A sure-fire SME vote winner

While the AIG and the Government don’t see eye-to-eye over everything right now – the manufacturing lobby group aren’t fond of the carbon tax, the mining tax or the support mechanisms in place for the manufacturing sector – Gillard’s address to the dinner focused on a topic everyone can agree is a good thing: business tax reform.

“We need to be sure Australia’s business tax system doesn’t hold industry back,” she told the dinner.

“When the tax system hinders investment in a struggling business or discourages lending to a business with a new idea, it does more than add to patchwork pressures – it harms national productivity as well.”

Gillard went on to say that the Government’s upcoming tax forum (to be held on October 4 and 5 – SmartCompany will cover the event in Canberra) will be aimed to finding policies that will help with “removing distortions, lifting barriers, delivering flexibility, making change work, encouraging enterprise, rewarding risk”.

Prime Minister, we are here to help with that job. We know of a business tax that if it could be eliminated would win you millions of votes from the business community.

It’s called payroll tax.

Yes, payroll tax is a state-based tax and so it is not necessarily directly in Gillard’s control.

But just as Gillard’s government has been prepared to deal with issues of states’ rights in areas such as health reform and the mining tax, this shouldn’t be used as an excuse by the Federal Government not to at least try and push for reform in this area.

And the Federal Government knows this is a problem – as Federal Treasury said in its discussion paper ahead of the tax forum, payroll tax simply isn’t functioning as intended.

“In theory, levying a tax on payroll can be an efficient and equitable method of raising revenue. A broad payroll tax has similar economic characteristics to labour income taxes.”

“In practise there are a number of exemptions (related to size of payroll, type of business activity or particular wages such as maternity pay) which means that a significant proportion (around 43%) of employee compensation is not subject to payroll tax. These exemptions distort behaviour, increase compliance costs for businesses and reduce productivity.”

The Henry Tax Review looked at a few suggestions to improve payroll tax, including replacing it with another tax that “captures the value add of labour and reduces the inefficiencies of the tax created by exemption” or harmonising payroll tax rates across the states.

If we’ve got to have a tax – and given that payroll taxes make up 31% of the states’ total tax take, we probably do – then abolishing payroll tax and starting again with something more fair, equitable and evenly spread sounds like a great thing to do.

Prime Minister, if you really are about “removing distortions, lifting barriers, delivering flexibility, making change work, encouraging enterprise, rewarding risk” then payroll tax should be your number one target.

And it is a vote winner – as we found out with a comment from an unnamed entrepreneur after a recent story on payroll tax cuts in the US.

“I can tell you for a fact, I make a point of not employing additional personnel due to payroll tax. Do the sums and you are better off keeping numbers down. My companies have been there and done that, and been heavily penalised by the payroll tax regime. Never again.”

The politician brave enough to take on the states and pursue real business tax reform has a huge prize waiting for them.