Exploring How Remote Work Could Impact the Way Countries Tax Individuals

July 6, 2021

The digitalization of the economy has changed how and where we work. Huddles at the boss’s desk have been replaced by morning video conferences, long nights at the office by incongruous hours flexed around extracurriculars, and dreary days in a metropolitan apartment by weeks in exotic (or at least comfortable) retreats. A question for policymakers to consider is how this new era of worker mobility will impact the fiscal landscape, and what changes must be made to address resulting revenue and compliance concerns.

While being remote has been slowly integrated into the workflow dynamic of certain industries for the better part of a decade—namely tech and consulting—the COVID-19 pandemic introduced such changes to the broader market and forced employers and employees to reconsider what it means to “come to work.”

For example, imagine a management-level British worker in the financial services industry leaving for the sunny shores of Mallorca, or the history and favorable tax rates of Prague. These choices will impact the tax revenues of both the United Kingdom and the country to which the worker moves.

Much of the conversation regarding changes to tax policy in light of economic digitalization has centered on the effects to corporate income tax (CIT) revenue, but a new paper by Rita de la Feria, a professor of tax law at the University of Leeds, and Giorgia Maffini, a tax policy advisor at PwC, considers the potential impact of widespread remote work, and the subsequent shift to an “internationally mobile” workforce, on personal income tax (PIT) revenue. The authors discuss the nature of the remote work changes and whether they are likely to be permanent, which taxpayers are likely to benefit from such changes, and how these changes could impact government revenues from personal income taxes and social security contributions (SSC).

The perceived changes to work are relatively familiar after more than a year of COVID-19 restrictions. Remote and hybrid-remote work setups have allowed for coordination and knowledge transfer via messaging apps and video conference and a decrease in the costs associated with in-person work such as real estate and utilities. But is this model sustainable?

The authors believe it to be, although they acknowledge that it is too soon to know for sure whether such changes will become permanent fixtures in the workplace as COVID-19 preventative measures wind down. While the initial data on remote work productivity is positive, and such shifts have been well-received by managers and executives at larger firms, the authors also acknowledge that such impressions are limited by the circumstances of the endeavor and a lack of empirical data on sustained output. A deeply felt impact on PIT revenue will only follow a widespread, permanent adoption of flexible remote work policies, and widespread adoption will only endure with sustained or increased levels of output and a supportive upper management.

Another factor considered by the authors is which jobs and workers benefit from the adoption of a remote work model. This has implications for the possible effects on PIT and SSC revenue A study from Tito Boeri et al, at the Centre for Economic Policy research, estimated that, in Europe, roughly 30 percent of jobs can be done remotely, while in the U.S. that figure is estimated to be 37 percent. That 37 percent of jobs, though, accounts for 45 percent of wages, evidence that high-wage workers benefit from such a shift in remote work policies at a higher rate than do lower-wage workers.

In further support of this point is a policy brief by the Stanford Institute for Economic Policy Research showing an outsized effect based on level of education and income: 57.8 percent of workers with four years of university education worked remotely during the pandemic, compared to just 22.7 percent of those who had completed only high school. Similarly, the highest quartile of earners worked remotely at a rate of 59.9 percent, compared to 47.9 percent, 40.2 percent, and 28.8 percent for the next three, respectively. Assuming this trend continues, such discrepancies could have a significant effect on PIT revenues, as the high-wage earners experiencing an increase in mobility pay the largest proportion of such taxes.

The magnitude of a possible shift in worker locations and the subsequent loss of PIT revenue is evidenced by the tax revenue compositions of OECD and EU countries, with particular attention paid to percentage of revenue from PIT and SSC as compared to CIT. OECD countries derived, on average, 10 percent of their total tax revenue from CIT, while PIT accounted for an average of 23.5 percent of total tax revenues. When PIT revenue is combined with SSC and payroll taxes, that figure jumps to an average of 50 percent of total tax revenues. Across the EU, the numbers were “even more striking,” according to the authors: an average of 6.5 percent of total tax revenue from CIT compared to 58 percent from PIT and SSC.

To illustrate the possible effects on PIT and SSC revenue, the authors modeled three scenarios for a loss of internationally-mobile workers from the United Kingdom’s tax base. In building out the models, they relied on the trends from the Stanford study and the figures from the Centre for Economic Policy Research study. They conservatively assumed that only 31 percent of workers in the two highest tax brackets—accounting for, in total, approximately £123 billion in PIT and £86.5 billion in SSC per year from 4.6 million taxpayers—were able to work remotely.

Think back to the example at the beginning, where the personal income taxes from the British worker were lost from the United Kingdom’s tax base when the worker moved abroad. While the effects of one worker making such a change might not be meaningful, the effects of a substantial share of similarly situated workers making the same change would be deeply felt by the jurisdiction losing workers.

The authors considered three scenarios with different proportions of remote-capable workers moving abroad and the potential impact on the United Kingdom’s tax revenue: 50 percent, 25 percent, and 10 percent of such workers moving abroad. The resulting loss of PIT and SSC revenues amounted to approximately £32.5 billion, £16.3 billion, and £6.5 billion per year, respectively. When contrasted with the effects on CIT of the recent corporate tax changes included in the FY 2021 budget, which are expected to generate between £11.9 and £17.2 billion in additional revenue, it is “unlikely that such increases [in CIT revenue] would cover the worst scenario in PIT revenue losses.”

Finally, the authors argue that the administrative costs of worker mobility could also impact national revenues. Third-party reporting plays a fundamental role in tax compliance, and, under current rules, firms act as both reporting and withholding agents. With a mobile workforce, such a system would require changes to reflect the evolving role of corporations in tax administration.

Over the last year, we have experienced a historic shift in the organization of our labor force. How we communicate, who we are able to hire, and where our work is carried out have been transformed in a matter of months. Whether these changes are permanent and widely adopted is yet to be seen. If workers take advantage of the new situation to seek lower tax rates on personal income, then the shift will require tax authorities to consider how a new form of tax competition might impact revenues and how it should influence policy.

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The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.

A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.

Withholding is the income an employer taxes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests.

A payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 23.05 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue.