This extra money would normally come from decreased spending on other policy areas (though higher taxes is also a conceptual possibility). As I point out at the start, the government could rationally do so. If you get subsidized to consume more gym classes, you might rationally decrease your spending on video games. Similarly, if the government is subsidized to spend more money on foreign aid, it might rationally reduce its spending on other policy areas.
Note, though, that by definition, if the government acts rationally, it cannot lose from this scheme unless it causes unintended side-effects (e.g. behavioural changes). If it acts rationally, it will only make transactions that increases its preference satisfaction.
Suppose that a lot of people want to ear-mark their taxes to a particular policy area. Then the marginal utility that the government gets out of additional spending on that policy area will probably be quite small. Therefore, it must increase the price of ear-marking taxes to that policy area. That will in turn decrease demand for ear-marking taxes to that policy area. |
