Response to PSA – “Ten Perspectives on Tax”

The Public Services Association (PSA) have released a new booklet, “Ten Perspectives on Tax” that intends to fight back against growing public demand for tax cuts. It did not take long – the first page of the first chapter to be precise - before I had to stop and address a crucial and defining error in logic. 

Trade unionist and writer, Morgan Godfrey, states “If there is a tax reduction there must be a corresponding reduction in spending or a corresponding increase in debt”. 

At first, this may seem like an obvious truth (at least it did to Godfrey!). In actual fact this is the sort of misconstrued logic that plagues the minds of the ideological left. Thankfully it only requires a simple example to correct.

Lets take country V (short for Venezuela – to make Godfrey and his big government friends feel comfortable). For simplicity lets say that country V has a national income of $100 and the government taxes income at 50%. Therefore the government of country V will yield $50 in government revenue, which can be spent on public goods such as health and education. For arguments sake, lets say country V manages to double its income (to $200). Without increasing the tax rate the government has managed to increase its tax revenue from $50 to $100. Hopefully my point should now be obvious. The government could cut taxes in half without reducing any spending! That is the magic of growth; it’s not a zero-sum game. 

In actual fact this is exactly what has happened in New Zealand. Tax receipts, in real terms, have grown as the economy has grown. Therefore the Government can cut taxes without reducing spending or increasing debt. 

Another way of thinking about this is by comparing countries. Singapore spends 4.9% of GDP on health (as of 2014). New Zealand spends 11% - more than double in relative terms. One would be forgiven for thinking that Singapore underspends on health. The PSA would certainly think so. But get this: Singapore actually spends slightly more per capita than New Zealand, according to the World Health Organisation. They get away with a lower relative amount (to GDP) because they are much wealthier than us. 

Do not be fooled by the propaganda of the PSA. Tax cuts are affordable. They are welcome. They are overdue. And they can happen without any loss in government services. This is not to say that trimming the government would not be of use. But rather the arguments of the PSA (and their big government friends’) stumble at the first hurdle: simple arithmetic.