Other things being equal, taxing goods is bad.
Of course other things are not equal and we need the money. But we should only be taxing goods after we’ve exhausted the scope to tax bads. Taxing bads is good because the effect of the tax is to reduce the output of the bad. Thus we should tax congestion on our roads and we should tax pollution.
I was struck by the painfully slow progress being made in reducing payroll tax by the states. On the one hand it’s a fairly efficient tax (in principle) because it is a tax on one form of value added – the value added from labour. On the other hand it’s a tax on labour which at least at the bottom end of the labour market is likely to increase unemployment. Futher it’s a pretty distorted tax by virtue of large small business exemptions.
The Victorian Government is cutting payroll tax at an agonisingly slow rate. Over the next three years, the rate will be cut in stages to:
“¢ 5.15% from 1 July 2006;
“¢ 5.05% from 1 July 2007; and
“¢ 5.0% from 1 July 2008.
At the same time, the Government is touting the benefits of a 10 per cent cut in WorkCover premiums. But workcover premiums cover only around 30-40% of the costs of workplace injury and illnesses. And injury and illness are bad – right?
So here’s an idea. We can speed up the pace of reduction in payroll tax by taxing workcover premiums (or workers’ compensation payments in the case of self-insured companies – the workers would get the same compensation but the firms would pay additional tax).
At over $6 billion workers compensation premiums * are a nice little tax base enabling us to lower payroll tax further and faster. And we’d crank up the incentives to keep workplaces safer. Taxing bads is good.
I guess none of this could be done quickly. The gradual reduction in the cross subsidies to small business (in both payroll tax and workers compensation premiums) would have to be ‘finessed’ as they say in the trade (ie concealed, denied and fudged around in various ways). But it seems worth putting on the agenda.
*This figure is from 2002 and does not include self insurance so the actual turnover through the workers compensation system would be a fair bit higher than this.