Peek-a-Boo! Aren’t you a cute widdle taxpayer…

Tax cuts bring voters to the yard the same way babies are enchanted by a game of peek-a-boo, and a good game of peek-a-boo never gets old. The theory surrounding peek-a-boo’s longevity is ‘object permanence’. In other words, babies find the game fun because there is an element of predictability about the outcome.

Last week New Zealand’s Prime Minister Bill English traded questionable pizza toppings for adulthood by popping up on TV to ‘surprise’ the country’s voters. English stated that if the trajectory toward surpluses continues, taxes in one form or another will continue to fall. The excitement among middle class New Zealand was palpable, and it is perhaps one of the many reasons National has been coasting toward a 4th term in Government.

Not everyone is happy though. Some New Zealanders are contending, or dare I say lecturing, the rest of the country in what they believe is being overlooked; government expenditure will need to be increased in real terms if core public services are to be maintained at the rate which they are currently.

So in times of ‘excess’ milk & honey, Governments can either hand money back (in the way Mr English has prescribed), pump it into public services or put some of it aside for a rainy day. In essence, that is the crossroads New Zealand is at right now, we are hauling in about 2% more than we are spending which leads to a question of what we should do with the leftovers.

To inform that discussion we should perhaps be looking across the ditch.

In Australia, the opposite is taking place. With an economy no longer buoyant from activity in the resources sector, growth has been stalling while budget deficits have become the norm. Meanwhile, the public have enjoyed tax cuts in the past decade furthered by both major political parties.

To reverse such deficits the Australian government has 3 options at its disposal:

1. Further rein in costs; or
2. Issue debt; or
3. Grow revenue.

In other words, once all that possible ‘efficiency’ in the public service has been realised (option 1) the government can either fund excess spending through loans (option 2) or increased taxation (option 3).

And that is where Australian politicians are trapped; however you look at it, tax increases are political suicide. If you’re a millennial voter in Australia, the effective personal tax rate paid by your parents has only ever fallen throughout your lifetime. So, good luck telling millennials that their taxes need to increase at the same time they’re trying to save 80k for the deposit on a house. Equally, you will get short shrift telling boomers they will need to open their wallet at the exact time they are making a final dash toward retirement. That only leaves deficits, and a government that campaigned on ending them.

The conditioning of voters to accept tax increases under no circumstances is a concern that has frustrated both economists and academics alike, “Why do Joe Public continually demand tax cuts and still expect the central government to provide a high quality of services?”. In a recent Political Science Association Conference I recall similar sentiments; academic staff were musing as to whether the public understand how the ‘social contract’ extends to taxation. “Have these ghastly neoliberal oligarchs brainwashed the populace into believing that lower personal taxes will lead to unfettered, year on year prosperity for all and sundry?” cried one, into his empty champagne flute.

Irrespective of the cause, rhyme or reason, increasing taxes to cover shrinking revenue, after years of reducing them in various ways, is a bit like changing up a game of peek-a-boo. Suggesting that taxes be increased to pay for stuff may sound plausible, but it creates uncertainty, which makes the game less fun. In effect, it would be akin to disappearing mid peek-a-boo and then having another adult continue the game.

So, if Mr English does indeed win in September he’ll need to decide how long he wishes to keep up the game with taxpayers before the political establishment becomes locked into a cycle of deficits. Because if it gets to that point, the toys really will go out of the cot.

TL;DR? Taxes are more offensive than spaghetti pineapple pizza, but if we keep cutting them, so help your God if we never need to raise them.