The Impact of Digitalisation on Personal Income Taxes

Abstract

This paper considers the potential impact upon personal income taxes (PIT) of the acceleration of digitalisation and remote working due to the COVID-19 pandemic. The societal changes brought about by the digitalisation of the economy affect all areas of the tax system. Until now, however, most attention has centred on corporate income taxes, and to a lesser extent VAT. What has been comparatively neglected is how the spread of remote working – and particularly inter-jurisdictional remote working – has the potential to trigger very significant challenges to PIT systems. In this paper we argue that some remote working is set to continue post-pandemic, and that some of it is likely to be inter-jurisdictional. These mobile workers are likely to be at the top of the income distribution, and thus even assuming a small number of mobile workers revenues loses can be significant. In the UK we estimate that the overall revenue loss – i.e. combined PIT and SSCs revenues – could amount to between £6.5 billion and £32.5 billion. This new mobility of workers at the top of the income distribution is also likely to have distributional impact, as well as significant spillovers in other taxes, in particular for CIT and for consumption taxes. These challenges are particularly problematic for PIT systems -like that in the UK- which are heavily reliant on PITs as total percentage of revenue, as well as on a relatively small number of high-income – and now potentially mobile - taxpayers. We conclude that the challenges of adapting our tax systems to a digital economy are far from over; indeed, they have just started.