Hypothecated tax

The hypothecation of a tax (also known as the ring fencing or ear marking of a tax) is the dedication of the revenue from a specific tax for a particular expenditure purpose. Hypothecation is the pledging of assets.

Benefits

A 2010 report by the World Health Organization offered four arguments in support of hypothecated taxes for health:

• Accountability and trust
• Transparency
• Public support
• Protecting resources

Criticism

A 2012 report by the Mercatus Center found that dedicating tax revenues to specific expenditures can be used by policymakers to mask increases in total government spending, and showed empirically that hypothecated taxes tend to result in an increase in total government size but have little effect on the expenditures to which they are tied.

Examples

• Examples of hypothecated taxation include the gasoline tax in the US, a tax on gasoline dedicated to the funding of transport infrastructure.

• Another example in many European countries is a television licence. There, all users of television sets are obliged to pay the government an annual fee to use their televisions. The proceeds of the levy are then used to fund public broadcasting.

• Various Chinese imperial armed forces including the Beiyang Army were assigned the customs revenues of their region.
• A hypothecated tax on tobacco products was used to fund VicHealth, a Victorian government body responsible for promoting good health, from 1987 to 1997. Since then, various other governments around the world have introduced similar hypothecated taxes on tobacco products.

See also

• Earmark (politics)
• Motivation, Agency, and Public Policy
• Benefit principle
• Bundling (public choice)
• Consumer sovereignty
• Tax choice
• The Other Invisible Hand
• User charge

Further reading

• Buchanan, James M. – The Economics of Earmarked Taxes 1963
• Le Grand, Julian - Motivation, Agency, and Public Policy: Of Knights and Knaves, Pawns and Queens 2003