The UK Chancellor of the Exchequer, Philip Hammond, announced in the Budget this week that national insurance contributions (NICs) for self-employed people will rise from 9% to 11% by 2019. These are known as ‘Class 4’ NICs. The average self-employed person will pay around £240 more per year, but those on incomes over £45,000 will pay £777 more per year. Many of the people affected will be those working in the so-called ‘gig economy’. This sector has been growing rapidly in recent years and now has over 4 million people working in it.
Workers in the gig economy are self employed, but are often contracted to an employer. They are paid by the job (or ‘gig’: like musicians), rather than being paid a wage. Much of the work is temporary, although many in the gig economy, such as taxi drivers and delivery people stick with the same job. The gig economy is just one manifestation of the growing flexibility of labour markets, which have also seen a rise in temporary employment, part-time employment and zero-hour contracts.
Working in the gig economy provides a number of benefits for workers. Workers have greater flexibility in their choice of hours and many work wholly or partly from home. Many do several ‘gigs’ simultaneously, which gives variety and interest.
In terms of economic theory, this flexibility gives workers a greater opportunity to work the optimal amount of time. This optimum involves working up to the point where the marginal benefit from work, in terms of pay and enjoyment, equals the marginal cost, in terms of effort and sacrificed leisure.
For firms using people from the gig economy, it has a number of advantages. They are generally cheaper to employ, as they do not need to be paid sick pay, holiday pay or redundancy; they are not entitled to parental leave; there are no employers’ national insurance contributions to pay (which are at a rate of 13.8% for employers); the minimum wage does not apply to such workers as they are not paid a ‘wage’. Also the firm using such workers has greater flexibility in determining how much work individuals should do: it chooses the amount of service it buys in a similar way that consumers decide how much to buy.
Many of these advantages to firms are disadvantages to the workers in the gig economy. Many have little bargaining power, whereas many firms using their services do. It is not surprising then that the Chancellor’s announcement of a 2 percentage point rise in NICs for such people has met with such dismay by the people affected. They will still pay less than employed people, but they claim that this is now not enough to compensate for the lack of benefits they receive from the state or from the firms paying for their services.
Some of the workers in the gig economy can be seen as budding entrepreneurs. If you have a specialist skill, you may use working in the gig economy as the route to setting up your own business and employing other people. A self-employed plumber may set up a plumbing company; a management consultant may set up a management consultancy agency. Another criticism of the rise in Class 4 NICs is that this will discourage such budding entrepreneurs and have longer-term adverse supply-side effects on the economy.
As far as the government is concerned, there is a worry about people moving from employment to self-employment as it tends to reduce tax revenues. Not only will considerably less NIC be paid by previous employers, but the scope for tax evasion is greater in self-employment. There is thus a trade-off between the extra output and small-scale investment that self-employment might bring and the lower NIC/tax revenue for the government.
Thriving in the gig economy Philippine Daily Inquirer, Michael Baylosis (10/3/17)
6 charts that show how the ‘gig economy’ has changed Britain – and why it’s not a good thing Business Insider, Ben Moshinsky (21/2/17)
What is the ‘gig’ economy? BBC News, Bill Wilson (10/2/17)
Great Freelance, Contract and Part-Time Jobs for 2017 CareerCast (10/3/17)
We have the laws for a fairer gig economy, we just need to enforce them The Guardian, Stefan Stern (7/2/17)
The gig economy will finally have to give workers the rights they deserve Independent, Ben Chu (12/2/17)
Gig economy chiefs defend business model BBC News (22/2/17)
Spring Budget 2017 tax rise: What’s the fuss about? BBC News, Kevin Peachey (9/3/17)
Self-employed hit by national insurance hike in budget The Guardian, Simon Goodley and Heather Stewart (8/3/17)
What national insurance is – and where it goes The Conversation, Jonquil Lowe (10/3/17)
Britain’s tax raid on gig economy misses the mark Reuters, Carol Ryan (9/3/17)
Economics collides with politics in Philip Hammond’s budget The Economist (9/3/17)
UK government publications
Contract types and employer responsibilities – 5. Freelancers, consultants and contractors GOV.UK
Spring Budget 2017 GOV.UK (8/3/17)
Spring Budget 2017: documents HM Treasury (8/3/17)
National Insurance contributions (NICs) HMRC and HM Treasury (8/3/17)
- Give some examples of work which is generally or frequently done in the gig economy.
- What are the advantages and disadvantages to individuals from working in the gig economy?
- What are the advantages and disadvantages to firms from using the services of people in the gig economy rather than employing people?
- In the case of employed people, both the employees and the employers have to pay NICs. Would it be fair for both such elements to be paid by self-employed people on their own income?
- Discuss ways in which the government might tax the firms which buy the services of people in the gig economy.
- How does the rise of the gig economy affect the interpretation of unemployment statistics?
- What factors could cause a substantial growth in the gig economy over the coming years?
Calls for a simplified tax and benefit system have been ongoing and many see the Coalition’s plans for a Universal Credit as a step in the right direction. However, a second suggestion set out in a report by lobbying groups is to introduce a single rate of income tax at 30%. The argument is that it will simplify the system, help lower income earners and boost growth.
As well as the introduction of a single rate of income tax, The 2020 Tax Commission’s Report also suggests an increase in the personal allowance to £10,000; scrapping National Insurance Contributions, stamp duty, inheritance tax and air passenger duty, as well as cutting fuel duty by 5p. For the typical tax payer, it may sound great – the difference between your gross and your net pay would narrow, but the wider consequences must be considered. Although a single rate of income tax would undoubtedly simplify the system, the impact on government finances must be considered. The commission predicts that overall borrowing would fall by £35bn after 15 years, but that the national deficit would increase by £49.1bn in the first year. Perhaps not an ideal solution given the current state of the national deficit!
The report does contain some radical change, but the idea of simplification is well-recognised as a necessary principle of any tax system. As the Chairman of the Commission, Allister Heath said:
It is time for Britain to make a vital choice between tweaking the status quo and letting our economy continue to be crippled by complex and punitive taxes, and drastically changing course with a radical but realistic plan for a tax system fit for the 21st century.
The 2020 Tax Commission has set out that plan and would ensure that income is taxed once at a single, much more reasonable rate. It could create the conditions to establish the UK as a global trading hub, generating renewed prosperity for all those who live and work here.
The current system is complex and many people end up paying an extremely high rate of tax, once everything has been paid. The Guardian article below gives a nice illustration. “If you earn income from shares, first corporation tax is taken out of the profits. Then you pay taxes on the dividends. Then because those profits drive up the share price you pay capital gains tax as well.” With a simpler and fairer tax system, the Commission argues that it will boost the competitiveness of the UK economy and help boost its struggling growth rate. How many, if any, of these proposals will be incorporated into the government’s plans is anybody’s guess, but it definitely presents an interesting solution and problem.
The Single Income Tax The 2020 Tax Commission (May 2012)
Why it’s time for a single income tax Guardian, Matthew Elliott (21/5/12)
Business backs income tax rate of 30% Financial Times, Martin Sandbu (21/5/12)
Calls for single 30% income tax rate BBC News (21/5/12)
Single 30% tax rate ‘essential’ for growth Sky News (21/5/12)
Osborne urged to introduce 30pc income tax for all The Telegraph, Tim Ross (20/5/12)
Tax shake-up urged to empower consumers and kickstart growth Independent, Russell Lynch (21/5/12)
The Tax Reform Britain needs Wall Street Journal, Matthew Sinclair (20/5/12)
- What are the key principles of a tax system?
- Explain why simplicity is so important when reforming a tax system. How can it affect the incentive to work?
- Would a 30% single rate of income tax be equitable?
- If the reforms set out in the report were to go ahead, what do you think would be the impact on goods and services provided by the government, such as the NHS, education, roads?
- Using indifference analysis, illustrate the effect of a cut in the basic rate of income tax. How does it affect the decision to work more or less? You should consider the income and substitution effects in your answer.
- Why does the report argue that the reforms they suggest would help boost growth?
- How might the proposals affect government finances in both the short and long term?
A large deficit which needs cutting and this needs decisive action. This was the gist of the message from George Osborne, and generally from the Coalition government. Although there is nothing confirmed in terms of what to expect, it is thought that there will be a proposal to ease National Insurance for new businesses. He said:
“And so we’ve got to deal with that [the country in Europe with the largest budget deficit of any major economy]. In that sense it’s an unavoidable Budget, but what I’m determined to do is to make sure that the measures are tough but they’re also fair and that we’re all in this together and that, as a country, we take the steps necessary to actually provide the prosperity for the future.”
We already know that there are plans in place to increase capital gains tax from 18% to nearer 40%, but beyond that, little is known. There are concerns that this policy may actually cost the government more in tax revenue than it will raise. Other policies we might expect include a rise in VAT, and a slashed spending budget for pensions. These spending cuts and tax rises will help Osborne to eliminate the structural deficit in current spending by 2015, when the Coalitions’ current term comes to an end. The success of the Coalition’s policies and their ability to reduce the deficit without causing the economy to fall back into recession will be crucial in determining whether the current term is the only term.
Budget 2010: Britain on ‘road to ruin’ without cuts (including video) BBC News (20/6/10)
Where could spending axe fall? BBC News (9/6/10)
George Osborne says emergency budget cuts will be ‘tough but fair’ Guardian, Larry Elliott, Toby Helm, Anushka Asthana and Maev Kennedy (20/6/10)
Budget 2010: capital gains tax Telegraph (20/6/10)
What’s the Chancellor planning to take away in reverse Christmas budget Independent, Alison Shepherd and Julian Knight (20/6/10)
Public borrowing at a peak, says ONS, but tough budget awaits Independent, Sean O’Grady (20/6/10)
A bloodbath none was prepared for Financial Times, Martin Wolf (22/6/10)
- To what extent is it necessary to cut the budget deficit now and not delay it until the recovery is more secured?
- How will easing National Insurance for small businesses affect the economy?
- If capital gains tax goes up, why is there concern that this could actually cost the government? How is this possible?
- The Lib Dems will oppose any increase in VAT, as they argue it is a regressive tax. What does this mean?
- How will the report by the Office for Budget Responsibility have affected Osborne’s emergency budget?
- What is the structural budget deficit? Illustrate it on a diagram.