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Queensland’s payroll tax lie

March 29, 2010

Payroll tax (like many other taxes) leads to fewer jobs, lower take-home pay, higher consumer prices and lower returns for investors. As I have previously argued, we should be striving to cut (and some day abolish) payroll tax.

In Queensland the government defends itself by saying that we have the lowest payroll tax rate of any state, at only 4.75%. But that isn’t quite right.

Queensland is the only state that charges a variable payroll tax, with medium-sized firms actually paying 5.94% marginal payroll tax, while only the larger firms (with labour costs above $5 million per year) pay the reported 4.75%.

This means that for medium-sized firms, Queensland’s payroll tax rate is actually higher than every other state except Tasmania.

The reason for this anomaly is that while every other state charges a single marginal rate over a fixed threshold, the Queensland government “claws back” the original threshold. This clawing back adds 1.19% to the marginal tax rate for firms with annual labour costs between $1 million and $5 million. This extra tax on medium-sized business is never reported because the marginal rates are not transparent in the budget papers.

Queensland’s extra tax on medium-sized businesses is poor public policy — both inefficient and inequitable. If the Queensland State government is unwilling to significantly cut payroll tax, they should at least agree to get rid of the extra tax on medium-sized businesses, and lower their marginal payroll tax rate to the same as large businesses.

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