Australia’s 2020-21 budget season will start today with the delivery of the Federal Budget this evening and followed by the State and Territory Budgets in the coming months. While the focus now is on changes in federal taxes, there is one tax reform at the state level which will add substantial supply-side stimulus to an economy in desperate need of support. That is, abolishing payroll tax.
It is taxation reform that will help the economy recover, and simultaneously give it resilience and flexibility at a time when our economy needs resilience and flexibility in response to a global environment of increasing environmental, social, political and economic uncertainty.
Abolishing payroll tax will release roughly $30 billion a year into the economy.
A tax on workers
Payroll tax is a tax on workers. Research suggests that workers bear the tax through lower wages. Not having to pay payroll tax means firms have more money to hire. We already tax worker income through the personal income tax system. We don’t need two taxes on the same base.
In an environment where the Fair Work Commission is granting wage increases and the award system produces high effective minimum wages combined with the current weakness in labour demand, cutting payroll taxes reduces hiring costs for firms who may not otherwise take on new workers.
Many Australian states and territories have tacitly acknowledged the detrimental impact and outdatedness of payroll tax, by increasingly deferring or abolishing payroll tax for some businesses and under some circumstances.
Better alternative to corporate tax cuts
Abolishing payroll tax is preferable to the oft-touted alternative of corporate tax rate reductions, more so at a time when economic engagement and recovery is paramount. Corporate tax is a tax on profit. Payroll tax is a tax on employment. Reducing taxes on declining profits pales by comparison with reducing taxes on hiring.
Most businesses benefit far more from abolishing payroll tax than from a cut in the corporate tax rate. Businesses understand payroll tax as a tax on labour income. The detriment to workers’ wages that payroll tax generates is much easier to explain and more intuitive than indirect effects on workers of corporate tax.
And, unlike a corporate tax rate cut, none of the economic boost from abolishing payroll tax is ceded to foreign investors. It stays right here, pumping Australia’s economy.
Australia’s fractious payroll tax regime is being pulled in two different directions by two different impetus. On the one hand political manipulation, on the other economic rationale.
Through politics, rates differ from state to state, adding distortions to corporate investment and employment behaviour. States have overlain a hodge-podge of exemptions and high tax-free thresholds on this already distorted regime, making the tax even less effective.
At the same time, states and territories have harmonised a number of key areas of payroll tax administration: clear recognition of the need for rationalisation of this outdated mechanism.
Abolishing state and territory payroll taxes will effect a wage subsidy of 4-6 per cent of salaries. This will boost jobs and re-assure unions in the midst of discussions on industrial relations reform. It will also reduce regulatory burden on firms.
Commonwealth could bring back land tax and distribute the revenue to states
The best way to replace the revenue would be with a land tax. Land tax is widely known to be amongst the most efficient taxes. Despite its qualities, Australia makes very little use of land tax. Land tax could be federal, set at a low rate that applies to the broadest possible base. We had a federal land tax for almost half a century until it was abolished in 1952. Let’s bring it back. Revenue could be distributed back to states.
A revenue neutral switch from a tax on workers to a tax on wealth holders would represent a positive move in fixing the Australia tax mix and the kind of supply side reform that the country is crying out for.
Policies or actions by government to make the economy more resilient will benefit us all, irrespective of how global uncertainties play out. With a focus on recovery and the term beyond, they will encourage growth and employment.
Australia needs political leadership across the spectrum of federal and state governments, prepared to institute reforms to support the jobs market long term and get the economy’s engine running smooth and strong. The coordinated abolition of payroll tax falls squarely into that tent.
Other Budget Forum 2020 articles
Blink and You’ll Miss It: What the Budget Did for Working Mums, by Miranda Stewart.
Economic Stimulus through a Gender Lens: Why the Budget Did Not Deliver, by Helen Hodgson.
Progressivity and the Personal Income Tax Plan, by Sonali Walpola and Yuan Ping.
Training Subsidies and Market Failures, by John Freebairn.
Getting Coherence into the Equity Debate – Part 3, by Andrew Podger.
Getting Coherence into the Equity Debate – Part 2, by Andrew Podger.
Getting Coherence into the Equity Debate – Part 1, by Andrew Podger.
What Has Volunteering Got to Do With the Budget? By Sue Regan.
Talk of Aspiration Is Not Borne Out in Federal Budget Papers, by John Hewson.
Asymmetric Taxation of Business Income and Losses, by John Freebairn.
Economic Security for Older Partnered Women and Widows: Fixing Gaps in Australia’s Superannuation System, by Monica Costa, Helen Hodgson, Siobhan Austen and Rhonda Sharp.
Heroic Assumptions in Budget Omit One Major Threat: A Global Debt Crunch, by John Hewson.
Dream Budget or Not? by Shumi Akhtar.
Will Instant Asset Write-Offs Boost Jobs? by Michael Coelli.
It’s Not the Size of the Budget Deficit That Counts; It’s How You Use It, by Steven Hamilton.
It’s Time to Meet Key Social Policy Challenges in COVID Recovery, by John Hewson.
Meet the Liveable Income Guarantee, a Budget-Ready Proposal That Would Prevent Unemployment Benefits Falling off a Cliff, by John Quiggin, Elise Klein and Troy Henderson.
COVID-19 Strengthens Australians’ Belief in the Fair Go, Government Should Support the Vulnerable, by Emma Dawson.
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