscal Challenges across Levels of Government | OECD iLibrary (oecd-ilibrary.org)