Section 199A’s Workplace Shift

By Diane Ring

As we mark the one year anniversary of tax reform, the aftermath continues to dominate tax policy analysis. New § 199A, which my co-author, Shu-Yi Oei, and I initially explored here and here and here, continues to attract significant attention, both in terms of the provision’s likely substantive effects, and the legislative, regulatory, and political issues it raises.

One of the most compelling, yet underanalyzed, questions is how § 199A could impact labor and dramatically reshape work, the workforce, and the workplace. In a new paper posted on SSRN on December 3, titled “Tax Law’s Workplace Shift,“ Shu-Yi and I tackle these issues in detail. In brief, the paper explores the factors that will determine whether § 199A is likely to cause a workplace shift from employee to independent contractor arrangements, and, if it does, how such a shift should be normatively evaluated. Ultimately, we show how our evaluation of these § 199A workplace effects must depend on the types of workers and work at issue. While a § 199A-induced shift towards independent contractor classification may make some workers more precarious, empirical data suggests that for others, such a shift may have different (and perhaps differently troubling) effects. Our Article lays a framework for analyzing the full range of the new deduction’s impacts and maps a course for further study of tax reform’s impacts on the future of work.

The question of the new passthrough deduction’s effects on work is likely to remain significant, and will continue to be investigated by tax scholars. (See, e.g., a new December 19th Center on Budget and Policy Priorities essay by Brendan Duke, “Pass-Through Deduction in 2017 Tax Law Could Weaken Wages and Workplace Standards”).

As the first filing season under the new deduction approaches, we will begin to see how both workers and businesses have responded to the incentives § 199A creates.  But it may take more time before the range of impacts that we hypothesize begins to emerge in the data. Some workplace shifts may only occur over time as new businesses enter the market, as businesses expand or contract, as workers gradually take on additional positions, as the planning potential of the deduction becomes more salient, and as we get more clarity about the deduction’s permanence. Such changes, though slower to appear, can ultimately be quite powerful in constructing the new reality for work in America.

Importantly, § 199A is but one part of a bigger global story about work. Just this week in the United Kingdom, the Court of Appeal ruled that Uber drivers are “workers” entitled to various benefits including vacation pay, sick pay, and minimum wage. Of course the new U.K. decision does not apply to the multitude of Uber drivers outside of the U.K., and U.K. law itself has three worker classification categories rather than two (as does the U.S.). However, the decision shines light onto the intersection of law and the workplace as a contested space in which a battle over the rights of workers is being fought.

Looking ahead to the coming year in the U.S., the two important questions will be: (1) does new § 199A create real shifts in the workplace that pose serious policy concerns? and (2) does § 199A create false shifts in the workplace through unwarranted “re-labeling” of workers?  The first problem demands a careful re-examination of the incentives that the new law has introduced into the workplace. The second problem demands careful attention at the enforcement level. Stay tuned!

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