Friday, 24 June 2011

Something for Nothing II: why the world feels different to the self-employed

In Greece, the worst tax evaders are the self-employed. This is hardly news.

The world feels different to the self-employed. This has a lot to do with the way they earn and the way they pay taxes.

Most self-employed people earn by the hour or the day. If they don't work, they don't get paid. That's not true for the average employee.

Studies show that in the private sector, employees spend about 40% of their paid time "on task"; in the public sector, this drops to about 30%. In most cases, their pay does not go down or up as a function of the amount of time "on task".

In addition, time off for sickness or holidays normally makes no difference to their weekly or monthly income flow. Of course, liability for such time is factored in to the employer's calculations when offering a wage or salary, but that factoring is not visible. In contrast, when a self-employed person goes on holiday, they have no income flow - unless, at the top end, they are being paid a "retainer". You could say that self-employed people should factor into the rates they charge their holidays and no doubt some do. Many don't and in any case it doesn't feel as if it is factored in.

Employed people are "taxed at source" - they receive an income flow from which tax has already been deducted. They can see how much has been taken away, but they don't feel it. That's one reason they are easier to tax than the self-employed.

A self-employed person has to pay tax by writing a cheque or authorising a transfer out of their bank account. In the UK, most self-employed people have to do this twice a year only, so large lump sums are paid over. The self-employed person feels the money going out. Ouch!

As a result, they are very sensitive to how the money is used. They will be particularly aggrieved when they feel it is used to give other people "something for nothing" - whether MPs claiming bogus expenses, or benefits scroungers, or fancy consultants charging fancy fees for A4 drivel, or large corporations and wealthy individuals negotiating derisory tax payments. Every self-employed person will have their own pet grievance and the grievances translate into tax evasion or populist right-wing politics or both.

So governments really do have a motive to convince their citizens that "we are all in this together". They need to persuade one lot of people not to milk the system (sometimes, they need to stop encouraging such behaviour) and they need to persuade self-employed people not to withold their milk.

Whether governments are also prepared to make tax compulsory for large corporations and the very wealthy is another question. In the UK, Her Majesty's Revenue and Customs has made it quite clear that for the very big people, tax is a voluntary matter. Read Private Eye!

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