The OECD definition of a tax appears to rule it out: ‘the term taxes is confined to compulsory, unrequited payments to general government’ (OECD, 1988). Orthodox public finance theorists argue that public spending should be determined by policy decisions, not by the amount of revenue raised by an earmarked tax. They point out that earmarking reduces the flexibility of the fiscal system: the yield of a tax and the revenue necessary for a service may at the start coincide, but over time, excess revenues may accumulate under some heads while there are deficiencies elsewhere. Dilnot (1993) shows Britain’s principal earmarked tax does not determine the amount of spending on the programs they pay for. He points out that in the early 1980s, when high unemployment cut that tax revenue, the tax rate was raised; in the boom of the late 1980s, as receipts rose, the subsidy to the National Insurance Fund from general taxation was cut; and in the recession of the 1990s, the subsidy was increased. In his view, ‘any further hypothecated taxes would principally be an exercise in deceiving voters that their tax payments controlled government spending in a way, which they simply will not’. However, he comments that more hypothecation might make it possible to raise more revenue, but remark that this would be on the basis of deluding taxpayers rather than increasing their choices over tax and spending decisions.

The Public Choice School

The theoretical base that libertarians refer to is the public choice school, which grew up in the 1950s and 1960s. The social welfare function has no place in the public choice model where the state is not ‘an independent choosing agent’, but ‘exists only as a means through which individuals combine to accomplish collective or jointly desired objectives’ (Buchanan, 1963). The public choice school contends that market failure is not corrected at zero cost. As well as market failure, there is government failure, which arises through the self-interested behavior of politicians and bureaucrats. The growth of the public sector is not a response to the demands of citizens, but a burden imposed by a powerful government bureaucracy. To restrain public spending, mechanisms to give more power to the citizen are necessary. Earmarked taxation is one of these mechanisms. Buchanan’s seminal paper on earmarked taxation (Buchanan, 1963) argued that financing public services from a general fund allowed the citizen to vote only on the aggregate level of public services, whereas earmarking allowed the voter/taxpayer/beneficiary ‘to participate separately, either directly or through his representative, in the several public expenditure decisions which may arise’. Thus voters could make ‘private’ choices on each public service by comparing their costs with their benefits. At the bottom line, earmarking represents a return to the benefit approach to equity in taxation.

An Unorthodox Approach