> You have to look at "productive" and "unproductive"
> activities without taking on a moralist outlook.
>
> Private sector workers' wages and benefits are paid out of
> profits that they create. Public sector workers' wages and
> benefits are also paid out of the same source: profits that
> private sector workers create (excepting public sector
> workers employed in state enterprises that operate for profit
> or at least break even based solely on revenues from goods or
> services they sell).
I think you are a bit confused here. Profits is not what pays for workers wages, in fact, wages and profits are remunerations of two different factors of production, labor and capital. In the SNA, generation of income account item "compensation of employees" (D.1) is one of the "uses" of value added (B.1) which is a difference between market output (sales) and intermediate consumption (cost of material used in the production process). The other use of the value added is operating surplus (D.2) whose uses include property income (P.4 - interest, distributed income of corporations, or rent) i.e. profits.
In other words, it is the sales of goods and services that pays off different factors of production i.e. labor and owners of property used in the production process. If you eliminate property income from the equation (i.e. money paid to property owners) you can reduce the amount of sales (e.g. by reducing the price) by that amount, but you still need to have enough sales to pay the labor - if you want the service to be produced - or otherwise you need to subsidize it.
I argued that government produces public goods i.e. goods that are consumed collectively and are "non-excludable" i.e. benefits are available to everyone regardless of whether he paid for it or not. For example, health care is a public good because I benefit from it even if I do not see a doctor in my entire life? How? By curing sick people and thus reducing the chance of spreading their diseases on me. Since I benefit from it, the argument goes, I should pay for it, but that encounters a problem - the only way to make me pay is to deny me the benefit if I do not, and that is rather difficult without penalizing everyone ales even those who do pay (the so called neighborhood effect). Therefore, a rational solution to the problem is to impose a certain premium that everyone who benefits from a good must pay. That premium needs to be paid to whatever agency is responsible for procuring the good in question, be it government or a private firm. However, if that premium is paid to the former it is called "tax," but if it is paid to the latter it is called "user fee" (or installment or premium) which creates an illusion that these are two different phenomena.
I further argued that if a public good is produced by government or a private business, it still needs to generate enough income through "premiums" (called taxes or user fees, which is mainly a semantic difference) to pay the compensation of employees who actually produce that good or service (plus intermediate consumption). If it does not, it needs to be subsidized or otherwise it ceases. So this is the socially necessary minimum to pay for that good. Now, if that good is produced by a private business - there is an additional factor of production involved, namely property owners, who also need to be compensated. That is why, ceteris paribus, the procurement of that public good by a private firm is more expensive than its production by government (or a nonprofit entity) - it adds profit to the compensation of employees and thus requires higher price (premiums). Stated differently, government as a producer of public goods can save the public quite a bit by eliminating property income from the equation.
I do not know what is so moralistic about - it is straightforward accounting. However, an important thing to keep in mind here is to view government as a producer of public goods - not just a guarantor of capitalist profits and oppressor of "da people." The latter is one of those aspects of Marxism that is a dud and should be forgotten, the sooner the better, and also an expression of the virulent US-style anti-government populism. If you, or anyone else, want hold such a view of government, that is your first amendment right I suppose - even though I think it is utter bullshit, more appropriate for a neo-liberal think tank or a militia outfit than anyone who takes socialism seriously.
Wojtek