In contrast to the Henry report’s advice that payroll tax be eventually abolished (recommendations 55 and 57), the Rudd government has decided to increase its own payroll tax. No, really. Australia’s federally mandated, employer-funded 9% superannuation contribution is equivalent in every way to a federally funded 9% contribution, paid for by a 9% federal payroll tax.
By itself, a federally funded super contribution proportional to income would be pilloried as upper-class welfare. By itself, a payroll tax would be seen as just about the stupidest way to pay for something. Put the two together, and you have such a great vote-winner that the government, without any supporting recommendation in the Henry report, wants to ramp up the tax to 12%.
Even at 9% the tax is patently worse than the much-ridiculed state payroll taxes because it has a higher rate and no thresholds. But by implementing the superannuation guarantee as a compulsory “private” transfer, the government keeps it out of the federal Budget and thereby hides the magnitude of its intervention and the crass stupidity of the equivalent tax.
Meanwhile, the government studiously ignores Henry’s recommendations 51 to 54, which call for an all-in land tax with a threshold and progressive rates, levied on value per square metre rather than aggregate value. The per-unit-area basis avoids distortions related to aggregation and ensures that most agricultural land would be below the taxable threshold.
It strikes me that such a land tax would be particularly suitable for on-budget financing of the superannuation guarantee, for the following reasons:
(1) Taxes that are politically unacceptable when used for general revenue can become acceptable when hypothecated for popular causes.
(2) Few causes are more popular than the financing of retirement incomes, because everyone hopes to retire.
(3) The main political problem with an all-in land tax is that it offends retirees who are asset-rich but income-poor, and who have based their retirement plans on the absence of such a tax. But if the tax were earmarked for superannuation, then obviously those who have taken their super would be exempt, because including them in the net would lead to churning. Problem solved.
(4) The popularity of property investment shows that rising values of land are already widely seen as a means of financing retirement. Funding the superannuation guarantee out of land tax would merely make the system official and universal. Surely a funding mechanism that is a virtue when practised by some cannot be a vice when practised by all.
If the superannuation guarantee were on-budget, there would be no support for funding it out of a 9% or 12% federal payroll tax. But I cannot resist pointing out that such a tax, imposed at the federal level, would at least be constitutional. State payroll taxes are another matter.
Under s.90 of the Constitution, only the federal parliament can impose duties of excise. If, as held by the majority of the High Court in Ha v. NSW (1997), an excise is “an inland tax on a step in production, manufacture, sale or distribution of goods”, then payroll tax would seem to be an excise in so far as it applies to labour expended in “production, manufacture, sale or distribution of goods”. If, as held by the minority in the same case, “A state tax which fell selectively upon goods manufactured or produced in that state would be an excise duty”, then payroll tax would seem to fit that definition in so far as it falls on goods, especially as the same judges added that “Whether a tax which falls upon locally produced goods discriminates against those goods in favour of imported goods is a question of substance, not form”.
It might be argued that payroll tax does not specifically target goods as opposed to services. But neither does the GST, which is imposed at the federal rather than the state level because it is assumed to be an excise!
As I explain in an earlier article, payroll tax is not the only unexploded constitutional ordnance in the present tax system. Stamp duties on new vehicles (recommended for abolition by Henry) are also arguably duties of excise, while the collection mechanisms for GST and personal income tax would appear to violate s.82 of the Constitution, which says: “The costs, charges, and expenses incident to the collection, management, and receipt of the Consolidated Revenue Fund shall form the first charge thereon …”
All of these constitutional threats can be removed with little political difficulty, no loss of revenue, and huge savings in compliance costs. But the legislators, in my experience, don’t want to know. I am therefore inclined to think that the most promising venue for meaningful tax reform is the High Court.
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