Global Responsible Tax: What can be done to ensure that people are skilled correctly for the future of work in the Global North?

Context

KPMG International hosted a roundtable discussion in June 2024 to explore the different approaches to navigating demographic dynamics in relation to tax and work. Highlighted as a key issue in an initial scoping roundtable hosted in late 2023, this conversation, focusing on the Global North, looked to discuss the unique set of intersecting challenges leading to a jobs and skills shortage in key industries including early retirement, ageing populations, immigration policies, remote, flexible and cross-border working.

Questions included how can tax keep pace with modern practices? Is it possible to change tax rules to accommodate cross-border working? How do we use tax policy to ensure a stable fiscal foundation while also supporting an ageing population without compromising retirement security? And how can we tackle the complexities of the ever-expanding gig economy without stifling its innovative potential? The conversation was held under the Chatham House Rule (which means nothing can be attributed to attendees) and was attended by ten expert participants (see below for a list of attendees). The write-up below summarizes the personal views of participants and does not necessarily reflect the view of any particular organization, including KPMG.

Executive Summary:

• There are significant labour shortages in the Global North due to an ageing population, declining workforce participation, and increased economic inactivity, particularly in the UK post-pandemic.

• Cross-border mobility issues and a preference for part-time or freelance work among younger generations add to the complexity.

• Studies show a decrease in average hours worked which is partly due a richer population and more people participating in flexible working.

• However, there is also a reduced productivity in Europe over the past 25 years. Insufficient training and lifelong learning opportunities, coupled with a tax system not supportive of these needs, exacerbate the problem.

• The discussion underscored the need to address tax barriers that hinder work, particularly for cross-border workers. High marginal tax rates and a reliance on labour income tax present significant challenges. A shift towards alternative taxation methods, such as property or consumption taxes was discussed.

• Participants suggested enhancing training programs, reducing tax barriers, incentivising work beyond retirement age, promoting healthy work environments, and reconsidering the tax base structure as potential solutions to the problems in the Global North. Collaborative efforts among governments, businesses, and stakeholders are essential to implement these solutions effectively.

Setting Out the Problem
Labour shortages and an ageing population

Participants discussed a range of interconnected issues affecting the global labour market, particularly focusing on the Global North. A significant concern highlighted was labour shortages, primarily driven by ageing populations, resulting in smaller workforce cohorts, rising dependency ratios and shorter working days. This demographic shift is challenging economies as fewer workers means less support for an increasing number of retirees, putting pressure on public services and economic sustainability.

Productivity & Economic Inactivity
Addressing the complexities surrounding lower participation rates, productivity and health

In Europe, the issue is not just a reduction in participation rates but also a decline in the average hours worked. This has contributed to a notable productivity decline over the past 25 years.1

Participants pointed out that this decline could be partly attributed to an increase in wealth and the desire of more people to have a flexible working day. However, it can also be due to inadequate training and lifelong learning opportunities, compounded by a tax system that does not adequately support such initiatives. Although investment levels in Europe are relatively stable, investment often fails to go go into business which drives economic growth and is directed into the private housing market.

Economic inactivity has surged in the UK, with an increase of 900,000 inactive individuals since the pandemic.2 This raises critical questions about how to reintegrate these individuals into the workforce. Participants noted that marginal tax rates and the structure of benefits create disincentives for workforce participation.

Promoting healthy work environments was identified as a critical factor in increasing participation. With the rise in long-term sickness following COVID-19, there is a need for policies that focus on creating less stressful work environments to prevent pushing workers out of the labour market.

Changing Trends
Flexible working, freelancing and self-employment

The discussion examined the flexibility of work, with younger generations increasingly favouring part-time and flexible working arrangements. This trend has brought more people into the workforce but also introduces complexities in taxation and social security contributions. The rise of freelancing and self-employment complicates the traditional employer-employee tax relationship.

Cross-Border Challenges
Managing and facilitating modern movement of working practices without stifling innovation

The conversation explored the complexities of cross-border working, where remote work introduces new taxation and social security challenges. Unintended consequences for social welfare systems were highlighted, especially when a significant portion of tax revenue is derived from labour income. Shifting to other forms of taxation, such as property or consumption taxes was suggested but also present their own set of challenges, particularly regarding regressivity. The discussion also touched on the migration of labour from East to West within Europe, which it was suggested could be partly driven by tax treaties and social security rules. This movement has implications for labour mobility. Similar issues are faced by other countries with land borders, impacting workforce fluidity and economic activity.

Simplifying tax regulations, particularly for cross-border workers, might enhance labour mobility and mitigate administrative and dual taxation issues. Participants suggested that such reforms are crucial for attracting and retaining talent in a competitive global market.

Training & Skills for Life
Investing in the future and incentivising work beyond retirement age

One of the primary strategies discussed was the enhancement of training and lifelong learning programs. By investing in continuous education, workers can better adapt to technological advancements and changing job market demands. Adjusting tax policies to encourage older individuals to remain in the workforce, it was suggested, might alleviate some pressures of an ageing population and support active ageing strategies.

Additionally, health taxes were proposed as a measure to promote a healthier workforce, potentially reducing long-term sickness and the costs involved, while increasing overall productivity.

A Collaborative Approach

The discussion underscored the importance of a multifaceted and holistic approach to address labour market and taxation challenges. Collaboration among governments, businesses, and stakeholders is crucial in implementing effective solutions that enhance workforce resilience, promote economic growth, and ensure equitable and sustainable development in an increasingly interconnected world.

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Contributors to the discussion included:

1. Bert Brys, Senior Tax Economist, OECD

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

3. Ekkehard Ernst, Chief Macroeconomic Policy Unit, International Labour Organization

4. Neal Lawson, Partner, Jericho

5. Chris Morgan, Head of Global Responsible Tax Programme at KPMG International

6. Annmarie O’Kane, Border People project manager, Centre for Cross Border Studies

7. Rose Tierney, Crossborder Tax Consultancy

8. Prof Dr Marjon Weerepas, Lecturer on Cross-border Taxation of Human Capital, Belastingrecht, Tax Law, Maastricht University

9. Lindsey Wicks, Senior Technical Manager, Tax Policy, ICAEW

10. Grant Wardell-Johnson, Global Tax Policy Leader and Chair of the Global Tax Policy Leadership Group, KPMG International

Footnotes

1. European Central Bank, 2017. The economic bulletin: Issue 1. [pdf]

2. Institute for Employment Studies, 2023. May labour market statistics: Comment from the Institute for Employment Studies. [online]