Analysis

Why the gig economy means nations will soon find taxation more taxing

The world of work is changing as the gig economy – and the self-employed themselves – go global. That will leave a big hole in countries’ coffers, says Dominic Frisby.

Woman typing on a laptop © iStockphotos

Governments around the world have got a big problem on their hands. I wonder if many of them even realise it. What has been their biggest source of revenue for years is going to get that much harder to collect, just as their needs, whether to cover spending programmes or service debts, grow more pressing.

Across the developed world, 50% of government revenue comes from income taxes. The relationship between employer and employee has proved easy to tax: the levy is deducted at source. But that relationship is changing.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

In the UK, the number of people working for themselves has grown by 50% since 2000, compared with a 6% rise in employees over the same period. London's gig economy has grown by 73% since 2010. But this is a global phenomenon. In Europe, Australia and across Asia there are similar levels of growth. By 2030, says EY (formerly Ernst & Young), a full 50% of full-time US workers will be contingent.

Get ready to gig

Some have criticised the gig economy, saying it exploits people and does not give them the protection they deserve, but surveys show much higher satisfaction levels among the self-employed than among the employed. The large majority of giggers want to stay in contingent work to progress their careers. As we live longer lives many more of us will pursue gig work in what was previously our retirement. Many will embrace multiple income streams as machines whether artificial intelligence (AI), robot or algorithm replace blue- and white-collar workers. Employers like it too. Freelancers dramatically reduce the costs and other burdens of employment.

Advertisement
Advertisement - Article continues below

The tax implications are considerable. First, there is the loss to government of employment and payroll taxes, but far bigger is the problem that income taxes will get harder to collect. At present there are few systems in place to deduct tax at source from contingent workers. There is vast scope for non-compliance, whether accidental or deliberate. America's Inland Revenue Service already attributes 44% of its $450bn annual tax gap to the improper compliance of individual business income. In the US, 69% of freelancers surveyed did not even know they had to file quarterly returns.

Chasing the self-employed

The response will be to raise taxes for the self-employed and to re-regulate those who employ them. Already UK freelancers who hire themselves out through limited companies have had their dividend taxes increased, while flat VAT rates for the self-employed have also been altered. Meanwhile, employers such as Uber and Hermes have come under pressure through the courts by those seeking to redefine full-time employment and gig work. Tax authorities will, I suspect, try to find ways to deduct presumed income at source from the platforms providing the work and then leave it to the individual to claim back the difference much as withholding tax currently works in the US. But none of this is as clean and simple as old-school income tax.

Tax systems, built around a physical economy, have struggled with the intangible, globalised economy. Look at the problems they have with the likes of Amazon, Facebook and Apple. What happens when workers themselves globalise? One estimate is that by 2035, a billion of the world's six billion people will be "borderless", working via the internet in multiple jurisdictions and never spending more than 183 days in any given one. Many will use borderless crypto money, often the most efficient system of payment across the internet, which itself is hard to tax and regulate.

The nations that adapt soonest to the realities of the new, digital, globalised economy around us will be those that thrive best. I don't see a single British politician talking about, let alone preparing for, any of this.

Daylight Robbery: How Tax Shaped Our Past And Will Change Our Future by Dominic Frisby, Penguin Business, £20. Audiobook on Audible.co.uk. Signed copies are available at dominicfrisby.com

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/519223/how-can-we-raise-more-money-in-tax
Economy

What are the best ways of raising more money in tax?

Given that whoever wins next week's election will be going on a massive spending spree, we're going to need to raise at least some of that money throu…
5 Dec 2019
Visit/518715/what-are-the-biggest-mistakes-investors-make-when-it-comes-to-tax
Investment strategy

What are the biggest mistakes investors make when it comes to tax?

The tax implications of an investment are something we rarely consider until after the event. That could prove to be an expensive mistake, says Domini…
27 Nov 2019
Visit/516603/how-tax-has-shaped-the-course-of-human-history
Economy

How tax has shaped the course of human history

Taxation is as old as civilisation itself. But how much is too much? Dominic Frisby looks at how taxation, war and society have evolved together over …
16 Oct 2019

Most Popular

Visit/investments/stocks-and-shares/600863/sirius-minerals-anglo-american-takeover
Stocks and shares

Do you own shares in Sirius Minerals? Here’s what you need to do now

Mining giant Anglo American has proposed a cash takeover of Yorkshire-based minnow Sirius Minerals. Unhappy shareholders must decide whether to accept…
20 Feb 2020
Visit/currencies/600842/eur-usd-euro-slide-against-us-dollar
Currencies

The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us somet…
19 Feb 2020
Visit/economy/uk-economy/600862/britains-economy-might-spring-a-surprise-on-the-doomsayers-this-year
UK Economy

Britain’s economy might spring a surprise on the doomsayers this year

The UK economy is looking pretty good – we’re more at risk of a boom than a bust, says John Stepek. Here’s why, and what it means for your portfolio.
20 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019