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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.






If you get subsidized to consume more gym classes, you might rationally decrease your spending on video games.

This depends on conditions for the subsidy. Getting extra $10 for gym classes provided one spends $1 less on video games would be an attractive offer for many people. Getting extra $1 for gym classes provided one spends $10 less on video games would get few people interested. For any government, spending additional 11% of the GDP on foreign aid at the cost of cutting 10% of the GDP on domestic programs is likely to be an electoral suicide.

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.

Can the typical price of ear-marking be set high enough without turning people back to traditional charities? Compared to voluntary tax contributions private charities would have a lot of advantages:

1) Ego boosters (such as getting your name on buildings or benches).

2) There is no worry that the government will cheat and reduce the part of the general pot of money that comes from non-ear-marked taxes.

3) More choices government does not decide which causes are spending-worthy.
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melian
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