Copyright Forbes
In a future where the nature of work is transformed by AI, how will tax systems evolve, and what can businesses do to best position themselves to respond? These are key questions, not only for tax authorities but for the citizens who rely on services currently funded by tax revenues. AI and the changing nature of work Current employment taxes are designed to operate within a certain model of work built around the employer/employee relationship. While this relationship will remain crucial to global economies, AI's integration into production may redefine employee roles across industries. If this occurs, the current employment tax model will be challenged. We can already see the signs of a labor market shake-up. Throughout 2024 and 2025, global labor markets have begun to slow primarily due to geopolitical tensions and trade disruptions, with hiring hesitancy most pronounced in industries facing rapid AI-driven automation. For instance, the International Labour Organization (ILO) adjusted its global employment outlook for 2025, now anticipating 7 million fewer jobs than previously forecast and a decrease in global employment growth from 1.7% to 1.5%. However, this is not just a numbers game. The real impact on tax systems comes from the changing nature of work. Recent Deloitte research suggests that the narrative around AI first centered on task replacement through automation. Next, it shifted to augmentation: assisting and extending people’s capabilities. As AI technologies matured, a more nuanced understanding emerged that emphasized the potential for collaboration between humans and AI. From a tax perspective the future will be crucially shaped by the eventual balance that is struck between people and machines in the workplace. Why employment taxes matter, and to whom they matter The contribution of employment taxes to overall revenue levels varies greatly country-by-country but is significant everywhere. Employment taxes currently make up about 24% of total tax revenue across Organisation for Economic Co-operation and Development (OECD) countries, but this proportion varies widely. For example, Japan: Social security contributions make up about 40% of total tax revenue France: Social security contributions make up about 37% of total tax revenue Germany: Employment taxes and social contributions represent about 35% of total tax revenue United States: Payroll taxes (including Social Security and Medicare) account for around 32% of federal tax revenue South Africa: Employment taxes (including UIF and skills development levies) contribute about 15% of total revenue Australia: Superannuation guarantee contributions are mandatory, but employment taxes as a share of total tax revenue are lower, at ~12% A particular feature of employment taxes is how far their revenues are often hypothecated to a specific area of state spending. Under the classic Bismarckian model, employment tax revenue, in the form of social insurance, is earmarked to fund pensions and other social benefits. For example, in 2024, the US Social Security program spent US$1.5 trillion, with 86% going to retirement benefits, 11% to disability benefits, and 4% to other benefits. Payroll taxes provided 90% of Old-Age and Survivors Insurance income and 97% of Disability Insurance income. And in Japan, social security spending is forecasted to reach 38.3 trillion yen in 2025, with substantial funding directed toward pensions, rising health care costs, and expanded childcare services. Employment taxes as a policy lever Few taxes operate solely to raise revenue, and they are almost always used to pursue some wider policy goal. Employment taxes are no exception, with reliefs, exemptions and credits being widely used to encourage or discourage different types of behavior. To encourage saving, particularly for retirement, many countries offer significant tax reliefs. In the UK, pension contributions receive tax relief, effectively boosting the amount saved. In Australia, salary sacrificed superannuation contributions are treated as employer contributions, which are not subject to Fringe Benefits Tax (FBT) and are taxed at a concessional rate. In 2025, Japan expanded its iDeCo (individual-type defined contribution pension plan), increasing tax-deductible contribution limits. Governments globally continue to introduce tax incentives to encourage electric vehicle (EV) adoption. Spain offers a 15% income tax deduction for electric vehicle buyers on amounts up to $23,500US. In the Netherlands, EVs that remain exempt from the tax on traditional passenger vehicles, receive a 75% road tax discount in 2025 (which will gradually decrease until 2030), and qualify for subsidies of up to $5,870US for zero-emission commercial vehicles. Several countries are using tax deductions and subsidies to address declining birth rates. Examples of policies in this area include German tax allowances for children (Freibeträge für Kinder), and Spain’s proposed new Universal Child Benefit (UCB), and Frances’s tax relief for families. Challenges for the future For governments, the challenge will be adjusting tax systems to address this change. How will governments raise the revenue they previously raised from employment taxes? How will they pursue the policy objectives which used to be pursued by employment taxes? How will resulting evolution in employment tax impact economic growth? For businesses, the challenge will be to track developments and develop a flexible response to changes in the tax base. All this, safe in the knowledge that, the revenue that used to be extracted from the productive process though employment taxes will, inevitably, need to be extracted from elsewhere. As the pace of AI adoption picks up, it will be ever more important from policymakers and wealth creators to focus on this area. Thank you Steven Effingham, Deloitte editorial director, for his contributions to this piece.
