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Must try harder

August 3rd, 2012

The most important single point in the Queensland Commission of Audit report (not a new one) is that Queensland is attempting to deliver the same services as the other states with a lower “tax effort”. To see what this means, let’s look at payroll tax which is both the biggest and (at least in principle, and with the exception of land tax) the least distorting tax available to state governments. The states were given the right to collect payroll tax back in the 1970s, in the hope that it would provide them with a tax base growing in line with the economy, and free them from dependence on the Commonwealth. It was never going to be enough, but the states made things worse by competing to provide exemptions, higher thresholds and so on, with the result that the tax collects less, and distorts more than it should. Unsurprisingly, Queensland has been the leader in this field. We have a payroll tax threshold of $1.0 million, about twice the level prevailing in other states, and a rate of 4.75 which is the lowest of any state. The LNP has promised a further increase in the threshold to $1.6 million.

The tax currently raises a bit under $4 billion, so raising the rate to 5 per cent would yield around $200 million a year. No one likes paying more tax, and a payroll tax is a tax on jobs[1], so raising the rate isn’t a step that should be taken lightly. Still, it seems clear that any job losses from a higher tax rate would be far less than those now under way. There are currently about 20 000 Queensland firms liable for payroll tax, and the average bill would increase by $10 000 a year. Perhaps some firms might respond by laying off an employee or not filling a vacancy, but surely most would not (and hardly any would lay off more than one. Cutting the threshold to $800 000, still much more generous than other states, would also raise $200 million a year.

If Newman took his hyperbolic rhetoric about a debt crisis seriously, the least he could do is ask his own supporters in medium-sized and big business to share some of the burden of fixing the problem, while still getting a better deal than anywhere else in Australia. Disregarding this rhetoric, we ought to have a serious discussion of whether the benefits of payroll tax concessions are sufficient to justify the lower standard of health, education, police services and so on now being imposed upon us.

fn1. The theory of tax incidence shows that, in equilibrium, a payroll tax is the same as a consumption tax, since both fall, in the end, on labour income. I’ve never been sure how much weight I should place on this result.

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  1. John
    August 3rd, 2012 at 13:29 | #1

    Why would someone think that a payroll tax has anything in common with a consumption tax other than that we call both taxes? A tax on consumption is the purest and best way to generate revenue. You can’t wriggle out of a tax on what people spend. If you want to sit on a pile of gold neck high that is fine, but spend and we tax you. A payroll tax is like any other fixed income measure and a consumption tax is nothing like that. And a consumption tax is in no way a tax on labour income or any other income. Furthermore, a payroll tax is something that employers, particulary small ones, resent.

    /rant off

  2. Uncle Milton
    August 3rd, 2012 at 13:59 | #2

    As the comment above shows, the idea that a consumption tax is equivalent to a payroll tax is not intuitively obvious. But logically they are the same. Payroll taxes are passed onto consumers as higher prices and onto workers as lower nominal wages (in practice, lower growth of nominal wages). Ultimately, the real wage faced by the employer inclusive of the payroll tax is the same as it would be without the payroll tax, with no effect on employment. An increase in the rate from 4.75% 5% would see the new equilibrium reached very quickly. Prices would rise by, say, 0.15 per cent faster than otherwise. Nominal wages would rise by 0.1 per cent less than otherwise. This would take about 3 months, tops.

    The various payroll tax exemptions muddy the waters a little bit but not materially for such a small change.

  3. August 3rd, 2012 at 13:59 | #3

    Wouldn’t land taxes be the least distortionary taxes available to the State governments? And there is plenty of scope to increment land tax rates up over time.

  4. John Quiggin
    August 3rd, 2012 at 14:05 | #4

    @Cameron Murray
    Yes, that’s true, but I’ve given up banging my head against that particular wall. I’ll correct the post.

  5. Freelander
    August 3rd, 2012 at 14:26 | #5

    One sensible aspect of landtaxes is that they could encourage the government, in some cases, to provide better local amenities because some of their value would be reflected in land values and more tax revenue. It is a pity that land taxation has failed to gain support because as land can not run away that source of tax would be handy for redistribution and welfare policies.

  6. Mick
    August 3rd, 2012 at 14:42 | #6

    Access Economics, using results from their CGE model, reported in 2000 that reductions in commercial stamp duty, motor vehicle taxes and land taxes would all have more than twice the impact on economic welfare as a proportionate cut in payroll taxes. Furthermore, a reduction in commercial stamp duty would have around 12 times the impact on GDP and around 20 times the impact on investment compared to similar cuts to payroll tax. Moreover, Access Economics found that a reduction in commercial stamp duty would stimulate exports, while a fall in payroll tax of the same size would actually result in a fall in exports, assuming long-run adjustment in wages and employment.

    The long-run impact of payroll tax on employment is similar to other broad-based taxes like income taxes and consumption taxes. Although the legal incidence of the tax lies with employers, ultimately payroll tax, like all taxes, is paid by individuals – the tax liability is passed on to consumers and employees. To the extent that payroll tax can be passed on to consumers through higher prices, the tax is similar to a consumption tax. To the extent that payroll tax can be passed on to employees as lower wages – decreasing disposable income – the tax is similar to income tax.

  7. Mick
  8. Mick
    August 3rd, 2012 at 15:11 | #8

    On the matter of land tax (and apologies for the simplistic Theory 101), it all comes back to the concept of ‘economic rent’:

    The concept of ‘economic rent’ is not new. Roughly explained, it is an economic return received over-and-above the return that is required to employ a set of factors (land, labour or capital, or a combination of any or all) to engage and sustain in a specific activity in market-based production (i.e. producing particular goods or services for sale in a market). This is approximately a modern neoclassical explanation that encompasses a broad interpretation the phenomenon. However, the original understanding – perhaps dating back to classical economist (although the term ‘economist’ was not in use at the time) Adam Smith in the late 18th century – is of a more strict nature.

    Classical analysis of economic rent is attributed, more than any other, to the work of David Ricardo around the turn of the 19th century. Ricardo’s ‘Law of Rent’ (c. 1809) explained the propensity for land to capture a disproportionate share of income in excess of marginal returns to other factors of production. The basis for this is related to its long-run inelasticity of supply, driven by the finite and immobile nature of its occurrence and represented by a kinked supply curve that becomes increasingly steep and eventually vertical. Moreover, owners of land could, for a one-off payment for acquisition, continue to accrue large amounts of ‘producer surplus’ (particularly, in the form of economic rent) as well as any excess gains in market valuation (usually associated with increases in the intensive productivity of surrounding land) in perpetuity.

    In this light, economic rent is a surplus of individual investors’ expected profit (which has its value in control over resources rather than directly in the resources themselves) in excess of marginal social utility (or marginal social product). As such, it represents an unearned transfer of wealth.

  9. Sam
    August 3rd, 2012 at 15:20 | #9

    I’ve always thought it would be good to apply a payroll tax on excessive hours. Level no tax on an employee if they work (say) 35 hours a week or less, but level quite a steep tax on all hours worked above that. This would be quite a lot more “distortionary,” but it would distort employer’s decisions in a favourable direction, so the tax would actually be pigovian.

  10. John
    August 3rd, 2012 at 15:43 | #10

    The best possible tax would involve deciding what is and isn’t a socially accepted level of wealth. For arguments sake, let’s say 10 million dollars net worth. And take 99 cents out of every dollar of net worth above that. There are ways around it, but the ethic of the tax is that beyond a certain point allowing people to accumulate billions of dollars, more than they could spend in 100 lifetimes, while thousands of people don’t have a bed on any given night in the City of Sydney. This not the mark of civiliced society. And an economist might say that the asset rich, income producing people will leave. Good. What have they done for us lately.

  11. John
    August 3rd, 2012 at 15:49 | #11

    @Uncle Milton
    It is simply not true to say that payroll tax ends up being passed through to consumers. Businesses frequently have to absorb extra costs without there being a change in the price of any particular consumer good.

  12. Uncle Milton
    August 3rd, 2012 at 16:34 | #12

    @John

    If every business is facing a rise in costs (e.g. the GST, the carbon tax, a payroll tax) they will pass it on.

  13. Katz
    August 3rd, 2012 at 17:13 | #13

    For a state government, how difficult would it be simply to adapt municipal rate valuations to calculate a rate of land tax appropriate to the financial needs of the state? In compensation, payroll tax could be abolished.

  14. John
    August 3rd, 2012 at 17:24 | #14

    @Uncle Milton
    In some sectors which are closely regulated, like electricity production and transmission, investors do get a regulated return and costs are officially passed through to the consumer. The investors risk is like a sovereign risk: the government might close down your coal fired plant. Unlikely, but obviously the cost can’t be passed through, if you are no longer in business. It may be true that costs tend to be passed through, but some businesses fail, for whatever reason, some make more money, that is the natural order of things. But it is not true to say that a cost levied against a business is as a matter of principle or theory will end up with consumers paying for it. There are so many ways in which circumstances arise where it just doesn’t happen. Petrol, perhaps, bulk commodities, fresh fruit and vegetables perhaps, and a mild skimming tax is least of the concern of people who grow food (as a paradigm example).

  15. Fran Barlow
    August 3rd, 2012 at 19:13 | #15

    @John

    Possibly the Feds have this wrapped up (and I don’t know what the current departure levy is — $250?) but at 8,000,000 per year surely $1000 each adult and $500 for each child isn’t that much.

    This would claw back some of the “benefit” of the high Australian dollar that is driving environmentally destructive tourism.

    At the margins, I have no problem with a payroll tax because the more diverse the sources of revenue, the better.

    OTOH, whether we shoule even have state governments is a more interesting question.

  16. sdfc
    August 3rd, 2012 at 19:25 | #16

    No that’s a silly question. Of course we should. Live in NSW I bet.

  17. Fran Barlow
    August 3rd, 2012 at 19:52 | #17

    @sdfc

    Yes, I do live in NSW, but that scarcely makes a difference. I’d be even more in favour of it if I lived in QLD or WA. Here we don’t have a lot of mining.

  18. sdfc
    August 3rd, 2012 at 20:05 | #18

    I doubt you would if you actually lived in either of those states. State government’s provide almost all of theinfrastructure and services. Why is it better to have those funded and administered from the other side of the country?

  19. John
    August 3rd, 2012 at 20:31 | #19

    @sdfc
    A more immediate matter to consider is that when something is dug out of our ground our capital is diminished to that extent. For every dollar that miners pay in tax, of which they resent every cent, the other side of the ledger should account for the fact that we have sold our property and we can never get it back, and when the government tries to take a fair cut, a media campaign defeats that proposal, which is as far as I know the only example of a private advertising campaign defeating a government revenue policy.

  20. Fran Barlow
    August 3rd, 2012 at 20:35 | #20

    @sdfc

    Given that the states were party to Big Dirt depriving the country of most of $100bn in revenue over the next decade the issue of who funds local services is utterly trivial.

    FTR though I’d replace the councils too and have regional government deliver those local services so there would actually be a better match with local needs.

  21. sdfc
    August 3rd, 2012 at 20:55 | #21

    John

    Onshore mineral rights are a state issue. There is no fair cut for the Fed’s outside of higher company and income taxes.

    You’re babbling now Fran. The east benefits from trade with WA. The land grab by the Feds is unseemly.

  22. John
    August 3rd, 2012 at 21:09 | #22

    @sdfc
    We should have an exit tax: whatever price you get for selling the fat of our land we get a few pathetic percentage points. Set the figure once year.

  23. Fran Barlow
    August 3rd, 2012 at 21:32 | #23

    @sdfc

    Onshore mineral rights are a state issue.

    It’s arguably not as the minerals are the property of “the crown”. Since 1901 there has arguably been only one “crown”.

    We are all Australians. The minerals belong to Australians. In the post-colonial period, there should be one Australian government securing the benefits of the exploitation of those minerals for all Australians, rather than the comparative handful clustered about where they are distributed.

    The state governments are ill-equipped to deal with billionaires. It might even be that the Feds are not powerful enough to deal with them, but certainly if they are going to struggle to deal with both mining billionaires and the states then the outcomes for both the states and the commonewealth will be poor. The states should pass quietly into history.

  24. TerjeP
    August 3rd, 2012 at 21:47 | #24

    The most important single point in the Queensland Commission of Audit report (not a new one) is that Queensland is attempting to deliver the same services as the other states with a lower “tax effort”.

    Oh how shocking.

  25. Fran Barlow
    August 3rd, 2012 at 21:58 | #25

    @TerjeP

    Not “shocking”. Ludicrous, and requiring ludicrous claims to hide the reality of its “ludicrosity”.

  26. Julie Thomas
    August 4th, 2012 at 07:00 | #26

    Note the lack of any real attempt on Terje’s part to positively participate in a discussion or contribute anything useful. Any theories about why he hangs around here putting himself and his silly ideas forward? Does he really not understand that his ideas have been trashed over and over by evidence and coherent argument and yet he still pops up with patronising and kindergarden level comments; to show that he is an interesting person with something interesting, if not intelligent, to say.

    There seems to be a sort of inherent arrogance among those types of people who become disciples of the libertarian project; like Gina thinking she is a poet and Murdoch thinks he can do haiku – well I spose he is married to an asian and that is enough for these superior types of human to be able to do it themselves.

    Fran, Terje will not be deterred by facts and rational argument; he is one of those types of human who are ‘masters of their destiny’ and that makes them – in their judgement – worthy of all the preferential treatment that they can manage to impose on the rest of us who are silly enough not to want to master our destiny through taking advantage of other people with fewer advantages.

  27. TerjeP
    August 4th, 2012 at 07:38 | #27

    Julie – why are you making me the topic? That’s a rhetorical question by the way. Commentary on other participants usually derails things so you really ought to avoid it. I could spend the next three pages discussing me but I already know about me and I doubt the rest of the readers are particularily interested. I think you should stick to the topic of the article and play the ball not the man. The topic is the shocking revelation that the Queensland government is trying to provide services cheaper than in other states.

  28. Fran Barlow
    August 4th, 2012 at 08:29 | #28

    @TerjeP

    The topic is the shocking revelation that the Queensland government is trying to provide services cheaper than in other states.

    Actually, in the balance between delivering services and raising less revenue they are simply privileging the latter over the former regardless of the warrant for the services and the probability that these services will simply not be provided by non-state actors or provided by some combination of state and non-state actors at radically lower efficacy.

    In order to hide that reality, they are pretending that their hand has been forced by resource scarcity or that the efficacy of their remaining spending may be better and you it seems, are in your own modest way, endorsing this dissembling out of cultural solidarity with the idea of lesser government.

  29. Julie Thomas
    August 4th, 2012 at 08:44 | #29

    Really Terje?

    First you are not actually my topic; but with your ego you won’t understand that. I’m not bothered by any ethical concerns about your mental health, you have shown yourself to be very resilient and quite immune to insult although you are pretty good at handing them out. Will I link to the quite irrational, personal and insulting comments you made to me at Club Troppo?

    Yes it is not enlightened or kind for me to use you as a classic example of the ‘type’ of person and the holder of beliefs, that I see as the problem. I think your type of person has probably been a problem for the rest of us since agriculture was institutionalised and inequality of the iniquitous kind began to flourish.

    Derailing threads huh? I think you started the derailing lol by inserting your personal preference for paying less tax, as if anyone was in any doubt about what you want. Did you think that was the topic? Terje doesn’t like paying tax.

    Oh yes you could talk for pages about yourself, I have no doubt about that. ROFL. I bet you do when you have a captive audience. You love to pontificate eh?

    Maybe I’m indulging in payback Terje, I have a voice now – yay for the internet – and can defend myself and the people like me who need government services to survive in the toxic environment that the neo-liberal agenda has created in this country.

    I actually think that it is my duty to attack your ideas and your hubris so as to defend myself. Perhaps it has to be a war between you and your kind and me and my kind?

    Something has to give when providing services cheaper and you didn’t offer any ideas or questions about what some of us have to go without so that you don’t have to pay tax. For you it’s just a waste of money providing any services for people so what have you to offer?

    You just repeat the old mantra “I don’t want to pay any tax, it’s my money, I worked hard for it and I’m keeping as much as possible and bugger the country and it’s less able people; they aren’t worth anything anyway.

    But you know I believe, and that is based on my actual experience of working with dysfunctional people, that these people would be able contribute if they were given support and a chance to choose a ‘destiny’.

    The topic is all about the ‘shocking’ – lordy not shocking at all – quite predictable really – actions of a man we all knew – well anyone who heard the stories about his personality issues – inadequate for the task – why even the Courier Mail is giving him stick and when your allies start to criticise you, this early in the piece, you are in trouble.

    There was an outside chance that they would behave decently when given this chance after so many years of wandering in the wilderness, where they belonged, and they have blown it.

    My conservative regional neighbours – who mostly voted for Katter lol – are not happy with him either and the more he reduces regional services the more we will all be happy to get rid of him next time.

    But okay Terje I’ll leave you alone if you can’t take criticism.

  30. TerjeP
    August 4th, 2012 at 09:12 | #30

    Will I link to the quite irrational, personal and insulting comments you made to me at Club Troppo?

    If you are going to reference alledged insults, as you just did, then it would be good if you provided a link. I think you are taking a personal tone that is quite uncalled for. As I said already you should try and stick to the topic.

  31. TerjeP
    August 4th, 2012 at 09:17 | #31

    Actually, in the balance between delivering services and raising less revenue they are simply privileging the latter over the former regardless of the warrant for the services and the probability that these services will simply not be provided by non-state actors or provided by some combination of state and non-state actors at radically lower efficacy.

    I didn’t think they had lowered tax revenue. However I am not a Queenslander and so I might have missed something. I thought they were trying to close the budget deficit (ie reduce borrowing).

  32. Ikonoclast
    August 4th, 2012 at 09:24 | #32

    I think the germane point is that Queensland is trying to deliver equal public services for less money than the other states and it is failing.

    Low tax, low regulation regimes don’t work well and they don’t deliver good social outcomes. Such regimes lead to high levels of inequality, monopolist or oligopolist domination, high crime rates, high incarceration rates, low levels of public health and disastrously high unemployment rates. Just look at the way Spain and Greece are heading as low taxes and low services are implemented. The evidence is clear on this and most people in Australia can see it.

    The extreme low tax position of the TerjePs of this world gain no traction in Australia and they never will. It is a minority outlier position in Australia. I wouldn’t get too steamed up about TerjeP’s views.

  33. TerjeP
    August 4th, 2012 at 09:40 | #33

    I think the germane point is that Queensland is trying to deliver equal public services for less money than the other states and it is failing.

    I live in Sydney. I’ve only spent a little time in Brisbane. However the notion that Queensland is failing in the provision of public services seems over the top. The roads seem better in Queensland. Public transport was good. I can’t really comment on schools or hospitals on the basis of first hand experience but based on outcomes are they really inferior to NSW?

  34. Julie Thomas
    August 4th, 2012 at 09:49 | #34

    Thanks Iconoclast

    “The extreme low tax position of the TerjePs of this world gain no traction in Australia and they never will. It is a minority outlier position in Australia. I wouldn’t get too steamed up about TerjeP’s views.”

    Sorry I was indulging my own desire to get steamed up and it’s Saturday!a Over it now : ) Terje is probably the most ‘intelligent’ of them and here I am indulging myself by trying to slap him around some, rather than encouraging him to keep thinking outside the box he is in. Silly me.

  35. John Quiggin
    August 4th, 2012 at 12:15 | #35

    @TerjeP The point isn’t that services are worse – it’s that they cost about the same. The real failure has been in the attempt to finance them while keeping taxes low. That worked as long as there were windfall gains from the real estate boom, but not in the long run.

  36. TerjeP
    August 4th, 2012 at 13:50 | #36

    I agree that government services should generally be paid for out of taxes or service charges rather than government debt. Assuming that is the crux of the point. If you can’t pay for it out of revenue and service charges then ultimately you should reduce services, deliver the same services more efficiently or increase taxes. However whether you prefer the former or later is in part a judgment about which services matter and which the government should be involved in.

  37. August 5th, 2012 at 09:27 | #37

    I’m struggling with the “reduced taxation” part. Perhaps it is in the terminology? There has certainly been an outbreak of various fees, charges etc. under the previous government, then little to no indication that the new government will be doing anything to reduce the overall grab from the public. In fact all signs are they’re investigating ways to increase the amount confiscated from us.

    Payroll tax certainly has a downward impact on wages & jobs. Payroll tax costs two jobs at my place, and puts a cap on salary for key employees. There is no way to avoid this, not while payroll tax exists.

    It is most galling to see the state govt. give payroll tax concessions to others, mostly employers who will bring little to Qld, and who have no particular affinity with the place.
    Those of us who are Queenslanders, & who won’t be removing their jobs from the state, are particularly aggrieved by to see this.

    Payroll tax doesn’t cause my cohort to export jobs, we just eliminate them.

  38. James Haughton
    August 6th, 2012 at 11:06 | #38

    Doesn’t a payroll tax encourage businesses to run a higher capital:labour ratio than they otherwise would?

  39. Ben
    August 16th, 2012 at 15:04 | #39

    Thanks for this Professor Q. Really useful to have this expert analysis available.

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