Payroll taxes: Thresholds, firm sizes, dead-weight losses and commonwealth grants commission funding

Payroll-tax thresholds make firms smaller than they would otherwise be and concentrate firms at just below threshold employment. We estimate the resulting dead-weight losses under perfect and monopolistic competition. Under monopolistic competition, the threshold-induced dead-weight loss in Victoria is approximately 10 per cent of payroll-tax collections over a wide range of threshold levels. Because payroll-tax design affects the size distribution of firms, it also affects the Commonwealth Grants Commission's assessment of a State's capacity to generate payroll taxes. This violates a principle of the Commonwealth Grants Commission that its grant to a State be independent of the State's policies.