Another ‘bad’ to tax: occupational injury and disease

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.

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derrida derider
derrida derider
15 years ago

Don’t get me on to the iniquities of workers comp policy in Australia! The determined efforts of State governments to “compete” by shifting as much as possible of the cost of industrial injury on to the injured workers and the taxpayer (the latter in the form of DSP) is a disgrace.

A think this issue is one of the tests of intellectual integrity for economic rationalists. Those of them who think it’s all about reducing employers’ costs are showing their class bias.

Gaby
Gaby
15 years ago

Nicholas,

I think this is a very clever post, on at least two scores. Not only is it a very interesting policy idea, but also you have managed to distil and present some important, but not necessarily simple, economic ideas in a basic, easily understandable way and then apply them to draw an interesting conclusion.

Noice.

I have noticed a motif, in the minor, in your posts on the economics and policy of good regulation. What do you see as the major issues in this area? I know this is a big question. Have you published on this general topic?

observa
observa
15 years ago

The fly in the ointment is clearly the fact that current workcover premiums only cover 30-40% of claims. If it were relatively straightforward and painless to tax this bad, then why hasn’t it occurred to date via premiums that collect 100% of claims? Of course when you have found the answer to that conundrum, you’ll be able to tax the payouts then and at a much lower rate, thereby making business so much more amenable to a new bad tax.

Peter Fuller
15 years ago

Nicholas,
As my ageing memory continues to betray me, I’m attemting to recall some of the detail of your paper to the Fabian Conference, late 2005. I’m pretty sure that your title – or certainly the theme – was a suggestion to Federal Labor to pick the low-hanging fruit in economic reform options. That seems to be relevant to the subject of this thread. I wonder if you can either link to that paper here, or initiate a new thread to generalise from workers’ compensation to other priority recommendations.

Will Derwent
15 years ago

The concept of taxing a bad rather than a good rests on the concept of a negative externality. In a market with no externalities, the profit maximising position of the firm coincides with the benefit to society, but in an externality that isn’t the case. Consider the pollution example. There are two methods to fixing the problem: you can tax the output of the firm to include the cost of the clean up, or you can ban the pollution altogether. If you tax the firm to clean up its waste, the society is back at its optimum position, and if you ban the pollution, it is sub-optimal, but there is no longer a ‘bad’. The problem is that in either case, there is no revenue from the pollution to fill the coffers of the government.

If there was a ‘bad tax’ applied, then profits of the tax rely on the continued existence of the bad! If by applying the tax you cause such a shock to the market that nobody makes a bad anymore, then you will get nothing in revenue. For taxes that alter firms’ behaviour, as firms begin to change their polluting ways, the revenue base will reduce too. If you tax the bad and clean up the problem, then the ideally weighted tax would only cover the cost of clean up, no more. So you can’t have it both ways: you can’t tax a bad and gather a handsome revenue stream in the process.

You could gather revenue on a bad by applying a tax on a bad that was highly inelastic: ie, almost impossible to remove from a firms costs. You could tax car companies for the carbon that their cars emit: they can reduce it but probably not eliminate it. By applying a tax on an inelastic bad, you would not really reduce its production (because it is so inelastic and difficult to remove from the production process), but you would gather revenue. It would amount to a tax on firms that was basically, a tax on firms profits or on consumer prices (depending on the elasticity of demand). It would be highly price or profit distorting (like petrol taxation).

Taxing workcover related expenses would be like this: it would improve the behaviour of poor performers in workplace safety, but eventually simply add to business expenditure when it is not possible to improve workplace safety anymore. At that point, it would be very similar in impact to taxing profits or goods.

Lin
Lin
15 years ago

I’ve been astonished, since coming to Australia, at the archaic things that governments do here. You’re arguing, it seems to me, about whether there should be a cheap and simple way for employers to employ people and not pay too much taxes to compenaste and rehabilitate them properly if they are injured. New Zealand has had an Accident Compensation Corporation since 1972 (or thereabouts). It taxes employers at somewhere between 0.6% for their office workers and 6% for aerial topdressers for their pilots and it provides for accident prevention, accident compensation, rehabilitation and a minimum wage (80% of standard wage or salary) while any employed person is out of work due to injury. The benefits are extended to every New Zealander, whatever their circumstances. Employed or not, pre-school, school-aged, working or retired, whatever. It does not have any benefits for medical circumstances such as ordinary sickness, it has to be an accident-caused problem. People get benefits according to the scheduled benefits, there is an appeal process but normlly no lawyers get into the process. The cost of contributions has, historically, gone up and down a little as money in the bank was in excess of foreseen needs or in deficit of them. New Zealand, because of ACC, is the adventure country of a lifetime.