The tax on professional income as a threat to economic security

Shilekhin Konstantin Evgenevich Senior Educator, Department of Economic Theory and Financial Law, Omsk Academy of the Ministry of Internal Affairs of Russia 644092, Russia, Omskaya oblast', g. Omsk, ul. Prospekt Komarova, 7, of. 406 Stalker_OrC@mail.ru Other publications by this author

In Russia, an experiment on taxing self-employed citizens on professional income has been going on for five years. According to the Federal Tax Service of Russia (hereinafter - the Federal Tax Service), during this time, more than 9 million compatriots have used the My Tax application and legalized their activities in the eyes of the fiscal authorities. By the end of 2022, the budget received 37.452 billion rubles (Section 3. of the Report of the Federal Tax Service of the Russian Federation on form No. 1-NM (2022)) from the payers of this tax. In general, tax revenues from this source grow every year. The experiment on the introduction of this tax was recognized as successful, as evidenced by both the data provided and the assessments of officials involved in its implementation. Recall that the main goal of the experiment is to "increase the number of individuals operating in the right field, and, accordingly, the income from them to the budget" (Explanatory note to the draft federal law "On conducting an experiment to establish a special tax regime "Tax on professional income" in the federal city of Moscow, in the Moscow and Kaluga regions regions, as well as in the Republic of Tatarstan (Tatarstan)").

At the same time, it should be noted that the introduction of a tax on professional income is far from the first attempt to bring out of the shadows citizens who avoid paying taxes. In this regard, it is necessary to elaborate on the reasons and conditions that made it possible to achieve these results. It seems doubtful that such a reason is only "the simplicity of registration as a taxpayer of such a regime, as well as the exclusion of reporting." It is easier not to register at all and not pay taxes, especially considering that the current mechanism for identifying and holding accountable individuals who defaulted on taxes is poorly developed and allows violators to avoid punishment ^{[5, pp. 46-57]}.

We believe that the reason for the success of the experiment lies in the employment structure of the payers of the new tax. The impact of self-employment on the labor market has been studied both in Russia ^{[10, 11]} and abroad ^{[1, 2, 4]}. However, domestic researchers focus more on the legal aspects of the new tax regime, and foreign researchers, as a rule, do not take into account the specifics of the labor market in Russia and do not analyze statistical data for our country. In other words, domestic research, as well as foreign ones, are not free from certain disadvantages, which we will try to overcome.

First, it is necessary to give some terminological explanations. Firstly, the concept of "self-employed" in the framework of this study is identical to the concept of "professional income tax payers". With this concept, we designate persons using the specified special tax regime introduced by Federal Law No. 422-FZ on November 27, 2018 "On conducting an experiment to establish a special tax regime "Tax on professional income"". Secondly, the concept of "self-employed" in the framework of this study is used to refer to persons who manage an economic unit independently or in partnership with others and do not hire anyone other than themselves, their partners and helping family members to work in an economic unit on a regular basis as employees. Thus, the concept of "self-employed" characterizes the self-perception of an employee in contrast to the concept of "self-employed", which characterizes the formal status of a person.

Empirical data for analysis are contained in the databases of the Federal State Statistics Service (hereinafter - Rosstat) and the Federal Tax Service, sociological research and scientific literature. The analysis of the employment structure should begin with external forms. The data presented in Table 1 show that entrepreneurial activity in the form of legal entities has a clear downward trend (the table was compiled by the author according to reports No. 1-Law, No. 1-IP Rosstat).

Table 1

Dynamics of the number of legal entities (legal entities), individual entrepreneurs (sole proprietors) and peasant (farm) farms (KFH)

In the short term (2020-2023), this trend has a weakly pronounced dynamics, but over longer time intervals (2010-2023) it manifests itself more strongly. At the same time, the dynamics of the number of individual entrepreneurs and peasant (farm) farms, although positive, is weakly expressed in the short term. In the long term, the number of individual entrepreneurs and peasant (farm) farms practically does not change. However, the number of self-employed is growing rapidly. From January 2020 to September 2023, their number increased more than 20 times from 416 thousand people to 9 million people.

The presented data allow us to draw a number of conclusions. Firstly, the introduction of a tax on professional income does not currently have a significant impact on the "traditional" forms of entrepreneurial activity. Secondly, individual entrepreneurs do not seek to become self-employed, allowing, in some cases, doing business in two forms. 

However, the data presented is not sufficient to understand the significance of the introduction of the analyzed tax regime. It is necessary to assess the state of employment in our country.

Table 2

Employed population aged 15 years and older by employment status in the main job, thousand people

An analysis of the data presented in table 2 (the table was compiled by the author according to Rosstat and the Federal Tax Service of the Russian Federation) allows us to conclude that, firstly, against the background of a rapid increase in the number of self-employed people, the employment structure of the population in Russia has not changed. During the analyzed period, the labor force decreased by 474 thousand people (0.62%). The number of employees has not changed much, just as the number of self-employed has not changed. However, the unemployment rate has decreased, but not enough to serve as a source of self-employment. Thus, we consider incorrect the thesis that the introduction of a tax on professional income made it possible to bring out of the shadows persons who were not previously part of the workforce.

Secondly, the observed decrease in the unemployment rate is fully covered by an increase in the number of employees.

Thirdly, the number of professional income tax payers does not correlate with the number of self-employed according to the Rosstat methodology.

Fourthly, developing the previous conclusion, it can be assumed that the self-employed do not feel like such ^{[13, pp. 176-183]}. Their social status and its subjective assessment have not changed following the change in their legal status. In 2022, the number of self-employed exceeded the number of self-employed. It is obvious that self-employment actually hides other forms of employment, primarily related to wage labor.

This situation of the self-employed has a number of explanations. Thanks to the experiment, some of the self-employed have legalized part of their activities. For example, people renting apartments and working for hire. Thanks to registration in the My Tax application, they were able to enter their income into the legal field. However, renting an apartment is not perceived as an entrepreneurial activity. A person still remains an employee and this is how he earns most of his livelihood. 

Secondly, self-employment masks wage employment. Despite the fact that the provisions of Federal Law No. 422 prohibit the transfer of labor relations to self-employment, this provision does not apply if we are talking about recruiting new employees, reorganizing departments or expanding activities. Moreover, given the widespread practice of outsourcing personnel, the possibility of opening new legal entities as new employers, it becomes obvious that this ban is nothing more than a formality. This suggests an analogy with a wall in an open field, which is not difficult to get around.

A number of arguments should be given in favor of the last remark. In mid–2021, a joint study was conducted by Vedomosti and Online Market Intelligence (OMI), during which 23,150 Russian Internet users were interviewed about their employment status. As it turned out, the majority of the current self–employed came from employment: 35.4% of respondents had previously worked under an employment contract, 7.1% - under a contract. About 27.9% of the self-employed worked informally, without an employment contract. Another 17.6% were unemployed. About 10% of entrepreneurs among the self-employed: 7% were registered as sole proprietors, 3% owned a legal entity.

Thus, 70% of the respondents had previously actually worked for hire, of which 35%, due to self-employment, have only legalized and will continue to perform the same labor function, but in a new legal status. The study does not report how many employees under an employment contract were only formally forced to change their status. However, it should be noted that some respondents indicated the requirements of the employer as the reason for registration of self-employment. Thus, it is obvious that employers practice transferring their employees to self-employment. "Many employers have put employees before a tough choice: dismissal or registration as self-employed."

We consider it important to pay attention to the number of unemployed who have become payers of professional income tax. Their number is not large. As noted by Chekmarev O.P., Lukichev P.M. and Konev P.A., "the price of involving one new person in the labor market is the transition of five other people who have already acted in the labor market to self-employment in order to reduce the level of taxation." ^{[22, pp. 233-248]} This study confirms the previously stated assumption that reducing the level of unemployment occurs primarily due to recruitment.

Characterizing the actual situation of the self-employed, attention should be paid to their distribution by sectors of the economy, i.e. the content of their activities. The tax authorities provide the following data as of October 2023.

Table 3

Fields of activity of the self-employed according to the Federal Tax Service of the Russian Federation

Analyzing the presented data, it should be borne in mind that, firstly, payers of professional income tax are not required to indicate the type of activity when registering in the My Tax application. Secondly, one taxpayer can specify several types of activities. Taking into account these circumstances, the presented statistics should be perceived not as a reflection of the real state of affairs in the field under consideration, but as a trend, as an indication of the vector of development of relations in the field of self-employment. Similar data are contained in the report of the Accounting Chamber of the Russian Federation on the results of the expert-analytical event "Analysis of the practice of conducting an experiment on the introduction of a tax on professional income."

More detailed information about the specific types of activities in which the self-employed are involved is provided by sociological research. For example, RANEPA employees provide survey data for 2001-2016. "the most in demand among consumers are works on the operation and repair of motor vehicles, tailoring and repair of clothes and shoes, repair of apartments, plumbing, as well as the provision of medical services (massage, treatment, etc.)."

Without denying this trend, we add that in the period after 2020, private transportation services were added to the already mentioned services (although the trend was noticed in demand among the population back in 2013) and delivery of goods. According to the Center for Market Economics, "in 2021, the total number of users of food delivery services in Russia exceeded 40 million people." Individual delivery services set daily order records measured in the hundreds of thousands. International studies clearly state the dominance of taxi and delivery services against the background of other services. 

Sociological research data show that the professional activity of the self-employed as a real estate agent (realtor), builder, driver, agricultural workers, beauty or art workers is characteristic of employees in their main activity. And working as a tutor, IT specialist or providing legal, financial, insurance services, repairing household or computer equipment, writing any scientific texts is very common for additional employment.

Similar data are presented by researchers from Strategy partners (Self-employment entrepreneurship and stable partnership with platforms, July 2022). According to the study, 63% of respondents (1,500 people) consider themselves self-employed professionals and only 37% are entrepreneurs.  

Summing up the interim results, it should be noted:

1. Working as a professional income tax payer is the main place of work for the majority of the self-employed, but the self-employed do not perceive it as an entrepreneurial activity.

2. Among those who combine self-employment with employment, IT specialists, lawyers, specialists in finance and marketing (advertising) predominate. For them, self-employment is an additional source of income and, in some cases, is perceived as an entrepreneurial activity.

3. Since the introduction of the tax on professional income, platform employment has been actively developing, primarily in the field of private transportation and delivery of goods.

The latter circumstance should be discussed in more detail, since we believe that it is the spread of platform employment in its current form that contains significant economic and social risks.

The development of platform employment is a continuation of staff outsourcing. According to the International Labour Organization, this type of employment gained particular popularity after the global economic crisis of 2008-2009. At the end of 2020, there were 777 active services and programs in the world that provided jobs and created jobs ^[13].

The number of people working using such programs and services is difficult to estimate due to trade secrets and can only be estimated indirectly through financial reports of companies that own applications and services and methods of sociological research. In our country, according to various estimates, from 7 million to 10 million citizens are involved in platform employment. 3.5 million of them receive income through digital platforms on an ongoing basis, and 1.7 million consider this to be the main way to earn money.

Sociological research allows us to draw an unambiguous conclusion that payers of professional income tax are in the vast majority of cases platform employees. The work of 89% of self-employed respondents is based in one way or another on the use of online services and platforms. Extrapolating from the results of the cited study, it can be concluded that in Russia, out of 9 million self-employed, 8 million work using digital services and platforms.

Thus, the introduction of a tax on professional income is a way to legalize platform employment. The legislator has created a tool that allows owners of Internet services and platforms to carry out their activities legally and attract staff for these purposes, bypassing existing labor legislation.

This is the main danger of a tax on professional income from the point of view of economic security. Being an instrument of ignoring labor legislation, it creates conditions for increasing the exploitation of workers, depriving them of opportunities for expanded reproduction. 

This is manifested in the fact that, firstly, a significant number of self-employed people have insufficient income not only in terms of ensuring consumption standards. The incomes of self-employed workers tend to be lower than those of workers performing the same functions on a regular basis, as noted in the ILO report. Foreign researchers also confirm this fact, but single out a part of the self-employed, whose income increases, provided that they leave their previous employment and actually go into business.    

Secondly, the working time of the self-employed is usually higher than that of employees performing the same function under the terms of employment contracts. In cases where self-employment is short-lived, it is not the main source of income, the employee combines employment and self-employment. Thus, the total time required to perform a work function is significantly increased. 

Thirdly, savings on labor protection, up to its complete disregard. The self-employed are not subject to the provisions on labor protection adopted in the labor legislation. This problem is most acute in the areas of taxi and delivery, where an increase in work time leads to a decrease in concentration, loss of attention and increases the likelihood of making a mistake when operating a source of increased danger.

Fourth, the unavailability of social protection. The low income of the self-employed does not allow them to voluntarily and independently replenish the necessary amounts of state and voluntary insurance funds that ensure compliance with social guarantees (temporary disability, old age, illness, rest, etc.). 

The undisputed beneficiary of self-employment in Russia in its current form are the owners of Internet services and platforms. Attracting the self-employed allows you to save from 20 to 40% on staff maintenance, proportionally increasing the company's revenue. In addition, owners of Internet services have the opportunity to shift responsibility for providing employment-related benefits or social protection benefits to employees and, accordingly, save on labor costs.

Thus, self-employment is based on principles that ensure the economic and legal deregulation of labor relations, strengthen labor coercion while dismantling social guarantees. The spread of platform employment in general and its specific form – self-employment reduce the well-being of the population, making it difficult to reproduce.

Nevertheless, it is impossible not to note the popularity of self-employment, which, in our opinion, is explained primarily by the opportunity to increase income^{[14, pp. 18-23]}. Given the decline in real disposable incomes of the population over the past decade (filed by Rosstat for 2010-2023), self-employment acts as a survival tool. Unwilling to put up with a decline in living standards, the active part of the population is looking for any ways to ensure a decent standard of living. However, the prevailing socio-economic relations leave only overexploitation as an alternative to lending and debt bondage.

As a conclusion to our research, we should make a number of suggestions that can help overcome existing problems, improve the situation of the self-employed and increase the economic security of modern Russian society. Firstly, overcoming the problems identified in the study by exclusively legal means seems unlikely. Representatives of the state and business are unanimous in assessing the progress and results of the experiment. They do not intend to initiate any changes, as directly indicated by Federal Law No. 565-FZ "On Employment in the Russian Federation" adopted in December 2023, which left the self-employed outside the legal field. Based on this, the only entity interested in changes is the self-employed themselves. Thus, the first and main condition for possible changes is the awareness of the self-employed of their objective position and the subjective formation of the need to improve their situation.

Secondly, the limitation of legal means does not mean that they are useless and impossible to use. It is necessary to equalize the rights of the self-employed and employees in terms of social guarantees, pension rights, and rest rights. If a self-employed person systematically performs work (provides services) in the interests of one Internet service or one platform, carries out this activity according to the standards and rules of the Internet service, uses equipment, equipment or intellectual property of the Internet service, he should be recognized not as self-employed, but as employees in the sense of labor legislation.