With the election of the Liberals to Government in South Australia, the payroll tax threshold in that state will be raised from $600,000 to $1.5 million of wages.

This is a sensible step towards removal of a tax that has been identified as reducing real employee wages.

Other states should follow South Australia's lead. This would result in increased worker wages and an improvement in Australia's growth rate.

Payroll tax reduces workers' wages

It is important to understand that payroll tax is a tax on employment. It is charged to businesses on the total wages of their employees. This effectively penalises companies for hiring workers.

Since the tax is directly linked to the wages of employees, businesses need to take it from the budget that would otherwise be allocated to employee wages.

As a business owner, I've seen the direct effect of this myself as our business has approached the payroll tax threshold.

With already thin margins, payroll tax unfortunately ends up being taken from the available budget for employee wages. A tax on wages means lower wages for employees.

The tax is charged above a threshold level of wages, with the threshold and tax rate varying by state.

As an example, in NSW if you pay a total of more than $750,000 in salaries to employees, you will pay an extra 5.45 per cent tax on the amount which is above that threshold, on top of other taxes that your business already pays.

The threshold varies from $625,000 in Victoria to $2 million in the ACT, and the rate varies from 2.5 per cent of wages in South Australia to 6.85 per cent in the ACT.

Even though thresholds are used to limit the scope of application of this tax, the Henry Tax Review identified that payroll tax still has the effect of reducing wages for all workers in the economy.

Unlike company tax, which is charged on profit, payroll tax is charged on a business's largest expense, payroll. This means that even an unprofitable company will be hindered by payroll tax.

Worse, as jobs are increasingly threatened by automation, payroll tax represents a distorting of market forces. Automation occurs when machines or software displace tasks and jobs traditionally undertaken by workers.

Where machines and workers are equal in cost, payroll tax unfairly tips the scales in the favour of automation by penalising companies for employing people.

This means that apart from being inefficient, payroll tax actually works against worker interests.

Solving wage stagnation

The RBA has noted that less frequent wage increases have been occurring since 2012.

In this period of stagnant wage growth, there would be no better way for government to boost wages and employment prospects for workers than to begin the gradual removal of payroll tax.

A sensible way to do this would be to progressively increase the payroll tax threshold, as is underway in South Australia. This would stimulate hiring and growth across Australia.

It would also simplify a tax system that is far too complicated.

Full removal of the tax would likely require minor increases in consumption-based taxes, such as land tax or the GST, to be sustainable in the long term.

This is consistent with the Henry Tax Review's suggestion of a move towards consumption-based taxes and away from complex and inefficient taxes like insurance tax and payroll tax.

Progressively removing payroll tax would accelerate Australia's growth and simplify our complex tax system.

Most importantly, it would have the direct and immediate effect of increasing real wages for employees.

David van Gogh leads Australian technology and risk advisory firm Amstelveen, has a Master's degree in business law from the University of Sydney and is a former director at Deloitte. He was a Liberal candidate in the 2016 federal election.