Don’t punish the gig workers in search of more tax revenue

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So punishing were taxes for the young, self-employed and successful in 1966 that George Harrison wrote Taxman, the Beatles' protest against the supertax imposed by Harold Wilson's Labour government. Harrison later explained that it became the lead song on the album Revolver "when I first realized that even though we had started making money, we were giving most of it away in taxes."

Today, tax rates in Britain for even the wealthiest pop stars are nowhere near the crippling ratio so lamented by the Fab Four: "Let me tell you how it will be/There's one for you, 19 for me/'Cause I'm the taxman, yeah, I'm the taxman." But governments everywhere face chronic cash shortfalls and some have noticed that those freelancing itinerant journeymen – plumbers and drivers, musicians and management consultants – don't pay as much tax as their cousins doing the same jobs in the employed sector.

That's not fair, thinks Philip Hammond, Britain's Chancellor of the Exchequer. Desperate for a couple of billion to shore up a gaping hole in the welfare budget, he announced last week in his annual budget speech that national insurance contributions (a British employment tax) would rise by two percentage points for self-employed workers.

There had been no warning; the tax hike was in breach of a clear promise by the Tories at the last election not to raise personal income taxes. Backbench Tory MPs fulminated at the Chancellor's attempt to stab the country's entrepreneurs in the back and then threatened rebellion. Within days, Prime Minister Theresa May had forced the Chancellor to scrap the tax hike; his future in government now looks less certain.

This isn't just about a failed opportunistic grab by a finance minister under pressure. It's about the so-called gig economy: Since the financial crash, self-employment has expanded more rapidly than the overall work force. Of the almost 20 million working Canadians, 2.7 million don't have a formal employer. Revenue Canada has a continuing conversation with these "contractors" and their clients to establish whether it's a "gig" or a full-time job that just doesn't appear on anyone's payroll.

There are incentives on both sides to keep these arrangements at arm's length: The "client" doesn't have to deduct taxes or pay for holidays, sickness, maternity and pension contributions. Meanwhile, the contractor can deduct all sorts of "business expenses". According to Britain's Institute of Fiscal Studies, the tax collected for an employee on a salary of £40,000 ($65,880) would be £12,000, but the state's share of the pie would fall to £9,000 if the job was done by a self-employed contractor or £8,000 if the "gig" was done through a limited company.

You can see why Mr. Hammond was anxious to dip his hand in the pockets of the self-employed. It's also not hard to understand why so many skilled professionals, from TV news anchors to accountants, are happy to forgo employee benefits in return for financial independence. According to the IFS, Britain's self-employed have accounted for more than 40 per cent of the growth in the work force over the past decade. They represent 15 per cent of the total, some four million people.

But we know that a great many of them are low paid and scrabbling for work, not living off the dividends from personal corporate vehicles. If they don't work, they don't earn, and that generally means they are at the beck and call of clients – it's a world of job feast and job famine, cancelled holidays and the nagging worry about illness and injury.

Uber, the Internet taxi business, is under legal challenge in Britain for failing to offer its gig workers holiday pay. Worker expansion in the digital economy seems to mean more insecurity, fewer real jobs and more of the precaire, the word used in France to describe the precarious world of the marginalized, often migrant workers living from job to job. If governments need to raise more cash to fund the welfare state, there must be a simpler, more effective way of collecting pennies than punishing the business your neighbour runs in his garage.

The world of paternalistic employment, the caring corporate that supports you from graduation to retirement is dying, if not dead already, but no one has thought what might replace it. If employment with benefits is to be only a sometime thing for the lucky few, the state will have to pick up the tab. That means dipping into bigger pockets than gig workers. They are out there, living tax-free, offshore. Many are benefiting from the gig economy – the Amazons, the Ubers and the Facebooks. The simple solution is transaction taxes on digital revenue, and it would be easier to collect than from guys making music in the garage.

Carl Mortished is a Canadian financial journalist based in London.