13 November 2020

Is this the worst policy idea of the pandemic?

By

Should remote workers be hit with a 5% tax increase when the pandemic passes? Deutsche Bank thinks so. “For years we have needed a tax on remote workers – Covid has just made it obvious” confidently asserts Luke Templeman, a strategist in the bank’s Thematic Research division.

Yet his policy brief proves neither that a tax was necessary before Covid, nor that the case is now obvious.

The bulk of Deutsche Bank’s argument seems to be in the following two paragraphs:

“The sudden shift to WFH means that, for the first time in history, a big chunk of people have disconnected themselves from the face-to-face world yet are still leading a full economic life. That means remote workers are contributing less to the infrastructure of the economy whilst still receiving its benefits.

“That is a big problem for the economy as it has taken decades and centuries to build up the wider business and economic infrastructure that supports face-to-face working. If a great swathe of assets lie redundant, the economic malaise will be extended.”

What does it actually mean to contribute to the infrastructure of the economy?

You might think it has something to do with the output of one’s work. In effect, a builder’s contribution is what they have built. Deutsche Bank thinks otherwise. They appear to confuse contributing with spending. It’s true that remote workers spend less on commuting and eating out. It’s also true that if remote work becomes a permanent shift then businesses will rent less city-centre office space. But this shouldn’t be a cause for concern. Remote workers will still spend money, they’ll just spend it on different things. Fewer sandwiches in Pret and more at their neighbourhood cafe. If they don’t, they’re effectively producing things for others in exchange for nothing in return.

If we bought Deutsche Bank’s logic, we should also consider taxing cycling (depriving taxi drivers of income), packed lunches (depriving cafes of income), and thermoses (ditto). But all of these allow people to save on one form of consumption in order to consume something else that they want more.

They also forget that assets can have multiple uses. London, for instance, has a shortage of housing. Freeing up some prime commercial real estate for housing may go some way towards solving that. Similarly, it’s not hard to imagine a barista in Pret finding work in a bar or cafe frequented by remote workers, or as a delivery driver.

If I were trying to salvage a plausible argument from the above paragraphs, it would run as follows. The rise of remote work will require an adjustment. Past economic changes such as globalisation, while beneficial overall, led to short-term disruption. Workers lost their jobs and were forced to retrain. A tax on remote work is a way of redistributing from the winners from this change to the losers. (Let’s put aside the fact we already have a progressive tax and welfare system for this very purpose.)

Yet, as an argument it just doesn’t stack up. If there’s a case for taxing remote work, there’s also a case for special taxes on imports from China, for special taxes on industrial robots, for special taxes on online shopping, for women entering the labour force, for new people going to university, and so on.

If we were to pursue the above policy agenda, there would likely be less disruption, but there would also be less innovation and less wealth. Deutsche Bank are effectively asking us to tax productivity gains.

Their approach would tax away most of remote work’s advantages. They write:

“The tax rate? Those who can work from home tend to have higher-than-average incomes. If we assume the average salary of a person who chooses to work from home in the US is $55,000, a tax of five per cent works out to just over $10 per working day. That is roughly the amount an office worker might spend on commuting, lunch, and laundry etc. A tax at this rate, then, will leave them no worse off than if they had chosen to go into the office. If we apply the same tax rate to workers in the UK with an assumed average WFH salary of £35,000, it works out to just under £7 per day.”

A key problem with Deutsche Bank’s approach is the absence of incentives. If you tax a more productive way of working at a higher rate then you will end up with less of it. Yet it’s not clear why the shift to remote work should be delayed.

In fact, I can think of a few reasons why the trend should be accelerated. In his recent report. The Case for Remote Work, Matt Clancy offers three.

First, remote work may boost productivity by allowing us to tap into the benefits of agglomeration without bearing its costs, such as high rents and crowded commutes.

Second, remote work can reduce regional inequality. As Clancy notes: “by decoupling where people live and work it spreads economic activity more equitably and may reverse the tendency for economic activity to cluster in a small number of superstar cities”.

Third, remote work is green. Fewer commutes means fewer carbon emissions.

It’s also worth noting that remote work is already at a mild tax disadvantage. While remote workers are entitled to a tax free allowance to cover expenses from working from home, they only qualify for it if they are forced to work from home, not if it is a matter of choice. Similarly, while it covers £6 per week’s worth of expenses, rent isn’t included. In effect, traditional ways of working benefit from a relative subsidy.

Deutsche Bank’s argument is hardly original either. Economists have been rebutting it off-and-on for the last 300 years. The French economist Frederic Bastiat satirised this approach in 1843, in ‘The Candlemakers Petition’. He wrote a letter to Parliament on behalf of candlemakers arguing for protection against an unfair foreign competitor: the sun.

“Please pass a law ordering the closing of all windows, skylights, shutters, cur­tains, and blinds — that is, all openings, holes, and cracks through which the light of the sun is able to enter houses. This free sunlight is hurting the business of us deserving manufacturers of candles.”

Or, as Deutsche Bank might put it: Sunlight users are contributing less to the infrastructure of the economy whilst still receiving its benefits. The worrying thing is, Bastiat was joking – Deutsche Bank is deadly serious.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Donate

Recurring Payment

Thanks for your support

Something went wrong

An error occured, but no error message was recieved.

Please try again, or if problems persist, contact us with the above error message. We apologise for the inconvenience.

Sam Dumitriu is Research Director at The Entrepreneurs Network.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.