Payroll Taxes in Australia, Part II: An Economy-Wide Approach to Estimating the Effects of Their Removal

Abstract

This paper provides an inter-industry analysis a quantification of some of the likely macroeconomic effects of the removal of payroll taxes (PRT) in Australia. The share of labour costs attributable to PRT in 110 Australian industries is estimated. The effects of removing these taxes are simulated using an extended version of the ORANI model. A variety of assumptions about the macroeconomic environment are employed. These include the requirements that first alternative taxes or government expenditure cuts be used to ensure no change in the public sector borrowing requirement second the balance of trade does not change third real pre-tax wage rates do not change. The results show that under the assumption that the alternative tax is an income tax surcharge, significant employment gains are likely, often in industries where the direct effects on labour costs of PRT removal are only modest. These employment gains are much less under the government expenditure cut scenario.