Gavin,

Removing payroll tax should encourage employment and adding it should decrease employment. Do you know if it does? Perhaps it may be administratively easier if your scheme was linked to payroll tax.

We should be able to experiment with ideas like yours and see what actually happens. Perhaps do it for companies in a particular geographic area, and limit it to the "positive" part so that companies do not get penalised if they shed jobs.

This could become a bit like the unfair dismissal laws if there was a potential penalty when you dismissed someone would it stop people being employed in the first place?

Do unfair dismissal laws stop people being employed? Is there any hard evidence that they do? Intuitively one would expect there to be an effect but does it really happen?

Dear "Fickle Pickle",

Funny you should mention payroll tax. I unsuccessfully submitted the following to THE AGE on Mar.17:

[Quote...]

The Victorian Government can rescue "mortgage-belt jobs" without Federal assistance. Here's how.

For every existing employer, the payroll tax bill should be the bill for a certain reference period MINUS some multiple of the change in the employer's workforce since that period. Increasing the workforce after the reference period would then result in less tax, and downsizing it would result in more tax. For employers, this reduces the marginal cost of hiring and the marginal benefit of firing.

Of course the "reference period" must be BEFORE the policy is announced, so that employers can't get a tax advantage by sacking people before the reform takes effect and re-hiring them afterwards.

What would this scheme cost? Nothing. If employers keep the same workforces, they pay the same tax. If they expand their workforces, they pay less payroll tax but expand the State economy and therefore expand the bases of all State taxes except payroll tax.

As a side benefit, the scheme would stop payroll tax from feeding into prices of goods, thus removing the possibility that payroll tax is an unconstitutional excise duty.

[...unquote.]

As a concession to hard times, one COULD implement such a scheme without allowing the "credit" to go negative. But I submit that any such concession should be separate; the tax credit will be more effective if it both encourages hiring AND discourages firing.

The comparison with unfair-dismissal laws is a stretch. The trouble with such laws is "If you can't fire, you can't hire." But an employment tax credit that goes negative when you fire doesn't mean that you can't fire, but only makes firing less financially attractive at the margin. That's not in the same league as being sued for unfair dismissal.

I don't know about the evidence on unfair-dismissal laws. But I know that the whole concept of unfair dismissal depends on the assumption that jobs are scarce and jobseekers are plentiful. I'd like to reverse that assumption.

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Gavin,

Perhaps we should go the whole way and turn the payroll tax into a payroll bonus. That is, the community pays organisations to employ people - perhaps only the same as the payroll tax. This would be paid by the Federal Government but it would not be paid to states that keep the payroll tax.

This is similar to your idea but more universal and easier to administer.

Where would the money come from? Well we could pay it by using it as a method of increasing the money supply.

http://stableproductivemoney.wordpress.com/2009/04/03/increasing-the-money-supply-without-loans/

That is, the federal government who controls the currency would simply issue some new money to be spent on employment. This reduces the cost of employment which increases the taxes. If too much money was introduced into the economy this way then the extra taxes collected could be used to decrease the money supply.

Think how popular this would make the Federal Government.

"Fickle Pickle":

The trouble with printing money to create employment is that the new money pays wages for only so long, but then stays in circulation indefinitely. Taxation by itself doesn't take money out of circulation, but merely redirects the circulation.

The most obvious source of funding for a "payroll bonus" is the dole: instead of paying people not to work, pay employers to employ them. But that raises the problem of how to stop employers from gaming the system so as to extend the bonus to their entire workforces -- or how to pay for such an extension if we let it happen. Eventually I hit on employment tax credits as a way of sidestepping that whole problem. :-D