In Canada, 15 per cent of the workforce is self-employed. Australia’s rate is 18.5 per cent. Recently I proposed the idea that there’s a distinct link between self-employment and entrepreneurial innovation.
Self-employed people are, by behaviour and motivation, entrepreneurs. The more self-employed people there are the greater the potential for innovation and hence economic development.
If this concept is valid, our better employment rate may be linked to the higher proportion of self-employed people in Australia. It’s an idea worth exploring. But to understand this it’s necessary to look deeper into how regulations and institutions allow or prevent self-employed people from ‘doing their thing’—that is, being entrepreneurs. One of the major issues is tax.
While Australia’s tax laws mostly treat self-employed people with equity, there are still political hurdles. Earlier this year, Assistant Treasurer Bill Shorten agreed not to change contractor tax laws, but only after heavy campaigning by Independent Contractors of Australia with much assistance from Robert Gottliebsen.
Problems also persist with the administration of the Superannuation Guarantee Act, which has allowed blatant institutional discrimination against self-employed people and needs to be fixed.
However, Australia’s self-employed people are still relatively better off than those in Canada.
Here, in 2000, tax laws were changed to remove the Australian Taxation Office’s (ATO) reliance on the employer-employee status for tax collection powers under PAYE. Since then, the ATO has turned around its relationship with self-employed people from outright aggression to a quality partnering where it can.
Administration of Canadian tax laws make being self-employed very difficult, and in many instances probably impossible. Much of it comes down to the way the self-employed are treated by the Canada Revenue Agency (CRA), which often wrongly labels the self-employed as employees.
For example, if you are investigated by the CRA you’ll receive a 77-point questionnaire that will make your head spin if you try to give clear answers. Based on this questionnaire the CRA makes a declaration on your status. If you disagree your only effective response is a challenge in the courts. What self-employed individual can afford to do that?
I’ve seen marketing consultants being declared ’employees’ of their clients. Specialist managers have suffered the same fate. It’s rather odd and pointless because under Canadian tax law self-employed people have clear obligations to pay taxes and the CRA has the authority to enforce collection. It seems to be the case that the CRA has an institutional—and possibly cultural—bias against self-employed people.
This bias isn’t written into Canadian law; it’s more the way the tax laws are administered that raises barriers for self-employed Canadians.
But it provides a good example of how laws and state institutions can suppress entrepreneurs. If individuals want to start their own business on their own but aren’t given business tax treatment their efforts come to nothing. Entrepreneurship declines.
Australia seems to be ahead of Canada in enabling entrepreneurship because of fairer and more business sensitive tax administration. Certainly tax treatment is just one part of a large entrepreneur/innovation matrix but it’s the most important starting point in understanding the impact of state institutions and their impact on self-employed entrepreneurs.