More Stimulating than a Big Bang

It’s not rocket science. If you tax employment you can expect to get less of it—especially when unemployment is high.

 So instead of trying to prop up employment by roundabout routes, such as long term infrastructure projects, or by giving people money and hoping they won’t save or spend it on imports, why not go for something that will have a direct and immediate effect—temporarily cutting payroll taxes, perhaps even abolishing them?

 Removing a tax on employment was clearly favoured as an economic stimulant by none other than John Maynard Keynes. Commenting in 1942 on proposed post-war stabilisation policies, he noted that since a tax on employment is partly shifted by employers to employees, cutting it both reduces employers’ costs of employing people and increases employees’ take-home pay and spending power. Moreover, as noted in his Collected Writings, unlike cuts in income taxes the latter gains accrue to employees rather than disproportionately benefiting the wealthier classes.

 And given that aggregate payroll taxes in Australia amount to roughly $17 billion annually, the stimulus from cutting payroll taxes is potentially substantial.

Worried about the effect of removing a major source of state revenue on state autonomy? Perhaps this is a golden opportunity to take a step towards resurrecting federalism by eventually replacing payroll taxes with state income taxes collected by ‘piggybacking’ on the Commonwealth’s collection system.

 So why hasn’t the government chosen to cut payroll taxes? Could it be that while the anticipated and ultimately observable outcomes of infrastructure spending proposals are readily recognised by voters, the political disadvantage of a payroll tax cut is that the effects are far less transparent.

Geoff Hogbin is a senior fellow in the economics program at CIS.