I didn’t really notice the GST debate, except being annoyed at all prices increasing when GST was introduced (I was in High School). It turns out the a major reason for it’s introduction was to eliminate many state taxes. One of these taxes being Payroll tax….
It turns out that if I employ too many people I will have to pay the state 4.9% tax on all the gross wages paid to my employees – including Superannuation! Not only is this a disincentive to employ, it’s also yet another administrative burden which limits growth. I hear it all the time, that ultimate success requires flexibility and scalability – Payroll tax is an ugly and unnecessary burden.
Sure we can’t just pull such revenue out from under the states, but it can be replaced with revenue from another more efficient tax – such as GST. At just 10% our GST is relatively low compared to other countries, in Europe some countries have a GST or VAT of 25%.
So why not simply increase GST? Consumers, AKA voters are the end-users and effectively the ones who pay the tax. Even though consumers can ultimately pay less in the long run, because the companies no longer need to pay payroll tax, the whole economy changes. Smaller business that didn’t previously pay Payroll tax are effectively charging their customers more, because they cannot discount from regained revenue from a dropped tax. Small changes to the rate over a long time may work best with matched reductions in payroll tax in the states. But in summary GST rate increases are political poison for non-business owning voters.
Another issue is fraud. As GST increases, the returns on VAT fraud become greater. Countries such as Sweden (25%) and the UK (20%) are subjected to simple but hurtful frauds which effectively steal from GST revenue. It basically works by having a fake company be liable to pay GST, and a legitimate company entitled to the return. The fake company goes bankrupt. As the GST rate increases, the amount of payback to such frauds increases, encouraging more incidents. It seems that any macro economic change, either short term (Government Stimulus) or long term (Tax Reform), opens the door for corruption and rorting. If the GST rate is to be increased, the right legislation needs to be in place to prevent such fraud.
So in the end the ultimate way for a business to overcome Payroll tax is to innovate good products which provide a comfortable return and innovate inside the business to improve internal efficiency, reducing the need to hire as many staff resulting in the ability to maintain a competitive edge.