Flat White

Want the best economic stimulus? Cut payroll tax

16 March 2020

2:30 PM

16 March 2020

2:30 PM

Governments across Australia have completely failed to deliver, or even propose, meaningful reform in the face of an economic fallout caused by coronavirusFrom deferred payroll tax payments to a wasteful cash splash, it appears that neither the state nor the federal governments are willing to provide the relief that businesses need to make it through the tough months ahead. By increasing government spending, the Rudd-style stimulus may technically stave off a recession, but this will not keep businesses open and workers employed. 

All businesses have to pay taxes and comply with red-tape, so why not start with these two?  

Australia has the equal third-highest company tax rate in the OECD at 30 per cent. Reducing this to a competitive rate, at least below the OECD average of 23.9 per cent, is essential. When businesses can keep more of their own money, they hire more workers, pay higher wages and invest in new technology. One might expect that the government would reduce corporate tax to allow businesses to be more resilient in the face of the current crisis, but this is not even on the table. 

Research from the Institute of Public Affairs has shown that red tape costs the Australian economy $176 billion each year in lost output. Unleashing $176 billion into the economy would provide a significant stimulus at around 10 per cent of GDP. Cutting red tape would mean that small business owners, in particular, could focus their time and money on keeping staff on the books, adapting their supply chains or reducing prices. But again, this does not even appear to be on the table.  

What are governments offering, then? Little that will help either struggling businesses or the economy. 

Take, for example, the Queensland government’s offer of payroll tax “holiday”. While tax reduction is a step in the right direction, the policy lacks the substance required to make a difference for most businesses across the state. 

Under the plan, businesses with an annual wages bill of less than $6.5 million can defer their payroll tax obligations until August. For businesses coming in just under the threshold, this would result in a deferred payment of around $120,000. 

While this sounds practical, it will not provide the boon one might expect.  


Firstly, it is simply a delayed payment rather than a true holiday. This will not save businesses any money, so it is a pointless idea.  

Secondly, payroll tax is a significant drag on the state’s economy. It is currently levied at 4.75 per cent for businesses paying between $1.3 and $6.5 million in wages, and 4.95 per cent for all those paying more. 

In 2017-18 (the most recent for which statistics are available), the Queensland government collected $3.89 billion in payroll tax. This is clearly a significant burden on local jobs, wages and investment, coming at a cost of approximately $1,780 per private sector worker. 

If the Queensland government is genuinely seeking to assist businesses, then it should be permanently lowering the rate of payroll tax, rather than just delaying the date by which some businesses must pay it. 

A better policy would be to extend their 1 percentage point payroll tax discount for regional businesses to all businesses. Although an ideal cut would be more significant than this, extending the regional discount would provide meaningful relief. Reducing the $1,780 cost-per-worker will ease cash flow pressures facing businesses effected by coronavirus. 

Thirdly, however, payroll tax does not apply to most businesses in Queensland. Some 60 per cent of Queensland businesses have a turnover under $200,000, a further 34 per cent have a turnover between $200,000 and $2 million, so it is unlikely most of these are paying out more than $1.3 million in wages. 

Deferring a tax is pointless given the current economic situation. Deferring a tax that does not even apply to so many businesses demonstrates that the policy was hardly thought through. 

To truly assist small and medium-sized businesses, governments should not look to the Palaszczuk government as an example. Instead, they should reduce burdens that apply to companies regardless of their annual turnover or wages bill. 

That brings us back to red tape and company tax. 

By imposing countless regulations, governments force business owners to waste time and money that could be better spent on growing the business, employing new workers, offering pay rises, or simply enjoying their evenings and weekends. 

One of the most prominent examples of red tape comes through industrial relations. According to the World Economic Forum’s Global Competitiveness Index 2019, Australia ranks extremely poorly for its labour market regulation. Out of 141 countries, Australia sits at 111th for hiring and firing practices, 95th for flexibility of wage determination, and 94th for internal labour mobility.  

These poor rankings are the result of a highly regulated and inflexible labour market. Industrial relations red tape makes it difficult and expensive for businesses to hire workers and keep them employed 

This is a problem at the best of times, and even more so now that coronavirus is having such an impact on the Australian economy.  

To ensure that businesses can stay open and Australians can keep working, governments at the state and federal level should be slashing red tape in the labour market. 

John Gray is the executive director of the H.R. Nicholls Society 

Illustration: Flickr.

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