Why we don't do hypothecation of taxes


The Treasury has traditionally been dead set against any hypothecation of taxes. This is the idea that we'll raise a certain tax and then promise to spend all the money received on a specific cause. The cynical might note that this is obvious: income tax was introduced to beat Napoleon and while he's long gone we still have income tax. Adherence to hypothecation of the income tax would blow rather a hole in the Treasury's sums. However, not assigning tax reveneus does make a great deal of sense:

The construction of these schools was funded by bond money the voters approved to build new schools to relieve serous [sic] overcrowding in schools… By law, these funds could not be used to fund teacher salaries or to back fill budget shortfalls currently being experienced by the District and its [sic] meets the Board goal of relieving overcrowding in all our schools.

This is how a school district can build a school for nearly $600 million dollars while it's got a current budget shortfall of just over $600 million. The money it raised from the bond issues was only for the building of schools.

Yes, there's a value in insisting that you borrow only for investment and not for current running costs, but it does neatly show the problem with hypothecation.

How much you can raise with a particular story has no, absolutely no, relationship to how much you want to spend on that particular story. This is true whether you're persuading the voters to back a bond issue to fix overcrowding in school or whether you're talking about a tax on baccy to stop people smoking or a high inheritance tax to bash the rich. How much you can raise from your tax simply doesn't correlate in any manner whatsoever with how much you might want to spend on a particular problem.

Baccy taxes raise some £8 billion a year but we don't spend that much in treating smokers, nor should we. We tax fags and booze so highly simply because we can: people will still buy then even at current extortionate prices and we get to use that money elsewhere to provide other things without having to tax incomes or anything else.

The other side of this is also that just because we do want to tax a spcific activity this doesn't mean that total spending or total taxation should go up. I'm in the camp which says we should have a carbon tax: but that doesn't mean that the the general level of taxation should go up nor that there will be new pots of money to pay for things environmental. We tax carbon because we want the externality of emissions included into market prices: this enables us to lower other taxes at the same time as imposing this new one.

As the school example shows, hypothecation is a bad idea, because there's no connection between how much we can raise in one place and how much we want or need to spend in that same place. And yes, this is as true of green taxes as it is of booz'nbaccy or school bonds.