catallaxy files

catallaxy in technical exile

The problem with earmarked taxes

with 26 comments

People often ask me about earmarked taxes, suggesting that they are a very good idea. In principle they could be a good idea, because they specify exactly how much tax would be raised to finance a particular activity. In practice, however, this is not the case, especially so in Australia. The problem we face in Australia is section 81 of the Federal constitution.

All revenues or moneys raised or received by the Executive Government of the Commonwealth shall form one Consolidated Revenue Fund, to be appropriated for the purposes of the Commonwealth in the manner and subject to the charges and liabilities imposed by this Constitution.

This means that no government can credibly commit to raise an earmarked tax and spend the money only on that earmarked activity.

Consider, for example, the Medicare Levy – the cost of Medicare is far in excess of the revenue raised by the levy. In other words, Medicare is an unfunded budget item – it is subsidised by general revenue. Someone recently suggested to me that the government introduce the requirement that the Medicare Levy actually be increased (on an expost annual basis) to raise the revenue necessary to fund it. I like this idea because it would undermine some of the fiscal illusion that surrounds Medicare. People should be entitled to know exactly how much the medicare system is costing them and have that cost reflected on their group certificate.

Another area where fiscal illusion occurs is in the fuel levy. The Brisbane Times reports this morning that the bulk of the fuel levy is not spent on roads. But with section 81 of the Constitution in place, why would we expect anything different? (emphasis added)

Motorists pay $15 billion a year in fuel taxes but the Federal Government steers only a quarter of that money back into road funding.

Critics of the funding program say the Government is not releasing enough of the cash collected from fuel excise to improve the national highway system. Most of the excise vanishes into consolidated revenue.

A spokesman for Mr Swan said the Government was delivering record levels of investment on roads, doubling investment to $26 billion over a six-year period – more than $4.3 billion a year from 2008 to 2014.

The revenue does not ‘vanish into consolidated revenue’ the money is collected under false pretences.* This highlights the need for greater transparency in government and also the need for a fiscal constitution.

* Update: From the WSJ

“If the [Securities and Exchange Commission] had jurisdiction over the White House, we might have all had time for a course in remedial economics at Allenwood Penitentiary,” former Reagan budget director David Stockman recalled in his memoir.

Written by Sinclair Davidson

January 3, 2010 at 9:15 am

Posted in Uncategorized

26 Responses

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  1. Sinkers without wishing to become too pedantic my understanding is ‘earmarked taxes’ which is an americanism, is getting money from General revenue for a specific program.

    on the other hand hypothecated taxes are specific taxes allocated to a specific area.

    You are talking about the latter not the former I believe and yes few b people would support such a concept

    Butterfield, Bloomfield & Bishop

    January 3, 2010 at 1:46 pm

  2. Sinkers without wishing to become too pedantic….

    Well burn off a limb with a blow torch…


    January 3, 2010 at 1:48 pm

  3. Well forrest thev two concepts are different.

    Butterfield, Bloomfield & Bishop

    January 3, 2010 at 1:58 pm

  4. I’ve seen the two being used interchangeably.

    Sinclair Davidson

    January 3, 2010 at 2:22 pm

  5. As an alternative, what I would like to see is an itemised list showing the distribution of government expenditure on the back of the tax return. It would have three columns, the actual expenditure, the percentage of government outlays that represents, and the figure in dollars your taxes contributed.

    So it would be clear how much of your taxes actually went to interest, medical, states to mismanage, natural disaster assistance, welfare payments etc.


    January 3, 2010 at 6:20 pm

  6. i thought someone had set up a website like that. can’t find it though 😦


    January 3, 2010 at 6:26 pm

  7. Entropy – comparing a cost of capital to society and a rate of return would be good as well.

    Semi Regular Libertarian

    January 3, 2010 at 6:32 pm

  8. Sinkers they are decidedly different

    Butterfield, Bloomfield & Bishop

    January 3, 2010 at 7:02 pm

  9. Homer – look at the opening sentence of Robert Carling’s op-ed that I linked to above.

    Sinclair Davidson

    January 3, 2010 at 7:14 pm

  10. You mean the tax check?

    Sinclair Davidson

    January 3, 2010 at 7:20 pm

  11. I think your examples show why this sort of tax isn’t going to work and isn’t very sensible in any circumstances excluding the trivial where it wouldn’t be worth it anyway (such as gun buy backs) — basically, you need to specify taxes for every little nitty gritty thing, yet it’s exceptionally difficult to know exactly who is paying for externalities or even how much they cost, where boundaries are, and so on — thus the main effect they have would be to proliferate the more-and-more complex tax rules and potentially distribute money to places it isn’t needed.
    Take your second road revenue example. Maybe it seems like a good idea to spend all of the car generated revenue on roads, but this ignores the whole pile of subsidies cares get, some of which are rather tricky to price (e.g., free use of crown land for public roads) and ignores the whole pile of externalities they create (pollution, health consequences etc.). All of these someone has to pay for, and if the car generated revenue is all spent on roads, it means these other things are entirely paid for by someone else. This means that the idea that these sorts of taxes are somehow equitable, which is presumably why you would want them, is surely incorrect. In addition, given that generating the same amount of revenue from different sources has different costs, it would be crazy to generate revenue via one method if it costs more than another, and this is what this sort of scheme basically forces the government to do.


    January 3, 2010 at 10:12 pm

  12. Conrad I’m not sure crown land is really that valuable and putting a road in place also creates value for other activities that can in turn be taxed. But I take the point that untangling things is (can be) very difficult.

    Sinclair Davidson

    January 3, 2010 at 10:24 pm

  13. Last time I did the maths I figured that the Medicare levy would need to be about 8% if it was going to raise enough revenue to cover the health budget.

    TerjeP (say Tay-a)

    January 4, 2010 at 11:25 pm

  14. Sinc, the last time I looked at the Treasurer’s Determination under Div 81 of the GST Act, there some thousands of Government charges, fees and levies for specific services, licences, etc. Maybe the answer is to convert taxes into such transactions. For example, we could introduce a TV licence to fund the ABC.

    Rococo Liberal

    January 5, 2010 at 9:12 am

  15. On second thoughts, I think we need to scrap most of the specific taxes. The Government should be able to exist on income tax, GST and a revenue based customs duty. Drop the panapoly of taxes, levies and charges that so hem in businesses at every turn and much of the strai of modern life would be removed at a stroke.

    Clive Hamilton would be pleased:)

    Rococo Liberal

    January 5, 2010 at 9:17 am

  16. Why a customs duty?

    I have a preference to lower the tax rates, abolish a lot of taxes and raise no new taxes or rates.

    Income tax for the Feds.

    GST for the States.

    Rates for local councils.

    I would be open to switch GST and income tax if a tax expert said it was easier or operationally better.

    Semi Regular Libertarian

    January 5, 2010 at 9:22 am

  17. A lot of these specific taxes have a ‘user pays’ element to them – costs are passed on and loaded up with more o’hds – an end user consumption tax is easier to administer, more transparent and less compounding.


    January 5, 2010 at 9:35 am

  18. That said, we still should have user charges (e.g, using the police for crowd control at the MCG) to lower the general tax burden.

    Semi Regular Libertarian

    January 5, 2010 at 9:37 am

  19. I agree with you SRL. I only added customs duty because it is easy to collect and the ACS collects GST at import anyway. Also, a 2% duty (with the necessary exemptions which are already in place) would raise some decent revenue without breaching any teraties or providing any tariff shelters.

    As a tax expert, I can see no trouble with letting the States administer GST. The Feds could collect and pass on the GST levied at Customs. The only real problem would be one of nexus. I assume that this would be solved by having rules about the location of a supply. For example if a NSW business made a taxable supply to a Victorian business, the supply would be deemed to take place in NSW, because it is the vendor that has the liability to account for the GST. And, businesses that operate in multiple States would have to register and account for GST in each of those States. But I suspect that would be the least of their worries if the plethora of taxes, fees and charges were mostly repealed.

    Rococo Liberal

    January 5, 2010 at 9:43 am

  20. The idea of a TV licence to finance the ABC is very funny, but would annoy very quickly. The ABC should be on pay-TV so people who want to watch it can do so without imposing their preferences on everyone else. But I’m not a fan on using the police for private crowd control at the MCG or anywhere else. It is an abuse of process and public authority for private gain.

    Sinclair Davidson

    January 5, 2010 at 9:50 am

  21. Sinkers,

    Robert Carling is not some-one who is credible.

    Look-up earmarked taxes and see what you get

    Butterfield, Bloomfield & Bishop

    January 5, 2010 at 10:16 am

  22. trust Homer to come up with a stupid dismissive statement. Carling was at NSW and Cth Treasuries, the IMF and World Bank. He’s more credible than you, doofus


    January 5, 2010 at 10:20 am

  23. FFS. Homer, get over it, get on with it. Do you have something to contribute or are you just taking up space?

    Sinclair Davidson

    January 5, 2010 at 10:23 am

  24. Carling was stupid enough to come up with saying Keynesian economics failed in the 70s.
    oops that’s right so did did Statman and Sinkers.

    His credibility is shot on that

    CIS was very good. Now it appears to going down the IPA path

    As I said look the wording up and find out how many US State governments for example agrees that earmarked taxes are the same as hypothecated taxes

    Butterfield, Bloomfield & Bishop

    January 5, 2010 at 11:01 am

  25. Doofus:

    Thanks for the info. Bye Homer.


    January 5, 2010 at 11:06 am

  26. “Carling was stupid enough to come up with saying Keynesian economics failed in the 70s.”

    A +


    “Robert Carling is not some-one who is credible.”

    “Carling was at NSW and Cth Treasuries, the IMF and World Bank.”


    Semi Regular Libertarian

    January 5, 2010 at 11:29 am

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