hypothecation

per wikipedia:

The hypothecation of a tax (also known as the earmarking of a tax) is the dedication of the revenue from a specific tax for a particular expenditure purpose. This approach differs from the classical method according to which all government spending is done from a consolidated fund.

an example would be the sugary beverage tax implemented in berkeley, ca, the proceeds of which went to several community organizations.

Berkeley Unified School District received $637,500 during the 2016–2017 fiscal year. Jezra Thompson of the district’s gardening and cooking program said the funding allowed more than 1,000 students in 17 schools to help plant — and eat — fresh produce from school gardens while learning skills like how to read food labels. Six family events in 2018 helped educate and feed 194 families.

this might sound like a great public benefit, but the problem is that the amount of money going into these programs depends on how much people spend on sugary beverages. this is obviously irrational because that decision should only be a function of the total budget as well as the relative priority (public benefit) provided by a given expenditure.

some economists get it

if you search the internet for the phrase “hypothecation is a fallacy”, you get essentially two results. first is this twitter post.

another is an article titled “why treasurers should go back to economics school”, by geoff harcourt, visiting professorial fellow, university of new south wales. key excerpts:

obsessed with the relationship of government expenditure and taxation, many treasurers suffer from deficit size fetishism, and fall victim to the “balancing the budget over the cycle” fallacy. many also get caught up with hypothecation — matching specific government expenditures with particular tax sources. …hypothecation is a fallacy — particular forms and amounts of taxes should not be attached to particular forms of expenditure.

citizens should pay taxes according to their overall ability to pay and they should receive government payments according to their particular characteristics as citizens — unemployed, aged, disabled and so on. the total of these government expenditures will be financed from the total funds raised by taxation and borrowing.

what’s the alternative?

imagine an expenditure formula like this:

a30,ab30,bcd50

this means that the general fund revenues first flow to expenditure a up to 30 dollars, then equally to a and b up to an additional 30 dollars, and then evenly between b, c, and d up to an additional 50 dollars.