Client: Business New Zealand

Date: March 2006

Authors: Dr Nicola Chandler; Dr Ganesh Nana

This discussion paper looks at the option of introducing a payroll tax which would be revenue neutral to the government as it would be offset by a cut in company tax. New Zealand does not have payroll tax at the time of writing, so this would be a new tax. Section 2 of this paper summarises the political background to the government’s recent consideration of a payroll tax in New Zealand, setting out government objectives and results of recent government research.

Payroll tax is a tax levied on employers’ wage bills. It is thus a tax on inputs rather than outputs. The employer has the legal liability to pay it but the incidence may ultimately fall on the employer, the employee or the consumer. It is widely used in other OECD countries, such as the United States and Australia.

We conclude that introducing a payroll tax in New Zealand, with a simultaneous cut in company tax, has some potential benefits in terms of encouraging labour productivity. There would however be more effective ways of targeting this objective, since the introduction of a new tax brings with it deadweight losses, distortions to the economy and equity concerns. There would not necessarily be an effective levelling of the playing field compared to Australia, because the policy is intended to be revenue neutral and the complexity of the tax system would be increased, thereby undermining one of the current advantages for businesses operating in New Zealand. Some businesses may benefit, but the overall picture is less clear. The more profitable companies will benefit the most because of the reduced company tax rate, and those companies with a larger wage bill will be relatively harder hit by the tax than less labour intensive companies. It may also hinder New Zealand firms versus foreign competitors by hurting companies at the margin. It is also possible that it would discourage start-ups in New Zealand.

A copy of the report can be found here.

BERL #4460