Tax Regulation And The Shadow Economy

By
IntelligentHQ
Tax Regulation And The Shadow Economy
Tax Regulation And The Shadow Economy

The case for deregulation and reducing the tax burden on jobs is a strong one. A reduction in such requirements will help bring more workers into the formal economy from the shadow economy. Why is this important? There are between 10% and 30% of all workers in the developed countries and 50% to 80% in undeveloped countries in the shadow economy. They lead highly precarious lives, most suffer from low pay and all have no pension rights and no protection if they are injured at work. Making it easier for good employers to expand will help drive out these practices, but over-regulation and excessive taxation will severely limit the growth of quality jobs.

It is a well-documented phenomenon in the USA that “right to work states” have higher levels of job growth than those where “union shop” or “agency shop” agreements are lawful. Likewise, the reason why the majority of new jobs in Spain are on fixed-term contracts is because of the substantial legal penalty that exists if an employee on a permanent contract is dismissed. There is also a direct correlation between tax levels and jobs going underground. In a recent report the IMF notes that

“the bigger the difference between the total labor cost in the official economy and after-tax earnings (from work), the greater the incentive to reduce the tax wedge and work in the shadow economy. This tax wedge depends on social security burden/payments and the overall tax burden, making them key determinants in the existence of the shadow economy.”

The OECD has also repeated noted that a complementary approach of reducing both product and labour market regulation could reinforce positive impacts on employment growth.

The impact of these factors can be directly seen in labour force participation rates where, in 2018, highly taxed and regulated countries such as:

Italy 49%
Belgium 53%
France 55%
Spain 57%

Contrasted with far less regulated and taxed countries like:

UK 62%
USA 62%
Cyprus 62%
Switzerland 68%

Of course, a great deal also depends on the extent to which regulations, tax rules and union rights are enforced. But we contend that laws only retain their legitimacy if they are applied consistently and fairly. Therefore, no law should exist unless it is followed by all those to whom it applies. In a less regulated environment there will be a greater reliance on voluntary compliance and good practice. Where companies that can afford to be more generous they will do so, but those struggling to survive will not be forced to comply with requirements that will only hurry their demise.

The Federation of International Employers (FedEE) exists to assist multinational employers remain legally compliant as they expand their operations to new jurisdictions. This is a far more difficult task than it may seem, even for enterprises with huge internal resources. To achieve this FedEE has developed the largest database of employment law in the world.

“The pity is”, reflects FedEE Secretary-General Robin Chater, “the more data we collect the more we realise that the sum of constraints on employers, large and small, is driving them to make conservative employment decisions, contract-out functions, use contractors and invest in technological solutions wherever they exist. Multinational employers are generally very good employers, offer high quality jobs and never work in the shadow economy. But instead of encouraging them to expand, governments seek to weigh them down with laws and penalties. Moreover, new companies are finding it increasingly hard to establish themselves. This is especially the case in France, where labour costs are kept artificially high by the ante-trust practices of the government. They establish wage cartels by requiring everyone in a sector to pay the rates set by a small group of unions and employers in the sector. Can it be any surprise that where companies do manage to grow in France they quickly establish operations overseas?”

So what is the proposal ?

* Currently, a typical employee works two days out of five each week before they receive any of their net pay. We believe this should be no more than one day in five.

* Corporation tax should likewise be limited to 20% of taxable revenues, with none payable until a company reaches a turnover of US$1M.

* The model for employment protection around the world should not be the US “At Will” approach, but the UK system with protection only coming into operation after two years employment and some scope thereafter to dismiss those who fail consistently to perform.

* Unions (and works councils) should be free to operate, not be hindered by employers, but should not have any special legal status, whilst no such practices as closed or agency shops and codetermination should be permitted.

* To cope with reduced tax revenues governments should improve their efficiencies (they can cut 30% of costs easily this way), speed up their operations, share services such as defence with other friendly countries and contract out such services as social insurance, health, education and policing. They should also halt fraudulent uses of overtime and falsified expenses which are rife practices across the public sector in many countries.

What is FedEE?

The Federation of International Employers is a leading organisation for multinational companies. It was founded in 1988 with financial assistance from the European Commission. Today it is an independent body with members all around the globe.

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