Making the case for earmarked tax revenue

25 May 18

With a public distrust of taxation and how it is used, ring-fencing tax for specific purposes could simplify it and solve the problem of some people being reluctant to pay it, says Common Vision’s Tim Dhoul. 



‘Hypothecation’ is more than just a fun word to roll off the tongue and impress your friends with, it could be the key to unlocking the heavily bolted door marked ‘public engagement on tax’.

There’s an ease of appeal behind the concept of hypothecation, in which taxes are earmarked for specific expenditure purposes.

You want to ‘see’ where your taxes go?

Hypothecation can do that.

You want to repair public distrust and rebuild the social contract between taxpayer and government?

Hypothecation could present the perfect starting point.

Yet, this is not the first time that hypothecation has entered the imaginations of those looking for new solutions in the face of funding crises – so much so that it’s been labelled a ‘zombie’ topic for its ability to come back from the dead.  

Its unending death lays with the endless procession of economists, policymakers and experienced tax professionals that, for technical reasons, have pretty much dismissed hypothecation as a viable proposition.

For one, funding a service from a specific stream of tax revenue makes that service far too reliant on fluctuations in the revenue.

The latest workstream from Common Vision’s Responsible Tax Lab recognises this but wants to explore whether there are benefits that can outweigh the risks and limitations attached to hypothecation.

The Lab recently convened a session, at which participants representing a broad spectrum of ages and expertise (including, but not limited to tax professionals), to reflect on these points.

One of the key takeaways from the event was that, given hypothecation’s technical drawbacks, it might be worth focusing on what hypothecation can do for public engagement on tax and how it could be used towards this end.

Public engagement and participation

Public distrust for government and decisionmakers is high – the same being true across much of the western world and this impacts on people’s willingness to pay tax.

Perceptions that current revenues are being ‘wasted’ on those seen as ‘scroungers’ in an age of austerity only exacerbate this problem.

In this context, there’s a strong case to be made that the social contract between taxpayer and government needs revisiting, and that we need greater public engagement on tax.

Could hypothecation offer a starting point towards this public engagement and a first step towards addressing public distrust?

Making a direct link between a tax and the subsequent services received has been criticised as ‘tying’ the hands of government.

But, if the public don’t trust those in power, might this be a good thing?

One could go further than this and bestow decision-making powers for hypothecated taxes to independent and publicly elected boards.

Might this ensure public engagement and participation in the debate?

There are parallels to participatory budgeting here and lessons that could be drawn on in helping to implement ideas.

Dangers of the element of choice

However, adding an element of public choice into the tax debate brings its own set of problems and could, in fact, deepen social divisive.

Making the headlines this month, for example, was a man who refuses to pay tax on religious grounds because he doesn’t want the money to fund abortions.

In this case, it’s clear that tax has become intertwined with personal beliefs and that is likely only to fuel conflict.

Participatory budgeting expert, Jez Hall has underlined the risks here, writing that an element of choice in tax could be used by “aggressive campaigners” and, “could, for instance, support the campaigns of pacifists unwilling to pay for national defence, or green campaigners refusing to pay for nuclear power.”

Taxpayer education

Hypothecation need not go as far as independent boards right away, however.

It could begin more simply, by accompanying taxpayer education initiatives.

If you can show taxpayers exactly how specific monies will be spent, would this make it easier for them to understand and appreciate why the tax has been set?

HMRC’s Annual Tax Summary provides an existing example, yet is its colourful pie chart as accessible and intelligible as it could be?

There is another challenge here that relates more directly to hypothecation and that is national insurance.

Described as coming ‘close’ to being hypothecated because it is earmarked for contributory pensions and employment benefits, many people misinterpret this as meaning that national insurance funds the NHS, and the presentation of existing information conspires only to increase the level of confusion.

Conversely, thinking that national insurance pays for the NHS may well be increasing people’s willingness to pay it.

The educational challenge is therefore not just how one might communicate tax hypothecation, but also what types of information would be most effective to communicate.

In spite of the risks and reservations attached, tax hypothecation may be the best opportunity to simplify tax in the public’s mind going.

Used wisely, it could also help repair a broken social contract through increased engagement and education.

Did you enjoy this article?