In the light of the recent policy debate on the desirability of hypothecated (earmarked) taxa- tion, this paper re-examines tax hypothecation in the context of a ...
Economic Incentives and Tax Hypothecation Alan Duncan
Andrew Jones
University of York
University of York
This revision: June 2003
Abstract In the light of the recent policy debate on the desirability of hypothecated (earmarked) taxation, this paper re-examines tax hypothecation in the context of a collective decision making process with various specifications of the relationship between voters and the legislature. A model is proposed in which the government and the electorate have potentially divergent preferences. A comparison is made between tax revenues and voter satisfaction under general fund financed public expenditures and expenditures financed by incremental and full public good-specific tax hypothecation. Acknowledgements: We are grateful to Tim Besley, Tony Culyer, Andrew Dilnot, Gianni de Fraja, John Sussex, Adrian Towse and Alan Williams for valuable comments and discussion. We also thank the Office of Health Economics for financial support. However, all views expressed are those of the authors alone. Address for correspondence: Department of Economics and Related Studies, University of York, Heslington, York YO10 5DD.
Key Words: tax hypothecation, earmarked taxes, public choice
1. Introduction Is there a role for hypothecated (earmarked) taxation in the funding of public services? The debate continues to provoke controversy and strong feeling among politicians, policy commentators and academics alike, with no sign that any consensus view is emerging.1 Political, moral and economic arguments have all been brought to bear, and in some sense these different facets tend to cloud and confuse the issue. From a political perspective, the prospect of tax hypothecation brings varied reaction. Those who support hypothecation suggest that earmarked taxes 1
The arguments are summarised by Jones and Duncan (1995)in a discussion of recent proposals for hypothe-
cated funding of the UK National Health Service (NHS).
provide a clearer mechanism for public preferences to be brought to bear on the political process than the current method of general fund financing. Opponents of hypothecation suggest that tax earmarking is a deceit based on fiscal illusion, and that a move to hypothecation is merely window-dressing to disguise potentially unpopular tax rises. Some commentators suggest that the tax-paying public are in fact deceived into believing that the revenues from earmarked taxes are indeed ’ring-fenced’.2 Hypothecation has been suggested as a vehicle to bring more direct accountability and transparency to the setting of public expenditure priorities. This suggestion implies either that the current mechanism of revenue allocation is flawed, that the government’s priorities have in some sense moved away from those of the electorate, or that there is some failure in communication which prevents the electorate from understanding the tax consequences of their public service demands. These arguments beg the further question; in what way would hypothecation per se bring about greater transparency more efficiently than some other form of liaison between policy setters and the public.3 Wilkinson (1994) provides a useful categorisation of hypothecated tax regimes. She distinguishes between strong earmarking (where the level of expenditures on a public service is determined by the level of hypothecated tax revenue) and weak earmarking (where tax revenues are earmarked for expenditure on a public service, but do not determine the overall level of expenditure on that service).4 Proposals by the Liberal Democrat party fall into the category of weak hypothecation, by suggesting that a rise of one penny in the marginal rate of income taxation would be earmarked for expenditure on education.5 Their proposal exploits the perception that individuals would be more willing to accept a hypothecated increase in direct taxation if that increase were to fund additional education or health expenditure than they would a general increase in direct taxation. However, since taxpayers have no direct control over total expenditure on the public service for which the incremental revenues are earmarked, the formal structural effect of this form of tax hypothecation would be to establish a constraint on the minimum level of expenditure on the public service. It is unlikely that such a constraint would bind in practice unless the hypothecated component of the tax were a significant proportion of 2 3
Andrew Dilnot, quoted in The Independent, 17/9/94. These are questions which perhaps prompted Professor Antony King’s assertion that ”[..] the notion of hy-
pothecation should not be seen as more than a public relations exercise”. (The Daily Telegraph, 17th September 1994). 4 Wilkinson (1994) also labels a hypothecated tax as wide (if the revenues fund an entire public service programme) or narrow (where revenues fund some specific spending within a wider programme). 5 ’Being Honest about Taxation’, Liberal Democrat publication (1994).
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the overall rate.6 Hence, weak earmarking would only contrain public expenditure decisions in the ’narrow’case, where hypothecated funds contributed to some specific spending programme within a more general public service area. One of the key unresolved issues in the hypothecation debate is whether earmarking (either of the strong or weak kind) are likely to increase or reduce willingness to pay taxes for health, education or other public services in such a way as to produce real economic effects. Does hypothecation meet concerns (over and above transparancy) about government failing to meet the public service demands of those who pay taxes by allowing people to adjust their economic behaviour? It is this issue which forms the motivation for the current paper. It is argued that there may be economic incentive effects associated with a move to earmarked taxes, nested within a more general willingness to bear a larger tax burden if the individual has knowledge of the areas of public services funded by the tax rise. Indeed, some proponents suggest that a move towards hypothecation can increase tax revenue. The reasoning behind this claim is that, if individuals are more aware of the destination of the taxes they pay, then they can express their own preferences for public expenditure decisions, and their willingness to pay taxes, more explicitly by either withholding or increasing work effort and private consumption. The argument works both ways. It may be true that taxes earmarked for ”popular” public expenditures (on, for example, health or education) are more willingly borne than are taxes earmarked for, say, social security or defence, in which case the revenue-raising potential of the former group of hypothecated taxes must be contrasted with the possibility that revenues may fall for the more unpopular public expenditure areas. A hypothecated increment in the level of taxation may therefore have differential incentive effects, depending on the area of public expenditure for which that increase in taxation has been earmarked. There has been very little examination of the possible economic effects of tax hypothecation. Any change in the mix of public expenditures will alter individuals’ levels of satisfaction with the range of public services on offer, and consequently alter their willingness to pay the required level of taxation. It is our intention to focus on the economic arguments for tax hypothecation, and more specifically the potential impact on tax revenues, public expenditure levels and voter satisfaction. 6
For example, to match current expenditure figures one would require around 8.4% of the current standard
rate of income tax to be hypothecated to education (ignoring any behavioural consequences which might result). For health, the figure is close to 25%.
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2. Some Background A number of economic models have been developed since the work of Buchanan (1963) to compare the strategies of general fund financing and tax hypothecation as a means to finance public expenditure. Much of the focus of this work has been on the mechanism by which heterogeneous interest groups arrive at a single collective decision. Eklund (1972) and McMahon and Sprenkle (1970) initiated a discussion of Buchanan’s result that expenditure decisions funded by tax rates hypothecated to each public good Pareto-improve on a general fund financed outcome. The Buchanan result relied on a constrained general fund financed model where the public vote on a total budget only, with the shares of the budget devoted to expenditure on each public service being set exogenously. In this context, the move to hypothecation acts as a relaxation of a series of constraints on public expenditures, and leads to a more efficient public choice outcome. Goetz (1968) and later Browning (1975) flag this assumption as a major deficiency in Buchanan’s analysis, by pointing out that ”there seems no compelling reason why the budget mix would be immune to the political forces which determine the other variables” [Browning (1975, p.385]. Their solution is to allow both budget mix and total revenue to be determined by a process of simple majority voting. However, despite this, Browning (1975) finds limited support for hypothecation from an efficiency point of view. Empirical evidence (from Dye (1992) and Kimenyi, Lee, and Tollison (1990) in the context of US tax hypothecation) is at best mixed. [...ASD/AMJ - maybe a little more analysis here on deficiencies with previous studies, and some suggestion as to why our approach is different] We proceed with an analysis designed to compare a world of non-hypothecated taxation with alternative hypothecated tax and public expenditure scenarios. The analysis is necessarily stylised, but the framework is one in which we can examine the validity and extent of the economic arguments for hypothecation. For this analysis we focus on a comparative static analysis of the equilibrium outcomes under regimes of general fund-financed taxation and hypothecated taxation.
3. An Economic Framework To proceed further requires some care in the specification of a reasonable economic framework within which alternative tax structures might operate. In this study we seek to focus on the relationship between the government and the electorate, and how the form of that relationship can affect public expenditure decisions. We must naturally make a series of assumptions regarding the precise structure of the optimising problem facing the government, but at its most intuitive
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level our structure requires the government to decide on the level and mix of public expenditures, taking some account of voter preferences. The final public expenditure outcome will be affected by a number of factors; the extent to which the government forms independent views about the allocation of revenues across public service areas; the extent to which the government cares about the good opinion of the electorate; the strength of the government’s preferences for low taxes; the relative importance that the government attaches to the views of one voter group rather than another; the extent to which the electorate are aware of the public expenditure destinations of the taxes they pay. In constructing our economic model, we have introduced scope to vary these aspects of the government-voter relationship. Public expenditure decisions under a system of general fund financing may then compared with those which might pertain under alternative systems of tax hypothecation. 3.1. A general model structure We consider an economy with a number of voter groups and a government which facilitates expenditures on each of a range of publicly-provided goods, denoted collectively by Q = (Q1 , ..., QK ). The ith voter group can form preferences over the consumption of P private goods Ci = (Ci1 , ..., CiP ) and the range of public expenditures Q.7 We denote these preferences by the function Vi = Ui (Ci , Q)
(3.1)
for all i.8 These preferences are potentially heterogeneous across voter groups, implying that some form of collective bargain may be required to arrive at an agreed level of public expenditure. Each voter group is assumed to enjoy a (non-negative) private income µi which is used to finance the private consumption. We ignore the possibility that a publicly provided good may actually be a ’bad’ for some voters, as might be the case with, for example, defence expenditure. This assumption may be strong if voter groups are relatively tightly defined, but less stringent if groups are in fact quite broad aggregates of individual opinion. Private consumers make their expenditure decisions under a budget constraint. In the benchmark scenario we assume that expenditures are financed out of a general fund with no legal constraints on the division of expenditures across the range of publicly provided goods and services. Revenues are raised through taxation of private consumption at a constant marginal rate 7
By interpreting one of the private goods as ”leisure”, this general structure becomes consistent with a model
of behaviour which includes labour supply responses. 8 We assume that voter preferences are increasing, twice continuously differentiable and strictly concave in C, and non-decreasing and concave in Qk .
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t across all voter groups and across all consumption goods. This implies that voter group budget constraints can be defined as
P X
(1 + t)Cip ≤ µi for all i
(3.2)
p=1
where t represents the pro-rata tax rate on private consumption. We do not model cash transfers from the government to the electorate. A basic allocative model of public service provision would introduce a government with preferences UG over the distribution of public expenditures Q of the form VG = UG (Q). However, this fails to provide a direct link between private and public decisions In the spirit of Goetz (1968) and Browning (1975), we therefore introduce an additional mechanism by which public opinion can be brought to bear on the allocation of tax revenues across the range of public services. Specifically, we introduce a function E(U) of voter utilities U = {Ui , all i} from (3.1) into the government preference function. One might view this function E(.) as an ”electability” function, reflecting the strength of the government’s responsiveness to public opinion. It is common to hear political parties described as high-tax or low-tax. This level of public policy debate is admittedly naive and over-simplistic. However, there is perhaps some truth in the notion that political parties have specific and direct preferences for low or high taxation. As a second development, and to reflect the presence of political factors in the public expenditure decision-making process, we therefore model the government to have direct preferences over the level of taxation. This we do by introducing tax rates t directly into the government’s preferences through a ”tax preference” function T (t). A full specification of government tastes is therefore defined as VG = UG (Q, T ,E)
(3.3)
where Q = (Q1 , ..., QK ) denotes the levels of public expenditure, T (t) denotes the tax preference function and E(U) represents the electability function.9 This specification affords us a degree of flexibility in modelling public service allocation. The introduction of the tax preference function T (.) gives control over the absolute level of tax rates and hence total revenues; the higher the weight given to T in (3.3), the lower will be the government’s preferred tax rate. The weights given to each element of Q determines the distribution of public expenditures that the government would autonomously choose. Finally, private preferences over the distribution of public expenditures are factored into the public decision-making process through the electability function E. 9
The preference function UG is an increasing, strictly concave and twice continuously differentiable function
of Q and a non-decreasing function of T and E. The electability function E is a non-decreasing function of each element of U. The tax preference function T is a non-increasing function of the prevailing tax rate t.
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A second constraint on behaviour applies to the public expenditure plans of the government, and simply states that total private resources must exceed total public expenditure. Normalising the prices of each of the K publicly-provided goods to unity, this requires that K X
k=1
Qk ≤
X
µi .
(3.4)
i
We assume that all revenue raised through the taxation of private consumption is directed towards the funding of public expenditure10 . The implicit tax rate t(Q) for any combination of public expenditures Q will therefore be
t(Q) =
K P
Qk
k=1
P i
µi −
K P
.
(3.5)
Qk
k=1
Assumptions regarding the characteristics of the functions T and E and their context in the government’s preference function define the extent and nature of the public accountability of the government; if VG = UG (Q, T ), then the government becomes dictatorial, taking decisions with no regard to the views of the electorate.11 Taking the other extreme scenario, if VG = UG (E) then we would characterise the government simply as a conduit through which voter preferences are aggregated. The institutional framework adopted in our analysis admits the possibility of a link between public and private preferences, and creates a potential tension between government decisions and accountability to the electorate for those decisions.12 It is within this framework that we shall discuss the likely consequences of tax hypothecation, using the impact of the feedback of private preferences into public decision-making, and the fact that with heterogeneous private preferences the final outcome can never equate to the 10
One may quite reasonably include wastage or leakage as an item of public ”expenditure”. The electorate may
be ignorant either of the existence or the level of leakage, in which case it may be argued that the relationship between taxes paid by voters and the public goods thus funded becomes less transparent. 11 The argument here is that the preferences of the government are intrinsically representative of private opinion, given that previous electoral success has mandated the government to take decisions on behalf of the electorate. However, there may not be such a strong case for omitting E if, for some reason, either the government’s own priorities, or public opinion itself, changes. Under either scenario it may then be the case that public expenditures decisions become inconsistent with the private views of the electorate. 12 The means by which public preferences may be aggregated forms a large literature in the field of public choice (see Goetz (1968), Mueller (1979) or Tullock (1967) inter alia ). We choose a framework for analysis in which the legislature aggregate voter group preferences through the electability function E in (3.3). Although the precise specification of this electability function is not addressed directly, the numerical simulations rely on a simple additive specification (see Appendix A).
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unconstrained private optimum for all individuals. We will also admit the possibility that government and voter group preferences may be defined over different sets of public expenditures. An example might be the level of provision of Civil Service infrastructure, to which (at least some) voter groups may be indifferent. 3.2. Model solution with a single private good The model of public service allocation described by equations (3.1) to (3.5) is difficult to work with analytically, even with relatively simple expressions for preferences. To give some feel for the nature of the model and to highlight those factors which influence the final equilibrium allocation of public expenditures, we must adopt a number of simplifying assumptions. To give insight to the characteristics of the analytical model we choose to aggregate to two heterogeneous voter groups i = {A, B} and a single legislative government agency.13 It is initially assumed
that there are only two public goods Q1 and Q2 and one private good C. We derive conditional
voter group preferences for public expenditures by substituting out for private consumption in (3.1) using equations (3.2) and (3.5). This generates closed indifference contours for the distribution of public expenditures for all voter groups.14 Whether or not the contours (3.3) of the government are closed depends on the form of the functions T and E and their importance in the government’s preferences. The government’s objective is to choose those levels of public expenditure which maximise (3.3) subject to the expenditure constraint (3.4). The problem can therefore be formulated as an inequality constrained optimisation problem of the form max UG (Q1 , Q2 , T (Q), E(U)) subject to
Q1 ,Q2
X
i∈{A,B}
µi ≥ Q1 + Q2 ,
(3.6)
where Vi = Ui [µi /(1 + t(Q)), Q1 , Q2 ] for i = A, B.
(3.7)
The first-order conditions for a solution to (3.6) can be derived as ⎡
13 14
X
∂UG ∂UG ∂T ∂E ∂UG ⎣ + + . ∂Qk ∂T ∂Qk ∂E i∈{A,B} ∂Ui
Ã
∂Ui ∂Ui µi − .P ∂Qk ∂C µj
!⎤ ⎦−λ=0
(3.8)
For notational convenience we choose distinguish voter groups alphabetically rather than numerically. Conditional preferences take account of the opportunity cost of increased public expenditure in terms of the
loss of private consumption. Assumptions on the form of preferences (3.1) and (3.3) ensure that the conditional preference functions have closed indifference contours and a finite maximum. See Browning (1974).
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for k = 1, 2, with an additional complementary slackness constraint of the form λ(
X i
µi − Q1 − Q2 ) = 0.
If the government’s budget constraint is binding then λ > 0 and
(3.9) P
i µi
= Q1 +Q2 , which requires
from (3.5) a tax rate on private (taxable) income of unity. The multiplier λ in this case represents the government’s marginal utility of taxable income. This would relieve the electorate of all taxable income, and would leave the government with no scope to increase public expenditures in any one area without reducing expenditures elsewhere. If, on the other hand, the constraint is slack (non-binding) then the required tax rate t is less than unity. Under these circumstances the marginal utility of taxable income λ is zero, since by choice the government opts for a public expenditure combination strictly within the interior of their budget set.15 These first-order conditions offer a useful description of the factors which influence the government’s public expenditure choices. These include: the distribution of private income (indicated by µi in (3.8) above); the relative bargaining power of the voter groups (∂E/∂Ui ); the preferences of each voter group for public expenditure (∂Ui /∂Qk ); the preferences of the electorate for private consumption (∂Ui /∂C); the preferences of the government for the distribution of public expenditure (∂UG /∂Qk ); the government’s response to public opinion (∂UG /∂E); and the strength of the government’s preference for low taxation (∂UG /∂T ). An analytical solution to (3.6) is difficult, even for simple functional specifications of private and public preferences. However, numerical solutions are feasible. In Figure 3.1 we describe the range of possible optima which are feasible for a specific (but arbitrary) parameterisation of preferences (3.1) and (3.3). Government and voter group preferences are parameterised to reflect heterogeneity in tastes for the public expenditure mix. Optimal public good choices are then evaluated (numerically) for a range of parameterisations of the relationship between government and the electorate, including extreme scenarios in which the government acts either without consideration of public opinion, or in complete deference either to one voter group alone or to some combination of voter tastes. The two sets of concentric ellipses represent (closed) indifference contours for each voter group, with A and B in Figure 3.1 representing the preferred allocations of Q1 and Q2 for voter groups A and B respectively.16 For this representation the government 15 16
See Silberberg (1981). Preference contours are closed because increased provision of public services is bought at the expense of private
consumption. Consumers would typically reach a point where they value private consumption more highly than they would increased public provision. Hence the existence of ”bliss points” (marked A and B in Figure 3.1) which represent unconstrained yet finite optimal public service allocations for each voter group. Appendix A details a specific modelling framework.
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Figure 3.1: Feasible Equilibria
Q1
A B
G
Q2
strongly prefers low tax rates, so that point G in Figure 3.1 would represent the public expenditure allocation that the government would choose if it were to take no account of public opinion. Those allocations bounded by the area GAB therefore represent feasible equilibria for a given parameterisation of preferences for public expenditures, but for various specifications of the relationship between government and the electorate. The more autonomously does the government act, the closer will be the equilibrium outcome to G. The more responsive is the government to public opinion, the closer will be the chosen allocation to the chord AB. If the government had no independent preferences for low taxation, the structure of this model of public service allocation would locate the government’s autonomous optimum to the north-east of chord AB. Our numerical simulations consider this as a valid scenario, but for the purposes of exposition we restrict graphical attention to solutions based on a low-tax assumption. On this basis, we may categorise the following scenarios: 3.2.1. scenario 1: the unresponsive government Consider first the extreme case in which the government takes no direct account of the views of the electorate when arriving at its expenditure plans. In terms of the general model this is equivalent to the single restriction ∂UG /∂E = 0 on government preferences. First-order conditions for the choice problem (3.6) under these conditions reduce to ∂UG ∂UG ∂T + =0 . ∂Qk ∂T ∂Qk 10
(3.10)
Figure 3.2: Equilibrium for an unresponsive government
A
Q1
B
Q1*
G Q2*
Q2
for a government with preferences for low taxation.17 The first-order conditions (3.10) imply G = −1.18 That is to say, the government will locate to a public expenditure that MRSQ 1 Q2
allocation at which point the value (in utility terms) of any additional provision of one public
service would be balanced by the utility loss from the consequent reduction in the other public service. Figure 3.2 describes a potential optimum. The private decisions of consumer groups A and B are conditioned on these optimal public expenditure levels and implicit tax rates, with no feedback into the government’s own choice process. 3.2.2. scenario 2: single group deference The second extreme in the set of possible equilibria defines a government as completely subordinate to one group of voters (group A, say), with no separate preferences over the provision of public goods and services. This characterisation requires that ∂E/∂UB = 0 and ∂UG /∂Qk = ∂UG /∂T = 0, which reduces the general first-order conditions (3.8) to ∂UG ∂E . ∂E ∂UA
µ
∂UA ∂UA µA .P − ∂Qk ∂C i µi
¶
− λ = 0.
(3.11)
for k = {1, 2}. To interpret the conditions (3.11), recall that each voter group has preferences not only for Qk , but also for private consumption. Moreover, there is an opportunity cost to an 17
This is because λ = 0 if ∂UG /∂T is sufficiently strong for the public expenditure constraint (3.4) not to bind.
Otherwise, the tax rate levied on private consumption would be set at unity. 18 since ∂T /∂Qk = (∂T /∂t).∂t/∂Qk and ∂t/∂Q1 = ∂t/∂Q2 .
11
Figure 3.3: An equilibrium for single group deference
*
A
Q1
Q1
B
G *
Q2
Q2
increase in public expenditure given that revenue is raised through taxation of private income. If the public expenditure constraint does not bind then λ = 0 and (3.11) reduces to ∂UA ∂UA µA .P . = (3.12) ∂Qk ∂C i µi This states that the marginal utility of an extra unit of consumption of either public good equates to the marginal utility of private consumption weighted by the proportion of total private income controlled by that voter group. If voter group A (the group to whom the government defers) is the sole contributor of all tax revenue,19 then public expenditures will be set at a level at which the marginal utilities of private and public good consumption for that group are equated. 3.2.3. scenario 3: pure voter coalition The third special case arises when ∂UG /∂Qk = ∂UG /∂T = 0 for all k publicly provided goods. This characterises the government as a bargaining agent, choosing optimal levels of Qk from among the range of possible private contracts arranged between the voter groups.20 First-order conditions for a pure voter coalition become X
19 20
⎛
∂E ⎜ ∂Ui ∂Ui − . ⎝ ∂Ui ∂Qk ∂C i∈{A,B}
µ
Pi
j∈{A,B}
µj
⎞
⎟ ⎠ = 0,
(3.13)
as would be the case if µB = 0 Indeed, the implicit objective function for the government relates directly to the objective function for a Nash
bargain.
12
Figure 3.4: An equilibrium for pure voter coalition
*
Q1
A B
Q1 G *
Q2
Q2
assuming that the public expenditure budget constraint does not bind. Clearly, the choice of public expenditure levels depends on the relative influence of each voter group on government decision-making, as characterised by the electability function E(UA , UB ).21 Examining the characteristics of the first-order conditions (3.13), we find that the chosen public expenditure outcome A B must be located on the contract curve MRSQ = M RSQ . The greater is the influence of 1 Q2 1 Q2
one voter group, the nearer will be the optimal public expenditure decision to their most preferred choice. Ultimately, if B has no bargaining power then ∂E/∂UB = 0 and conditions (3.13) reduce further to the first-order conditions (3.12) of the single group deference case. Figure 3.4 describes a possible optimum. 3.2.4. scenario 4: government-single voter coalition Finally, we may characterise the decision-making process as one of coalition between the government and a single voter group. If voter group A is the preferred group, then the relevant first-order conditions can be derived by applying the single restriction ∂E/∂UB = 0 to (3.8). Here, the government negotiates with voter group A to arrive at a compromise arrangement when its own preferences for Q1 and Q2 are at variance with those of the single voter group. Again, the chosen outcome depends on the distribution of taxable income as well as the relative preferences of the voter group for private and public expenditures, the government’s relative preferences for public expenditure and electoral success. In this extreme case, the bargaining 21
e 1−e For the numerical example in Appendix A, we use the simple specification E(UA , UB ) = UA UB .
13
Figure 3.5: An equilibrium for government-single voter coalition
A
Q1 B *
Q1
G *
Q2
Q2
process excludes the views of all other voter groups. If the public expenditure budget constraint does not bind then ⎛
∂UG ∂UG ∂T ∂UG ∂E ⎜ ∂UA ∂UA + =− − . . . ⎝ ∂Qk ∂T ∂Qk ∂E ∂UA ∂Qk ∂C
µ
PA
j∈{A,B}
µj
⎞ ⎟ ⎠
(3.14)
G A for k = 1, 2, from which the contract curve MRSQ = MRSQ can be derived. Both 1 Q2 1 Q2
(3.10) and (3.11) can be seen as special cases of the government-single voter coalition, when ∂UG /∂E = 0 and ∂UG /∂Qk = ∂UG /∂T = 0 respectively. 3.3. Model Solution with two private goods The previous analysis is instructive in the sense that it highlights factors which might influence the public expenditure decision, but restrictive in the sense that private consumption decisions are limited to a single consumption good. Moreover, from the point of view of applying this framework to an assessment of the economic consequences of tax hypothecation, the single private good model affords no opportunity to introduce a system of full tax hypothecation, since there would be only one private good to be taxed. As an extension to the previous model, we therefore consider a system where voter group preferences are extended to include two private consumption goods and up to three forms of public expenditure. In particular, we assume that the ith voter group is endowed with collective preferences Ui over public expenditures Q = (Q1 , ..., Q3 ) and the private consumption of two
14
goods C1 and C2 , to give Vi = Ui (C1 , C2 , Q)
(3.15)
for all i. The preference structure of the government is identical to (3.3). Assumptions on the form of voter and government preferences follow those of the simpler model. This generalisation introduces an extra element of flexibility to the behavioural model. Voter groups may now adjust the distribution of private consumption in response to a given public expenditure distribution. These adjustments may impact on the government’s public expenditure budget constraint, forcing a revision of public expenditures and a consequent change in voter satisfaction. 3.3.1. model solution To operationalise this more general model of public expenditure allocation, and in the absence of unambiguous theoretical conclusions at an algebraic level, we choose to solve out the general structural model numerically. For the purposes of our simulations we consider two heterogeneous voter groups i = {A, B} and a single legislative government agency. We restrict attention to a system with up to three public goods Q1 , Q2 and Q3 along with two consumption goods Ci1
and Ci2 for each voter group i = {A, B}. The government is modelled with preferences over Q1 ,
Q2 , T (Q) and E(Q) and, selectively, a third public expenditure Q3 . It is assumed that voters are either ignorant of, or indifferent to, the level of Q3 . To solve this system, we adopt the following convention;
1. for given Ci1 and Ci2 , the government sets Q1 to Q3 to maximise (3.3) subject to (3.4) and (3.5). 2. for given Q1 to Q3 , each voter group i = {A, B} sets Ci1 and Ci2 to maximise (3.1) subject to the private budget constraint (3.2), given (3.5).
3. repeat steps 1 and 2 to convergence. The benchmark outcomes for a general fund financed system of taxation under alternative parameterisations of government and voter group preferences are described in Table 3.1. We list these parameterisations in Appendix A. Note however that they are in no sense calibrated to reflect actual public spending levels, nor do they necessarily reflect true preferences for public services. Rather, the experimental design is intended to focus on the theoretical notion that full tax hypothecation affects economic behaviour in a manner which may increase total revenues, and which may direct those revenues towards public services which find favour with those who pay the hypothecated tax. 15
Turning first to the parameterisation of voter tastes for private consumption and public services, we consider four scenarios: 1. voters are homogeneous in their tastes for private consumption and public service provision, both preferring consumption of C1 to C2 and provision of Q1 to Q2 . 2. voters are homogeneous in their tastes for private consumption but heterogeneous in their tastes for public service provision. Voter group A prefers consumption of C1 and provision of Q1 . Voter group B prefers consumption of C1 and provision of Q2 . 3. voters group A has no preferences for public services, and prefers C1 to C2 . Voter group B prefers consumption of C1 and provision of Q1 . 4. voters are heterogeneous both in their tastes for private consumption and public service provision. Voter group A prefers consumption of C1 and provision of Q1 . Voter group B prefers consumption of C2 and provision of Q2 . These scenarios correspond to the four successive row entries in each panel of Table 3.1. We also parameterise a variety of relationships between government and the two voter groups, concentrating particularly on the government’s strengh of responsiveness to public opinion, the extent to which the government has independent tastes for low overall taxation, and whether there exists a third area of public expenditure (Q3 ) for which the government has a preference, but for which voters have none. In all cases, we assume that the government prefers an equal distribution of revenues between Q1 and Q2 , and places equal weight on the views of each of the two voter groups. We consider the following six scenarios: 1. the government is relatively responsive to public opinion (ie. weights the electability function E highly in its preference function), has independent preferences for low overall taxation (ie. weights the function T highly in its preference function), and has no preferences for a third area of public expenditure Q3 . 2. the government is responsive to public opinion, has no independent preferences for low taxation, and has no preferences for Q3 . 3. the government is unresponsive to public opinion, has no independent preferences for low taxation, and has no preferences for Q3 . 4. the government is relatively responsive to public opinion, has independent preferences for low overall taxation, and has positive preferences for Q3 . 16
5. the government is responsive to public opinion, has no independent preferences for low taxation, and has positive preferences for Q3 . 6. the government is unresponsive to public opinion, has no independent preferences for low taxation, and has positive preferences for Q3 . These scenarios correspond to the six successive panels of Table 3.1. The equilibrium solutions reported in Table 3.1 demonstrate to what degree the precise relationship between government and taxpayer can affect the chosen public service outcome under a general fund financed system of taxation. We report for each of the paramerisations outlined above the following outcome measures; welfare measures (UA , UB and UG ); total consumption of each of two private goods (C1 = CA1 + CB1 ,C2 = CA2 + CB2 ), public expenditure allocations (Q1 and Q2 ); tax outcomes (total tax revenue T R ; specific tax rates t1 and t2 on consumption goods C1 and C2 respectively). Concentrating initially on the first of the six results panels (rows numbered 1 to 4) in Table 3.1, we see the effects on public expenditure allocation of private preferences for public services. This first series of results characterises the government as responsive to public opinion, with a preference for low taxation, and with no desire for expenditure on some third ”hidden” public service. When voter group tastes are homogeneous both for private consumption and public provision (row 1), we see that voter group preferences for Q1 are accommodated in the final public expenditure allocation (recall that the government would choose an equal distribution of expenditures were it to disregard public opinion). The relative preference for consumption of C1 is also clear in the levels of C1 and C2 . Compared with this benchmark, the remaining three series of results (rows 2 to 4) shows how private preferences for public services can affect the final outcome. When private preferences for public services are divided (row 2), the distribution of Q1 and Q2 becomes more equal. When at least one voter group has no preference for public services (row 3), total revenues, tax rates and public service provision falls as a consequence. This is a demonstration of the willingness-to-pay argument. When voter group A sees no benefit to the payment of taxes, the long term outcome would see taxes and public exenditures bargained down. Finally, when voter preferences for private consumption are divided (row 4), we see a more balanced distribution of private consumption and public expenditure. Consider now the effects on public expenditure allocation of alternative relationships between government and the electorate. Compared with the first panel of results (consistent with a lowtax, responsive government with no hidden public expenditure agenda), the second panel (rows 5 to 8) relate to a government without a low-tax preference. Tax rates and total revenues in
17
all cases exceed those in the first panel at the equilibrium levels of public service provision. The third panel (rows 9 to 12) correspond to a goverment which is relatively unresponsive to public opinion. Notice how the distribution of public expenditures more closely reflects the government’s own preferences. In the remaining three panels (rows 13 to 16, 17 to 20 and 21 to 24) we introduce a third ”hidden” area of public expenditure about which the electorate are ignorant. This series of results may be compared, respectively, with panels 1 (rows 1 to 4), 2 (rows 5 to 8) and 3 (rows 9 to 12). Notice in all cases that the presence of this third public expenditure area forces taxes to rise, private consumption and voter utility to fall, and reduces public service provision in those areas preferred by the electorate.
4. Financing public expenditures through hypothecated taxation We have spent some time detailing the characteristics of equilibrium for our stylised model of public expenditure allocation under a general fund financed system of taxation. The reason for this is clear; in a comparitive-static analysis of the impact of either incremental or full tax hypothecation, we must have an understanding of the factors which underpin the general fund financed outcome. Having set down a general model of public service allocation, we hope to replace the general fund financing structure of taxation with alternative systems either of incremental or full tax hypothecation. The welfare consequences of a move towards tax hypothecation depend crucially on the nature of the base (general fund financed) equilibrium. To give just one example, suppose the true characterisation of the government-voter relationship is one of pure voter coalition. Suppose further that consideration were being given to a move towards tax hypothecation in the form of a hypothecated tax increment (that is, a policy reform which increases one area of public expenditure only, holding the other public expenditures at their pre-reform levels). If the economy were characterised by pure voter coalition, then such a reform could never find favour with the electorate, for the simpe reason that the pre-reform distribution of public expenditures is Pareto-efficient. Any movement away from the pre-reform levels of public expenditure can only benefit one voter group to the disadvantage the other group. However, can we say more about the economic consequences of a move towards some form of tax hypothecation? Can we indicate whether tax hypothecation may bring benefit to the electorate? And what are the conditions under which such a result might hold? Consider two alternative hypothecated tax structures. The first corresponds to the ’weak narrow’ earmarking scenario outlined by Wilkinson (1994) where a hypothecated tax increment levied against one consumption good is introduced, the revenues for which are earmarked to the 18
funding of a specific public service. 4.1. an incremental hypothecated tax structure Let us assume that a tax increment ∂t1 is levied against private good C1 , the revenues for which are hypothecated to the first public expenditure Q1 . All remaining revenues are pooled into a general fund, out of which all remaining public expenditures are financed. For the government, the hypothecated increment introduces a second constraint on public expenditure over and above (3.4), which requires that Q1 ≥ ∂t1 .
X
Cj1
(4.1)
j∈{A,B}
For the consumer, the effect of the hypothecated increment is to drive a wedge betwen the taxes levied on C1 and C2 . Assuming that (4.1) does not bind, the hypothecated tax increment re-defines voter group budget constraints as (1 + t1 )Ci1 + (1 + t2 )Ci2 ≤ µi for all i
(4.2)
where t1 and t2 represent the full pro-rata tax rates on private consumption of C1 and C2 respectively. We may derive expressions for t1 and t2 in terms of Q and µi ;
t2 (Q) =
K P
k=1
P
Qk − ∂t1 .[ (µi − Ci2 ) − i
P i
µi −
K P
Qk
K P
k=1
Qk ] (4.3)
k=1
t1 (Q) = t2 (Q) + ∂t1
(4.4)
4.2. simulation results: hypothecated tax increment Let us start by examining the effect of a hypothecated tax increase of ∂t1 on voter satisfaction and public expenditure allocation in the context of the two-good model described above. We levy an incremental amount ∂t = 0.05 on C1 , the revenues for which are earmarked for Q1 . Table 4.1 reports the simulated impact of this counterfactual on taxes, consumption and public expenditure allocation. The precise parameterisations of government and voter group tastes are exactly those described for our general fund financed benchmark, and the mode of the analysis is comparative-static, in the sense that we re-solve the same structural model under the new tax system, and compare the equilibrium outcomes with those for the benchmark scenario. We again report welfare measures (expressed as percentage deviations from the benchmark general
19
fund-financed results in Table 3.1) and consumption, public expenditure allocation and revenue impacts (all expressed as absolute deviations relative to the benchmark). What is immediately apparent from the results in Table 4.1 is that the hypothecated increment is almost universally ineffective in raising the level of expenditure on Q1 . Although the ”next-day” effect of a tax increment of 5% levied on C1 and hypothecated to Q1 should (from Table 3.1) be close to 0.24 for the first parameterisation (row 1), when one takes account of behavioural responses in private consumption and reallocation of non-hypothecated tax revenues the initial gain is entirely bid away. Notice also that, whilst the 5% tax wedge is maintained (columns t1 and t2 ), a large proportion of the initial 5% tax rise on the first consumption good evaporates as the new optimal allocation is established. Ultimately, the first tax rate t1 is only 1.9% higher than the general fund financed level. This pattern is repeated across virtually all of the parameterisations in Table 4.1. What we see here is a precise manifestation of the worry that most commentators have about the idea of a hypothecated tax increment, that in the long term any initial gain will be lost as the government and the taxpayer re-negotiate the allocation of non-hypothecated tax revenues. The only substantive impact of the hypothecated tax increment is to drive a wedge between consumption taxes, causing a re-allocation of private resources across private consumption goods.22 In terms of welfare, the most significant change occurs when voter tastes for private consumption are heterogeneous (row 4, and the fourth rows of the subsequent five panels). This is simply because the tax-induced increase in consumption of C2 finds favour with the voter group (B in this case) whose preferences value C2 most highly. Since public service allocations are virtually identical, there is no compensation to voter group A for the tax rise on C1 in terms of increased provision of Q1 . In fact, the results in Table 4.1 would be identical in every respect if one were to hypothecate the revenues from a 5% tax increment levied on C1 either towards Q2 or to the general fund. That is to say, the destination of the funds from the tax increment is irrelevant to the distribution of public expenditures in the long term, and simply serves to drive a 5% tax wedge between consumption goods. Whether or not this leads to an overall efficiency gain depends in large part on the elasticities of private consumption, and has little to do with preferences for public service allocation. 22
notice how the resources switch away from C1 as it becomes more heavily taxed (columns C1 and C2 in Table
4.1).
20
4.3. a complete hypothecated tax structure Our second system hypothecates all revenues raised through t1 to the funding of the first expenditure item Q1 . The remaining set of expenditures {Qk , k = 2, ..., K} are financed by t2 .
For the consumer, this structure leads to a budget constraint identical in form to (4.2). For the government, the system of full tax hypothecation requires that Q1 = t1 .
X
Cj1
(4.5)
X
Cj2
(4.6)
j∈{A,B} K X
Qk = t2 .
k=2
j∈{A,B}
which, substituting out for Cj1 using (4.2), gives t1 (Q) =
Q1 P i
t2 (Q) =
K P
µi −
k=1
K P
Cj2
Qk −
P
(4.7) Cj2
j∈{A,B}
Qk
k=2
P
(4.8)
j∈{A,B}
for any Q. Either form for t1 (Q) and t2 (Q) may be substituted into (4.2) to complete the form of the private budget constraints. 4.4. simulation results: complete (good-specific) hypothecation This second counterfactual analysis is also set in the context of the more general economic model with two private consumption goods. Public expenditures are funded by two pro-rata taxes levied on each consumption goods, the full proceeds from which are hypothecated towards specific public expenditure areas according to (4.5) and (4.6). We compare equilibrium outcomes following a move from general fund financing to complete hypothecation, where all revenues from the taxation of the first private good are directed towards the first area of public expenditure. Taxation of the other private good funds the remaining public services. A comparative-static analysis is again adopted for a range of parameterisations. In Table 4.2 we report a series of simulations designed to compare public service expenditure allocations, private consumption decisions and tax rates following a move to full tax hypothecation. We include simulations for a range of characterisations of voter tastes for public services, and for a variety of specifications of the relationship between government and the electorate. Again, welfare measures are expressed as percentage deviations from the benchmark general 21
fund financed outcome, whilst all remaining measures are expressed as absolute deviations from the benchmark. In contrast to the results for a hypothecated tax increment, the system of complete goodspecific tax hypothecation forces a significant reallocation in public service priorities in line with taxpayer preferences, and in many cases raises aggregate tax revenues also. This is not so surprising, since a system of complete tax hypothecation is a fairly radical departure from the general fund financed benchmark. Among the range of simulation results reported in Table 4.2, we might highlight the following systematic outcomes: 1. in all cases, a system of full (good-specific) tax hypothecation forces a redistribution of public service provision in line with voter group preferences (column Q1 in Table 4.2). In many cases, the increase in Q1 occurs despite a simultaneous reduction in the level of the tax t1 which funds Q1 (see column t1 ). This is because for these cases taxpayers are homogeneous in their relative preference for C1 . Hence, consumption of C1 rises to an extent sufficient to override the potential reduction in revenue hypothecated towards Q1 . (Note the constrast between outcomes when the voters are homogeneous (rows 1 to 3 in the first panel of Table 4.2 and the first three rows in each subsequent panel) and heterogeneous (row 4 and the fourth rows in subsequent panels) in their tastes for private consumption. What we see here is an equilibrium where the level of the hypothecated tax depends on preferences for private consumption as well as public service provision. 2. the hypothecation typically improves the well-being of both voter groups when tastes for private and public consumption are homogeneous among taxpayers (row 1, columns UA and UB ), at the expense of the government (whose welfare UG falls in virtually all cases). Whether or not social welfare improves depends on how one rates voter preferences against those of the government. When preferences either for private consumption or public services are divided among voter groups, we do not typically see universal welfare improvements. In these cases, the benefit to one voter group from full tax hypothecation is bought at the cost of a reduction in welfare for the other group (rows 2 to 4 of the first and subsequent panels). 3. in general, the less responsive is the government to public opinion, the greater is the welfare gain to the electorate from full tax hypothecation and the greater is the welfare loss to the government. To see this, compare the third panel (rows 9 to 12) with the first (rows 1 to 4). Also, the increase in expenditure on the public service most preferred by the taxpayer is more extreme when the government is unresponsive. Essentially, this is because an 22
unresponsive government forces the allocation of public services to a level further away from the voters preferred distribution. Full tax hypothecation therefore provides a means by which the extent of dissatisfaction can be realised through more significant behavioural responses. 4. When a third public expenditure is introduced for which the government has positive preferences but about which the taxpayer is ignorant (compare the fourth to sixth panels with the first three), a fully hypothecated tax system typically forces the government to reduce expenditure on this item (column Q3 in Table 4.2). Revenues may rise or fall depending on the extent of the government’s responsiveness to public opinion.
5. Conclusions In this paper we have focussed on a particular aspect of the hypothecation debate; does earmarking (either of the strong or weak kind) increase or reduce willingness to pay taxes in such a way as to produce real economic effects? Overall, this comparative-static analysis demonstrates that incremental tax hypothecation generates no positive economic effect in a first-best world, whereas full tax hypothecation can under certain conditions generate greater voter utility and higher total tax revenue. The positive economic result under full tax hypothecation depends crucially on voter tastes for private consumption, public service provision, and the nature of the relationship between government and taxpayer. Whilst the provision of the public service most preferred by the taxpayer rises universally relative to the benchmark, we can never describe the outcome as a Pareto-improvement for voters and government combined. On the other hand, one can find circumstances under which the welfare of each voter group rises under a system of full tax hypothecation compared with the general fund financed outcome. These outcomes typically arise when taxpayers are relatively homogeneous in their tastes for private and public consumption, or when the government allocates revenues to an area of public expenditure to which the taxpayer is indifferent. Whether one regards this as an improvement in overall social welfare depends on how one rates voter preferences against those of the government. That said, we have not addressed a number of the issues (of transparency, equity and revenue cyclicality) which contribute to the wider debate on tax hypothecation. Our study is a comparative-static analysis of first-best outcomes under systems of general fund financing and either incremental or full tax hypothecation. We are therefore unable to suggest whether hypothecation has a role to play when information is imperfect, or when mechanism to allocate 23
revenues across public services fails in some way. The hypothecation debate ought therefore to focus also on whether there exists some form of allocative failure in the distribution of tax revenues across public services and whether hypothecation is the most efficient way to increase transparency and reduce the severity of this allocative failure.
References Browning, E. K. (1974): “The Diagrammatic Analysis of Multiple Consumption Externalities,” American Economic Review, 64, 707—714. (1975): “Collective Choice and General Fund Financing,” Journal of Political Economy, 83, 377—390. Buchanan, J. M. (1963): “The Economics of Earmarked Taxes,” Journal of Political Economy, 71, 457—469. Dye, R. F. (1992): “The Effect of Earmarked Revenues on the Level and Composition of Expenditures,” Public Finance Quarterly, 20, 543—556. Eklund, P. (1972): “A Theory of Earmarking Appraised,” National Tax Journal, 25, 223—228. Goetz, C. J. (1968): “Earmarked Taxes and Majority Rule Budgetary Processes,” American Economic Review, 58, 128—136. Jones, A. M., and A. S. Duncan (1995): “Hypothecated Health Taxes: am evaluation of recent proposals,” Discussion paper, London: Office of Health Economics. Kimenyi, M. S., D. R. Lee, and R. D. Tollison (1990): “Efficient Lobbying and Earmarked Taxes,” Public Finance Quarterly, 18, 104—113. McMahon, W. W., and C. M. Sprenkle (1970): “The Theory of Earmarking,” National Tax Journal, 23, 255—261. Mueller, D. C. (1979): Public Choice. Cambridge University Press. Silberberg, E. (1981): The Structure of Economics: a mathematical analysis. London: McGraw-Hill. Tullock, G. (1967): “The General Irrelevance of the General Impossibility Theorem,” Quarterly Journal of Economics, 81, 256—270.
24
Wilkinson, M. (1994): “Paying for Public Spending: is there a role for earmarked taxes?,” Fiscal Studies, 15, 119—135.
25
Table 3.1: Benchmark equilibria under alternative regimes Preferences Group A
Welfare Group B
Consumption
Public Services
Taxes
UA
UB
UG
C1
C2
Q1
Q2
Q3
TR
t1
t2
G: responsive,low tax,Q3=0 1.
C1,Q1
C1,Q1
2.531
2.531
2.390
4.769
2.789
1.354
1.087
-
2.441
0.323
0.323
2.
C1,Q1
C1,Q2
2.495
2.495
2.378
4.759
2.783
1.229
1.229
-
2.457
0.326
0.326
3.
C1,-
C1,Q1
2.117
2.527
2.253
4.867
2.846
1.231
1.056
-
2.287
0.297
0.297
4.
C1,Q1
C2,Q2
2.495
2.495
2.378
3.771
3.771
1.229
1.229
-
2.457
0.326
0.326
G: responsive,Q3=0 5.
C1,Q1
C1,Q1
2.481
2.481
2.308
4.530
2.649
1.564
1.256
-
2.821
0.393
0.393
6.
C1,Q1
C1,Q2
2.453
2.453
2.297
4.518
2.642
1.420
1.420
-
2.839
0.397
0.397
7.
C1,-
C1,Q1
2.037
2.509
2.128
4.682
2.738
1.392
1.188
-
2.580
0.348
0.348
8.
C1,Q1
C2,Q2
2.453
2.453
2.297
3.580
3.580
1.420
1.420
-
2.839
0.397
0.397
G: unresponsive,Q3=0 9.
C1,Q1
C1,Q1
2.492
2.492
2.173
4.711
2.755
1.274
1.260
-
2.534
0.339
0.339
10.
C1,Q1
C1,Q2
2.490
2.490
2.173
4.711
2.755
1.267
1.267
-
2.534
0.339
0.339
11.
C1,-
C1,Q1
2.053
2.492
2.158
4.718
2.759
1.266
1.257
-
2.523
0.338
0.338
12.
C1,Q1
C2,Q2
2.490
2.490
2.173
3.733
3.733
1.267
1.267
-
2.534
0.339
0.339
G: responsive,low tax,Q3>0 13.
C1,Q1
C1,Q1
2.302
2.302
1.972
4.374
2.558
1.191
0.957
0.921
3.068
0.443
0.443
14.
C1,Q1
C1,Q2
2.268
2.268
1.963
4.366
2.553
1.081
1.081
0.919
3.081
0.445
0.445
15.
C1,-
C1,Q1
1.943
2.297
1.884
4.465
2.611
1.085
0.933
0.906
2.924
0.413
0.413
16.
C1,Q1
C2,Q2
2.268
2.268
1.963
3.459
3.459
1.081
1.081
0.919
3.081
0.445
0.445
G: responsive,Q3=0 17.
C1,Q1
C1,Q1
2.219
2.219
1.955
4.058
2.373
1.385
1.112
1.071
3.568
0.555
0.555
18.
C1,Q1
C1,Q2
2.194
2.194
1.948
4.049
2.368
1.257
1.257
1.068
3.583
0.558
0.558
19.
C1,-
C1,Q1
1.832
2.253
1.823
4.211
2.463
1.240
1.059
1.027
3.326
0.498
0.498
20.
C1,Q1
C2,Q2
2.194
2.194
1.948
3.208
3.208
1.258
1.258
1.068
3.583
0.558
0.558
G: unresponsive,Q3=0 21.
C1,Q1
C1,Q1
2.234
2.234
1.614
4.290
2.509
1.076
1.064
1.061
3.200
0.471
0.471
22.
C1,Q1
C1,Q2
2.232
2.232
1.614
4.290
2.509
1.070
1.070
1.061
3.200
0.471
0.471
23.
C1,Q1
C1,Q1
1.869
2.234
1.607
4.296
2.512
1.070
1.062
1.060
3.191
0.469
0.469
24.
C1,Q1
C2,Q2
2.232
2.232
1.614
3.400
3.400
1.070
1.070
1.061
3.200
0.471
0.471
26
Table 4.1: Impact of 5 per cent hypothecated tax increment (relative to benchmark) Preferences Group A
Welfare Group B
Consumption
Public Services
Taxes
UA
UB
UG
C1
C2
Q1
Q2
Q3
TR
t1
t2
G: responsive,low tax,Q3=0 1.
C1,Q1
C1,Q1
-0.001
-0.001
0.271
-0.011
0.011
-0.000
-0.000
-
-0.000
0.019
-0.031
2.
C1,Q1
C1,Q2
-0.001
-0.001
0.270
-0.011
0.011
-0.000
-0.000
-
-0.000
0.019
-0.031
3.
C1,-
C1,Q1
0.003
-0.001
0.220
-0.011
0.012
-0.000
-0.000
-
-0.000
0.018
-0.032
4.
C1,Q1
C2,Q2
-0.396
0.424
-0.006
-0.012
0.020
-0.006
-0.002
-
-0.008
0.024
-0.026
G: responsive,Q3=0 5.
C1,Q1
C1,Q1
0.024
0.024
0.047
-0.008
0.011
-0.002
-0.002
-
-0.003
0.018
-0.032
6.
C1,Q1
C1,Q2
0.021
0.021
0.047
-0.008
0.011
-0.002
-0.002
-
-0.003
0.018
-0.032
7.
C1,-
C1,Q1
0.047
0.015
0.035
-0.008
0.012
-0.002
-0.002
-
-0.004
0.018
-0.032
8.
C1,Q1
C2,Q2
-0.370
0.454
-0.002
-0.011
0.018
-0.005
-0.001
-
-0.007
0.024
-0.026
G: unresponsive,Q3=0 9.
C1,Q1
C1,Q1
-0.009
-0.009
0.757
-0.012
0.010
0.001
0.001
-
0.003
0.019
-0.031
10.
C1,Q1
C1,Q2
-0.009
-0.009
0.757
-0.012
0.010
0.001
0.001
-
0.003
0.019
-0.031
11.
C1,-
C1,Q1
-0.036
-0.009
0.742
-0.012
0.010
0.001
0.001
-
0.003
0.019
-0.031
12.
C1,Q1
C2,Q2
-0.367
0.421
-0.014
-0.011
0.020
-0.005
-0.005
-
-0.009
0.023
-0.027
G: responsive,low tax,Q3>0 13.
C1,Q1
C1,Q1
0.004
0.004
0.246
-0.009
0.010
-0.000
-0.000
-0.000
-0.001
0.018
-0.032
14.
C1,Q1
C1,Q2
0.003
0.003
0.246
-0.009
0.010
-0.000
-0.000
-0.000
-0.001
0.018
-0.032
15.
C1,-
C1,Q1
0.016
0.002
0.209
-0.009
0.010
-0.000
-0.000
-0.000
-0.001
0.018
-0.032
16.
C1,Q1
C2,Q2
-0.338
0.403
-0.005
-0.009
0.018
-0.004
-0.002
-0.003
-0.009
0.023
-0.027
G: responsive,Q3>0 17.
C1,Q1
C1,Q1
0.033
0.033
0.046
-0.006
0.009
-0.001
-0.001
-0.001
-0.004
0.018
-0.032
18.
C1,Q1
C1,Q2
0.031
0.031
0.046
-0.006
0.009
-0.001
-0.001
-0.001
-0.004
0.018
-0.032
19.
C1,-
C1,Q1
0.057
0.026
0.036
-0.006
0.010
-0.001
-0.001
-0.001
-0.004
0.018
-0.032
20.
C1,Q1
C2,Q2
-0.308
0.428
-0.002
-0.008
0.015
-0.004
-0.001
-0.002
-0.007
0.023
-0.027
G: unresponsive,Q3>0 21.
C1,Q1
C1,Q1
-0.004
-0.004
0.530
-0.009
0.009
0.000
0.000
0.000
0.001
0.019
-0.031
22.
C1,Q1
C1,Q2
-0.004
-0.004
0.530
-0.009
0.009
0.000
0.000
0.000
0.001
0.019
-0.031
23.
C1,-
C1,Q1
-0.011
-0.004
0.524
-0.009
0.009
0.000
0.000
0.000
0.001
0.019
-0.031
24.
C1,Q1
C2,Q2
-0.304
0.392
-0.009
-0.008
0.018
-0.003
-0.003
-0.003
-0.010
0.023
-0.027
27
Table 4.2: Impact of full tax hypothecation (relative to benchmark) Preferences Group A
Welfare Group B
UA
Consumption
Public Services
Taxes
UB
UG
C1
C2
Q1
Q2
Q3
TR
t1
t2
G: responsive,low tax,Q3=0 1.
C1,Q1
C1,Q1
0.474
0.474
-0.540
0.011
-0.021
0.061
-0.051
-
0.010
-0.027
0.051
2.
C1,Q1
C1,Q2
0.704
-0.798
-1.007
0.033
-0.035
0.068
-0.065
-
0.002
-0.055
0.097
3.
C1,-
C1,Q1,
-0.087
0.518
-0.523
0.019
-0.025
0.047
-0.041
-
0.006
-0.035
0.063
4.
C1,Q1
C2,Q2
0.001
-0.019
-0.009
-0.000
0.003
0.000
-0.003
-
-0.002
0.000
-0.001
G: responsive,Q3=0 5.
C1,Q1
C1,Q1
0.010
0.010
-0.142
0.018
-0.029
0.023
-0.012
-
0.011
-0.044
0.082
6.
C1,Q1
C1,Q2
0.013
-0.264
-0.267
0.036
-0.051
0.028
-0.012
-
0.015
-0.079
0.147
7.
C1,-
C1,Q1
-0.158
0.035
-0.118
0.023
-0.034
0.017
-0.006
-
0.011
-0.048
0.089
8.
C1,Q1
C2,Q2
0.025
0.010
-0.016
0.000
0.005
0.001
-0.007
-
-0.006
0.000
-0.002
G: unresponsive,Q3=0 9.
C1,Q1
C1,Q1
0.875
0.875
-2.610
0.028
-0.032
0.095
-0.092
-
0.003
-0.050
0.089
10.
C1,Q1
C1,Q2
0.892
-1.041
-2.674
0.030
-0.032
0.095
-0.093
-
0.002
-0.052
0.092
11.
C1,-
C1,Q1
-0.047
0.878
-2.576
0.029
-0.032
0.093
-0.091
-
0.003
-0.051
0.090
12.
C1,Q1
C2,Q2
-0.015
-0.013
-0.001
-0.001
0.002
-0.000
-0.000
-
-0.000
0.000
-0.000
G: responsive,low tax,Q3>0 13.
C1,Q1
C1,Q1
0.950
0.950
-2.655
0.091
-0.081
0.076
-0.048
-0.038
-0.010
-0.159
0.281
14.
C1,Q1
C1,Q2
1.229
-0.721
-3.135
0.109
-0.092
0.083
-0.062
-0.038
-0.017
-0.185
0.327
15.
C1,-
C1,Q1
0.019
0.987
-2.331
0.095
-0.087
0.062
-0.039
-0.032
-0.009
-0.162
0.287
16.
C1,Q1
C2,Q2
2.009
-2.443
-0.181
0.055
-0.099
0.031
0.003
0.010
0.044
-0.129
0.154
G: responsive,Q3>0 17.
C1,Q1
C1,Q1
-0.319
-0.319
-0.843
0.078
-0.116
0.043
-0.004
-0.000
0.039
-0.210
0.411
18.
C1,Q1
C1,Q2
-0.329
-0.712
-1.032
0.092
-0.135
0.046
-0.004
0.001
0.043
-0.244
0.482
19.
C1,-
C1,Q1
-0.770
-0.230
-0.668
0.080
-0.120
0.035
0.002
0.004
0.040
-0.201
0.394
20.
C1,Q1
C2,Q2
2.288
-3.180
-0.113
0.064
-0.105
0.033
-0.001
0.009
0.042
-0.164
0.194
G: unresponsive,Q3>0 21.
C1,Q1
C1,Q1
1.825
1.825
-6.771
0.134
-0.085
0.102
-0.076
-0.075
-0.048
-0.204
0.344
22.
C1,Q1
C1,Q2
1.844
-0.585
-6.817
0.135
-0.086
0.102
-0.077
-0.075
-0.049
-0.206
0.346
23.
C1,-
C1,Q1
0.561
1.823
-6.702
0.134
-0.086
0.101
-0.075
-0.074
-0.048
-0.205
0.344
24.
C1,Q1
C2,Q2
2.178
-2.886
-0.454
0.059
-0.122
0.032
0.016
0.016
0.064
-0.152
0.189
28
