How Tax Systems Influence Choice of Employment Form published by OECD (2021)
“In a number of OECD countries, growing shares of workers earn income outside of traditional employee-employer relationships. While these trends are driven by many factors, there is concern that rising shares of non-standard forms of employment in some countries may be unduly driven by incentives embedded in tax systems. Differences in the tax treatment of non-standard workers (such as independent contractors) relative to standard employees may create tax arbitrage opportunities, both for firms in their selection of labour contracts offered to workers (e.g., a full-time employment contract versus a contract for services) and for individuals in their choice of organisational form (e.g., employee versus self-employment).
To the extent that they exist, opportunities for tax arbitrage across employment forms diminish the effectiveness of tax systems. This can mean that firms and individuals carrying out similar activities may be subject to different levels of taxation, with important implications for the equity of tax systems and tax revenue generation. A recent OECD Tax Policy Working Paper (Milanez and Bratta, 2019) investigated the potential for such tax arbitrage opportunities by assessing the extent to which the taxation of self-employment differs from the taxation of standard employment. This Special Feature highlights and summarises the paper’s methodology and results, which are of particular interest as the paper relied upon the Taxing Wages framework, extending it to cover non-standard workers.
In particular, for a set of seven countries – Australia, Hungary, Italy, the Netherlands, Sweden, the United Kingdom and the United States – this Special Feature reviews the modelling of the labour income taxation, inclusive of social contributions,1 of standard employees according to 2017 tax rules as well as the labour income taxation of non-standard employment forms and, in particular, of self-employed workers. The aim is to model the tax burden on labour for standard employees and self-employed workers, in order to understand whether countries’ tax systems treat these employment forms differently…”