9.7 Well-being and tax incentives for employment

In chapter 7, the framework for assessing tax measures undertaken by states in their aim for well-being through taxation, described in chapter 4, is applied to the well-being aspects of tax incentives for employment, whereby employment is taken to mean the circumstance of having a paid job.

Below described are a number of the observations, issues, and recommendations that follow from this application.

The main argument for states to intervene in matters of employment, discussed in answer to the first four general questions, is again to correct market failures, which occur for instance as a result of asymmetries of information or bargaining power, and thus to ensure higher levels of (healthy and safe) employment. Persistent high levels of involuntary unemployment erode the financial basis of welfare states and threaten the provision of public goods. Current challenges concern unemployment, the aging population coupled with increased life expectancy, increasing international mobility and migration, and the stress placed upon social security and welfare systems as a result of the before mentioned developments. While taxes may themselves have distortionary effects on employment, tax incentives for employment can also serve to prevent or mitigate the negative effects of market failures or, moreover, to bring about positive effects. As to why well-being is important in relation to (tax incentives for) employment, many studies seem to simply assume that well-being is what ultimately matters. While well-being may be better suited to reflect value than traditional economic indicators, such does however not explain why well-being in itself is of importance. In taxation and employment, matters such as justice, redistribution, equality considerations, health, and economic growth can reasonably be said to be important also outside the sphere of their well-being impact. States should put into perspective the relative importance attributed to well-being in tax incentives for employment, and the potential trade-offs inherent in attributing such importance to well-being. Specifically with regard to taxation, literature explicitly addressing employment and well-being aspects seems scarce. It seems uncommon for tax measures that aim to stimulate employment to be expressly related, in their wording or goal setting, to well-being. Formulated well-being aims related to employment often lack specificity, and face difficulties of causality and measurability. It seems challenging to combine, through taxation, employment aims with well-being aims in a way that is realistic and achievable within a determinable time frame. That said, if tax measures purposely aim for employment and well-being, states should clarify which particular well-being aim is pursued, so that ex ante assessment, continuous monitoring, and ex post evaluation can be as concrete and specific as possible. Aspects of tax incentives for employment raise questions of intergenerational equity, for instance concerning the intergenerational burdens of pension and social security contribution programs. Furthermore, tax incentives for employment applied by one state may well impact other states, and may have well-being effects beyond humans, for instance on wildlife. States should provide clarity on these choices to be made as to who or what are within scope of the well-being concept used, which can substantially determine the way tax incentives for employment are implemented and play out. Furthermore, states have a range of different policy instruments available, as alternatives to tax incentives for employment. Governments can for instance reform pension systems, use active labour market policies, optimise employment protection, or offer education-based solutions. Integrated assessment of the pursuit of well-being aims by states necessitates taking stock of these different policy instruments available. Many studies agree that more fundamental problems in labour markets (such as skill shortages, or non-competitive labour markets) are generally better addressed via direct state intervention than via taxes. Moreover, considering that effects of (un)employment, other than financial, may have the largest impact on one’s well-being, policy instruments that focus on job retaining and psychological counselling may be more effective from a well-being perspective than purely economic measures. Although the effect of taxation on employment will often be subsidiary to the effects of other policy instruments, there is scope for use of taxation as an (additional) instrument to address employment issues. For instance, tax incentives, such as in-work tax credits, have proven to be viable and effective measures that allow for reduced administration costs (through using already existing tax systems) in combination with increased take-up rates.

When viewed from a consequential perspective in response to questions 5 and 6, and in relation to employment and well-being, it is important to consider in integration the net effects of state intervention via spending and taxing, and not only the tax effect in isolation. This need for an integrated assessment shows also from the distortive or undesirable employment impacts that can emerge through the combined application of taxation and other policy measures. As mentioned above, on many occasions the effect of taxation on employment will be subsidiary to effects of other policy instruments. That said, taxes still have effects on employment that should not be disregarded, and there is potential for positive contributing effects. In practice, it however proves difficult to fully disentangle tax effects. It is not easy to identify who ultimately bears the tax, and whose well-being is ultimately affected by tax incentives for employment. Likely, the level of centralisation of bargaining in a state plays an important role in the matter of incidence of labour taxes. A number of general issues and recommendations that concern the effectiveness and efficiency of tax incentives for employment are identified in chapter 7. How states deal with such issues and recommendations to a large extent determines how effective and efficient a tax incentive for employment is in achieving well-being aims. Here again, it shows to be difficult in practice to assess or estimate the effects of taxes on labour in a robust way. Notwithstanding, regular monitoring, control, and evaluation of the effectiveness and efficiency of tax measures to incentivise employment are important to ensure that immediate effects on job creation are not cancelled out through indirectly harmful and unpredicted effects. Empirical evidence on the success of tax measures in creating employment is quite limited. While tax policies and measures concerned with well-being and employment should be open to revision as new information becomes available, states should also be aware that responses to such policies or measures likely take at least a couple of years to fully emerge, and that the resulting effects may not always be reversible. This generates a recommendation for long-term outlooks.

Viewed from a deontological perspective in answer to questions 7 and 8, there are again restrictions imposed on tax incentives for employment through international, supranational, and national bodies of rules or laws, such as concerning territorial or sectoral limitations incorporated in such tax incentives. States need to verify and substantiate whether their tax incentives for employment are in conformity with such applicable laws and regulations. Tax incentives for employment can furthermore create conflicts with equal treatment, neutrality, equity, ability-to-pay, simplicity, certainty, or with other principles that underlie tax systems. These potential cases of conflict need to be addressed by states using tax incentives for employment, whether or not in the sphere of well-being. In case principles are weighed in view of conflicting well-being considerations, states should provide insight into the consideration made. One of the risks posed to political processes by tax measures that incentivise employment is again that special interest groups may lobby with greater effect than others, potentially resulting in a distortion of the incentivising employment effect as originally desired or intended. States need to assess such risks posed by tax incentives for employment to political processes. Proper substantiation, increased transparency, and pre-determined checks and balances, or review procedures, are all examples of initiatives that can be undertaken to manage political process risks associated with tax incentives for employment.

From a virtue ethics perspective applied in answering questions 9 and 10, finally, states should be cautious of the potential to stimulate undesirable character traits through tax incentives for employment. As examples, tax incentives for employment can create a stimulation for people to work in black or shadow economies, can reduce incentives for training and work effort, can encourage privilege-seeking behaviour, or can turn competition between states harmful and wasteful overall. And while the personal achievement of financial goals through employment can contribute to individual well-being, financial pursuits may also distract from other aspects of well-being that are arguably more weighty or meaningful (such as spending time with family and friends). Therefore, states should assess and indicate which character traits are stimulated by their tax incentives for employment, to enable a discussion on the desirability thereof. Where direct government spending in the form of, for instance, welfare benefits relating to employment can carry negative stigmas, tax incentives such as in-work credits may trigger less public aversion. However, public and political support may be lacking where tax incentives for employment are perceived to result in less equitable distributions. Governments using tax incentives for employment need to carefully consider their course of action and the behavioural impact thereof. There are also different ways in which tax incentives for employment may encourage competition for existing well-being, rather than bring about additional well-being. For one, if tax incentives for employment are targeted towards selected sectors, such incentives are likely to encourage competitive privilege-seeking behaviour. In addition, the competition for employment between states can turn harmful and wasteful overall, stimulating beggar-thy-neighbour behaviour. More generally, research suggests that people are willing to go to great lengths to compete with others, even if such competition may be to the detriment of leisure or quality time with family and friends, and may significantly affect well-being. Especially in the consideration of tax incentives for employment, these issues can generate externalities that substantially affect the optimality of policies.