One of the single biggest aims of governments both Left & Right wing is to create more jobs, with higher and higher levels of pay, to create a thriving middle class with high levels of upward mobility. The right wing political parties are all about boosting the economy and creating more jobs, jobs, jobs. While the left wing political parties are all about bolstering the power of unions and fighting to raise the rates of pay and the minimum wage.
If you were to look up all the taxes levied on Australians (125 of them in total as stated by the Henry Review) and rank order them from most productive to most detrimental Payroll Tax would be right at the bottom of the list, by a long margin.
It is completely counterproductive and works against all political party's aims at every turn. It is accelerating the offshoring of hardworking Australian’s jobs through making it more expensive to employ local Australian’s than it is to employ people overseas in countries with better tax policies, ones that are actually geared toward making it easier and cheaper for businesses to employ their citizens.
What no Australian government (State or Federal) have ever tried to do however is pull the single most effective lever to achieve those aims.
And there’s a very simple reason why. Tax Revenue. More specifically State Tax Revenue.
When you list those same 125 Australian taxes in order of largest to smallest revenue generators payroll tax comes in at #4 behind only Personal Income Tax, Company Income Tax & GST. When viewed through the lens of which governments get what slice of the pie, it comes in as the State Governments #2 revenue generator, behind only GST.
This gives you everything you need to know about why it hasn’t been touched before. Not only is it something the Federal Government can’t do, because it’s entirely out of their control, in order for it to succeed it would need the coming together of all State & Territory governments, which as COVID has proven is no easy feat.
How bad is it really?
To give an example, say you are a technology or consulting company that sells your services to Australian businesses, you’ll want an Australian presence to sell to your customers in Australia. A face to put to the name and liaise with your customers. But beyond that you don’t really need anyone in the back end of the business to be here. Compare that to a construction company who need their employees on site to build the building where it stands and you can start to understand why it is so expensive to build a house but so cheap to buy clothes from amazon
As a business let’s say you need to hire a new consultant or software developer and their going rate is $80,000 per year. To employ an overseas staff member that will cost you as a business $80,000 per year. To employ an Australian you’ll need to add 10% on top for superannuation and a further 4% on top of that for payroll tax, costing the business $91,250 per year, but only if your employee happens to live in the lowest tax state in the country, Tasmania. If they live in the ACT the highest tax state you’ll have to pony up 6.85% in payroll taxes taking the total cost for that employee to $94,028.
Now we could make the argument that superannuation is also creating issues here, and you wouldn’t be wrong, but it is a little more nuanced, as this money is all still the employees, its just they can’t access it until 65. So we’ll leave that topic for another day.
Now as much as these figures might not sound like a whole lot, if you consider that this means a business offshoring its labour force can hire 1 extra employee for every 6 it starts to add up very quickly. A business hiring 100 Australian locals would be competing against a business hiring 117 offshore employees of the same quality for the exact same cost.
And this also assumes that there is no arbitrage between salary levels in the 2 countries, which accelerates this even further. In order to compete against other countries, where labour is cheaper (China, India, etc) we need to build our tax system in a way that makes us structurally more competitive, not less. We are at enough of a disadvantage already due to our high wage levels, adding unnecessary and pointless taxes on top is only adding insult to injury for businesses that want to hire locally. Eventually they’ll be forced to do what they need to stay competitive against those who do.
So what of the massive hole in the government budget, how do we replace the State governments second largest revenue earner?
We look to the cost benefit analysis. What taxes create the least drag on the economy for every dollar they raise? Are there any that create a headwind in the economy and raise revenue?
From the Henry review studies have shown when governments change the mix of taxes such that they retain the exact same amount of income, and through reducing one tax by 1% and raising another by 1% they get the following changes in GDP
- Moving from GST & Land Taxes to Company Taxes = -2.01% in GDP per capita
- Moving from GST & Land Taxes to Personal Income Tax = -1.13% in GDP per capita
- Moving from Income Taxes to GST = +0.74% in GDP per capita
- Moving from Income Taxes to Land Tax = +2.47% in GDP per capita
Looking at the data its clear that we should move to a mix of lower company and personal income taxes and toward one with higher GST & Land taxes. It'll given an instant boost to the economy and put more money in the pockets of ordinary working Australians
At the moment Land taxes are only levied on investors, there is an exemption for any owner occupied property, as well as a few additional exemptions for specific types of land use such as primary production (Farmers)
All that is needed is for the owner occupier exemption to be removed and it will easily replace all the lost revenue from Payroll Tax.