Fundamental change does not occur quickly.
John Maynard Keynes circa 1940.
TAXATION
Prosperity is the tide that carries us all to realisation and enjoyment of our material and social aspirations. No economy can grow in a sustainable way unless it has a good tax system. The Australian tax system was reformed under Keating with bi-partisan support from Opposition leader Howard, accelerated under Howard as Prime Minister with the excellent introduction of an efficient and almost sensible Goods and Services Tax (GST) .
All taxes ultimately reflect in the prices of goods and services, and asset prices, and also have an impact on the current account deficit. This is simply because business calculates its returns on an after-tax basis. Prices have to rise to increase the rate of return, or goods have to be produced more cheaply to enhance margins. Often Mumbai seems better than Moree or Melbourne.
The problem with taxes generally is that politicians never feel the need to explain taxes properly. All taxes impact on all prices, but politicians keep taxes hidden so that the real costs passed on to the consumer are not blamed upon a poor tax system, and the waste that occurs in government spending, including duplication and triplication, remains largely undetected. Also at disparate State-Federal election times the States can blame the Federal government for high taxes and lack of service delivery, and vice versa.
A good tax system is transparent, relatively simple, involves as few collection points as possible; encourages work, savings and investment; and assists employment creation. It should also be designed to inform taxpayers, to keep governments accountable.
THE TREASURY REVIEW
Sometime in the New Year the Ken Henry tax review will be handed to the Federal Government. Ecinya had always thought that there were two economies – the real economy, the production of goods and services, and the symbol economy, money and credit. Last week a journalist, Michael Stutchbury, we believe, identified another economy – the political economy.
Ecinya always hopes to be pleasantly surprised on matters relating to taxation, but given that the preliminary document issued by Treasury in August 2008 ran to 344 pages, and that Treasury is involved in the final document (with Mr Henry being hardly independent), that consideration of extending the GST to food is being excluded from the review, that the government has over-spent in many areas in response to the ‘Global Financial Crisis’, and accumulated significant debts, and blown the Howard-Costello budget surpluses, the final document is unlikely to be a ‘reform’ package.
Thus, at this point in time we can regard the Henry Tax Review as having little to do with the ‘real’ economy, and a lot to do with the ‘political’ economy.
BACK TO THE FUTURE – PAYROLL TAX
Our focus in this our first paper on taxation is payroll tax, and we are re-producing in its entirety a paper published as an open letter on 7 March 1991, which fits neatly with our Keynesian head-quote above that fundamental change does not occur quickly, and sometimes does not happen at all, because of the inefficient and misleading character of the ‘political’ economy.
In 1991 Gerry van Wyngen and George Sutton got together, had some economic modelling done, and published a full-page advertisement in The Australian. The quoted cost was $18,000 and this was met by a private company contributing $5,000, a public company $5,000, and Gerry and George contributed $2,000. Because it was considered a matter of public interest, The Australian newspaper reduced the page price to $12,000 at their own suggestion. G & G heartily agreed.
After publication we sent a copy of the advertisement to the top 25 Australian public company Chief Executives and a number of them mentioned payroll tax in television business programmes in the months following. Not one of them wrote to us to express their thanks for our efforts. Without rancour, we found this to be most disappointing and time has not completely removed the scar tissue.
Gerry van Wyngen was a marvellous person, and a consistent and learned contributor to the economic debate via many channels, but principally through his writings in BRW Magazine and The Australian Financial Review. He died in April 2009. This Ecinya Insight is dedicated to his memory.
PAYROLL TAX IN AUSTRALIA
Payroll Tax is a State tax and in the 2007 fiscal year payroll tax collections were $14.4 billion, equivalent to 29% of total State tax collections (source Treasury paper ‘Australia’s future tax system’ August 2008). Average weekly earnings are equivalent to $62,400 annually. Dividing $14.4 billion adjusted for 30%, tax but omitting collection costs, payroll tax collections are the current equivalent of 161,500 jobs, about 25% of Australia’s official unemployed of 659,000. Of course this figure of 161,500 is increased by the fact that many people receive less than average weekly earnings, and reduced in the short-term by people who might be sacked by the State governments as they would need to replace the lost revenue from the Commonwealth. A loan from the Commonwealth would overcome this short-term difficulty.
Considering the recent stimulus package created more jobs abroad than locally as people spent on overseas holidays, and purchased home entertainment systems, we could probably speculate that unemployment numbers might reduce by about 13%, taking the unemployment rate down to under 5% from the current 5.7%. Ecinya still considers that putting the GST on food would simplify the entire tax system, including payroll tax, and we suspect that Mr Walsh, Mr Howard, Mr Hawke, and Mr Keating would substantially agree. The obvious offsets would have to, of course, take place, pensioners, unemployment benefits, lower income tax brackets for lower incomes in particular, a lower corporate tax rate etc.
The advertisement, considered to be relevant today, is reproduced as follows:
"AGENDA PAYROLL TAX
AN OPEN LETTER TO
- Prime Minister Hawke
- Premier Greiner
- RBA Governor Fraser
- Mr Kelty
ABOLISH PAYROLL TAX
- iT WILL CUT UNEMPLOYMENT 1%
- IT WILL CUT INFLATION TO UNDER 2%
- THE COST TO CONSOLIDATED REVENUE IS LESS THAN YOU THINK
Why abolish payroll tax?
Payroll tax is a tax on employment. Payroll tax chokes the source that creates the capacity to pay it, with rising unemployment, as Australian employers struggle to compete against imports. Payroll tax is stupid.
Silly Taxes Upset Proper Industrial Development.
STUPID is an apt acronym. On the one hand we bemoan our lack of industrial and commercial base. On the other, we impose a tax that actively discourages formation of such a base.
Mr Hawke….. where you can lead.
Payroll tax is a deduction for Federal taxation purposes which means that of every dollar paid to a State government up to 39 cents is effectively lost to Federal consolidated revenue. The $6.5 billion expected to be raised by the States this fiscal year will be offset in part by revenue lost to the Federal government totalling in excess of $2 billion. Thus you are in an excellent position to offer to reimburse a substantial part of the loss of revenue to States that would result from the abolition of payroll tax.
Mr Greiner…. where you can lead.
As Premier of Australia’s best managed State and a strong believer in the reform of State taxes you can volunteer your willingness to share in the responsibilities of abolishing payroll tax.
Mr Fraser…. where you can lead.
As Governor of The Reserve Bank and an outspoken critic of inflation, you can promote and facilitate a reduction in inflation in the order of 4% which effectively puts Australia on the road to zero inflation and – eventually – a permanent reduction in interest rates to industry, commerce, miners, farmers and home buyers below 10%.
Mr Kelty…. where you can lead.
As Australia’s leading trade union official, respected for your farsighted thinking, you can demand this tax on employment be abolished. You are undoubtedly aware of the study by Bruce Chapam (RBA Conference Proceedings 1990) estimating a 3% wages fall translates to an increase in employment of 0.7-0.9% per annum. Using the relationship cited by Chapman we estimate abolition of payroll tax would increase employment by approximately 100,000, effectively taking almost 1% off the rate of unemployment.
Why payroll tax raises less revenue than the figures indicate.
Using an estimated collection of $6.5 billion is fiscal 1990-91, after deducting the loss of revenue to the Commonwealth, the net "take" to Australia’s consolidated revenue is in the order of $4.5 billion in a normal year i.e. a year in which Australia is not in recession, with business profitability severely curtailed. However, elimination of payroll tax would increase employment and therefore income tax collections, and reduce unemployment and consequently social security benefits paid. The savings on unemployment benefits (on the Bruce Chapman model) are estimated to total $1.6 billion per annum. The increase in income tax revenue alone from the extra jobs generated by abolishing payroll tax is estimated at in excess of $0.5 billion. Thus the total improvement in the Commonwealth’s consolidated revenue from the abolition of payroll tax would likely exceed $4 billion per annum, being the extra corporate tax paid plus the increased collection in income tax from increased employment, plus the gain from reduced unemployment benefits paid.
Payroll tax collects so little.
As we have seen above, the net revenue to Australia’s various tax authorities is not $6.5 billion. It is not even $4.5 billion after compensating for deductibility on Federal income tax. After adjusting for the employment effects and their revenue implications, the real revenue base of payroll tax is less than $2.4 billion.
You can argue the figures, but not the facts.
Economists in government, The Reserve Bank, academia and banks will undoubtedly be able to sharpen the above figures. The components may differ in degree, but the bottom line will be similar. Our belief is that the eventual loss of revenue from payroll tax is even less than the $2.4 billion projected above. The stimulus to productive activity throughout Australia would eventually provide an increased tax base across a wide range of production and consumption.
Payroll tax is an immoral tax.
It actively promotes unemployment. In the process it denies many people, unnecessarily, the self-esteem and fulfilment that comes from working to one’s capacities and energies. The long-term unemployed do not develop the skills or the confidence to hold down a job. School leavers are disillusioned by the lack of current job opportunities and on-costs that are an impediment to them obtaining work. The loss of youth morale after 12 years at school is disheartening.
When should payroll tax be abolished?
The announcement should be made immediately. The phasing-out can be delayed six months if necessary. The important matter is that business and unions plan for it immediately.
Which industries would be most favourably affected?
All, including manufacturers, processors that add value to Australian rural products and minerals, the hospitality industry, commercial cleaning, banks, retailers, housing, the list goes on.
The States would benefit.
Victoria especially, the home of Australian manufacturing would receive an immediate boost to economic activity and reduction in unemployment.
Eliminating payroll tax would help exports and cut imports.
By making Australian industry and commerce more competitive there would eventually be a strong positive effect on the balance of payments.
There are other secondary benefits.
By deceasing inflation, which flows naturally into lower interest rates, the Australian dollar would also fall. There are very substantial benefits from this. Apart from the direct boost to competiveness, the cost of borrowing money to invest in increased plant and machinery is slashed, the stricken rural sector receives relief, and through the lower dollar, Australian products are cheaper on world markets.
Surely the benefits of eliminating payroll tax are not that substantial and wide?
Yes, in fact they are. Payroll tax is the most stupid tax Australia has ever implemented. Taxes, once introduced, have a habit of sticking because of the traditional adversatorial Federal-States approach to taxation revenue and because Australians have sat on their hands, this stupid tax remains."