The Growth of Contractors in the Construction Industry: Implications for Tax Revenue
Buchanan, John, Allan, Cameron, The Economic and Labour Relations Review : ELRR
Tax reform has again emerged as a major subject of policy concern. To date most attention has focussed on alleged inefficiencies and inequities in the operation of the system. This is primarily defined as a poor balance in the mix between direct and indirect taxation.
To date the policy debate on tax has devoted little attention to how tax systems and labour market structures interact to affect both public revenue and the nature of employment. This has not been the case in the academic literature. Amongst academic researchers there is an established tradition that examines the effects of taxation changes on labour supply. Here debate has considered such issues as the alleged impact of high marginal tax rates on hours worked by middle and upper income earners. Other researchers (eg Apps et al. 1998a) have examined the sensitivity of lower income earners to changes in the tax system, especially amongst women and those receiving income support. Analyses of women have examined the impact of different tax reforms on household decisions concerning participation in the workforce. Policies of income splitting, for example, tend to discourage many women from participating in paid employment. Studies of social welfare recipients focus on the what are commonly termed high 'effective marginal tax rates' (EMTR) arising from the interaction of the welfare and taxation systems. This refers to social security recipients losing income support at a faster rate than increased income from wages as they enter paid employment.
To date few policy and academic researchers have examined how the tax system interacts with the structure of jobs, especially the legal form they take. Different disciplines have touched on some aspects of this problem. Accountants and employment lawyers, for example, have examined at length the issue of how and when a worker is deemed to be an 'employee' or 'a contractor'. The designation of either status has major implications for tax liabilities and deductions. Debates within these disciplines are usually preoccupied with the critical issue of determining the employment status of people working in particular situations. Accountants and lawyers rarely, if ever, examine aggregate trends in these issues. Amongst labour economists and labour studies researchers there has been growing interest in the labour market significance of contractors and the relative decline of employees (see VandenHeuvel & Wooden, 1994 for Australian developments; Meager, 1996: 489-494 for an overview of overseas trends). These writers are primarily concerned with the industrial relations implications of the rise of contractors. They rarely, if ever, explore the implications for taxation policy and practice.
This paper provides an initial attempt to link these analytical traditions. In doing so it builds on a limited but growing literature in the US and UK on the subject. This literature has primarily focused on how developments in tax policy play a critical role in structuring the labour market. Gonos (1997), for example, shows how the growth of the temporary help industry in the US has been underpinned by doctrines in taxation law prevailing over employment law in defining who is the 'employer' of a 'temp' or 'agency' worker. Harvey (1995) has examined how developments in tax law and practice in the UK have underpinned the growth of contractors in that country, especially its construction industry. Building partly on this literature this paper devotes particular attention to one aspect of the tax-structure of work relationship: how developments in the labour market impact on tax revenue. It-does this by way of a case study of the industry in Australia with the highest proportion of contractors--construction. (1) It addressed three questions. First, what are the differences between contractors and employees, especially concerning their tax liabilities? Second, how has the number of contractors increased in the construction industry in recent years? …