By Elizabeth Greenwood

This is a not a rhetorical question.

After doing a deep dive into the history of payroll tax, I can actually share the answer with you along with the (perhaps unsurprising) revelation that this reason no longer exists and hasn’t done so for decades.

Let’s go back to 1927, because that is when tax on wages began.

In 1927, the New South Wales government was becoming increasingly concerned with the fact that the minimum wage wasn’t enough to feed the average family.  Single men and married men without a family were being paid the same as men who had a wife and large family to support.

During debate, it was said that the “family . . . has never, until within the last ten years, been regarded seriously as a unit from the economic point of view”, and that “the business of bearing and rearing children is without doubt the most important of the nation’s activities, for without it there would be no nation.”

So, a Family Endowment Fund (for the maintenance, training and advancement of children under the age of 14) was established and funded via a tax on wages.  Payments from this fund were made to the mother of each means-tested family.

Fast forward to World War II.

Having taken over the states’ income taxing powers, the federal government decided that the NSW scheme was such a good idea, it would use its newly acquired taxing powers to establish a national Child Endowment Scheme.

The problem was the proposed scheme would be expensive and the government of the day felt that “war demands will become greater and greater… whatever fields of taxation remain should be reserved for legitimate war purposes.”

And so, payroll tax was born.

This was due to a number of reasons.

First of all, it was only going to be temporary, a war-time measure only.

Second, without this tax, the proposed child endowment scheme would not be possible.

Third, the need to sustain and improve family life in Australia was regarded as being more important than the “special claims of the employers in respect of the proposed tax”.

Fourth, employers were told to consider the tax from an accounting point of view. It was simply another form of capital to depreciate. It was said that “(t)he employer must employ men and women. He makes depreciation of his factory building and machinery a charge against the running cost of his industry. To the degree to which they become worn (o)ut he sets aside so much of the realized profits of his production in order that the buildings and plant may be kept operating continuously. What of his labour force… Surely worn-out men should be replaced.”

There was plenty of opposition to the imposition of such a tax, including a word of warning from the then NSW premier who explained that, despite thinking it was a good idea at the time, “this taxation proved disastrous, as it discouraged employment . . . The New South Wales Government had substantial reasons for removing the burden of the family endowment tax from industry. Small employers were forced into the position of running their business at a loss and still being called upon to tax because they continued to keep their employees at work. Surely such a principle is unsound and will cause dismissals from employment at a time when it is very necessary to have full employment. One of the most important objectives that we should strive for is to prevent the cost of living from increasing. If an endowment tax is levied on industry it will certainly go into business costs and will find its way into commodity prices, increasing them.”

Sound familiar? Let’s keep going. We are now in 1971, when payroll tax became a state tax. How? Why?

It all boils down to the fact that differences of opinion on how to transfer back the income taxing powers taken over in World War II could not be settled.

So, here we are. The reason for having a payroll tax no longer exists. Australia’s social security system now provides for those less well off.

Despite being well-established that payroll tax is a disincentive to employment and harmful to the economy, it still exists (mainly because it is such a lucrative source of revenue).

However, as the saying goes, ‘don’t look a gift horse in the mouth’. Problem is, this gift horse is on its way to the knackers and no-one is noticing or doing anything about it.

Elizabeth Greenwood is Senior Policy Manager, Workers Compensation, WHS and Regulation at Business NSW.