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Should people be allowed to ear-mark their taxes to specific policy areas for a price?

Stefan Schubert          13 September 2015 09:02 AM

At a given price level, there is a an optimal bundle of goods and services that maximizes a consumer's preference satisfaction. This means that given that you are consuming such an optimal bundle, you cannot increase your preference satisfaction by buying more of one good or service and less of another - e.g. more gym classes and less video games.

Suppose, however, that an external actor subsidizes gym classes (e.g., your parents, the government), but not video games. Then you might increase your preference satisfaction by buying more gym classes and less video games. Indeed, that is the point of such subsidies.

Similarly, the government's optimal bundle of goods and services - which is a function of the voters' preferences - may change if certain goods and services are subsidized. For instance, if someone is willing to top up each extra dollar the government spends on foreign aid with ten extra cents, it might rationally decide to spend more on foreign aid, and less on other policy areas. (Exactly how large this top-up would need to be would depend on the marginal utility that the government gets from more foreign aid spending, and the marginal disutility it gets from less spending on other policy areas.)

No doubt there are people willing to make such top-ups, which gives room for moral trade - a notion developed by Toby Ord - between them and the government. Like all forms of trade, such trade would increase both parties' preference satisfaction.

In principle, anyone could take part in such a moral traed (e.g. another government). Here I am going to focus on a special kind of moral trade with the government, however, namely ear-marking your tax money for a special policy area (e.g. foreign aid) for a certain price. People could be allowed to ear-mark all or parts of their taxes for a particular policy area of their choice, if they paid for it via a higher tax-rate.

My guess is that a fair number of voters would accept this offer even on terms which are quite favourable for the government. If so, allowing people to ear-mark their taxes for a price should be very advantageous for the government. The fact that it got more tax money would outweigh the fact that some of the tax money was ear-marked.

Also, note that these ear-marked taxes will to some extent cancel each other out. If four tax-payers, who pay an equal amount of tax, ear-mark their taxes to four mutually exclusive and equally large policy areas, the government will get more tax money in total without the distribition of government spending having been changed. In practice, some areas are going to be more popular to fund, however, which means that this will perhaps not be the normal state of affairs.

Another advantage is that people might feel more motivated to pay their taxes if they knew that their taxes were going to something they felt strongly about. That could mean less tax evasion. It could also mean that people started to think of their ear-marked taxes as something more akin to charity, and less like taxes in the classic sense. It would feel like less of a burden.

One possible worry that deserves comment, though, is connected to the notion of counterfactual trust (which Ord mentions) and replacability arguments (which, e.g. 80,000 hours have used a lot). Suppose that lots of people start ear-marking part of their taxes for foreign aid. Then the government might be disposed to reduce the part of the general pot of money - coming from non-ear-marked taxes - that goes to foreign aid. In the end, the ear-marking will have led to very little extra spending.

This constitutes a breach of counterfactual trust - the government doesn't distribute the general pot of money in the way it would have done if there hadn't been any opportunity for moral trade, because it thinks that in this way, it can maximize its moral preference satisfaction. I don't see a moral problem with that (which can be the case with other forms of breaches of counterfactual trust), but there is a potential pragmatic problem. If tax-payers see this happen over and over again, they might be dissuaded from ear-marking taxes for their favourite cause.

One way to get around this problem is to explicitly refrain from such redistribution of the general pot, at least the first few years. Inevitably, I think that there will be some such redistribution in the end, though.

Potentially, it won't make that much of a difference, though. We know that people have problems getting these replacability arguments. Lots of people don't just want more money to foreign aid - they want their money to go to foreign aid. If that's right, issues of replacability and worries of breaches of counterfactual trust are less important.

Another worry is that this would introduce a certain element of unpredictability in the government budget - particularly if these sorts of ear-marked taxes became common. Temporary shortfalls in the general budget could be covered by increased government borrowing, but unexpected extra funds would normally have to be saved until new capacity to use them has been added. That would probably be a minor problem, though, as would the extra admin work this would incur.

One objection is that this would give rich people, who pay large amounts of taxes, an undue influence over government spending. It is indeed true that this system would give them a better chance of satisfying their moral preferences. However, the government's moral preferences would also be better satisfied under this system (since it would only take part in such transactions that increases its moral preference satisfaction). Thus it is not true that the gains that rich people make happen at others' expense. Everyone wins from trade - this is not an exception.

As some readers might have noticed, there is a similarity between this system and charity tax-deductions. The main difference is that under a system of ear-marked taxes, the controls of where the spending went to would be much more rigorous.Today, you can get tax-deductions for donations to all sorts of highly ineffective charities. Under this system, you could only ear-mark your taxes for something that the government has already deemed spending-worthy.

Has this idea been put forward before? Has it even been tried in practice, perhaps? If not, one could test it by letting people ear-mark small parts of their taxes to a small number of areas - say foreign aid, health care, education, etc. Perhaps it would be most interesting to test it in a country where you can't make charity deductions, since there's bound to be some competition between tax-deductible donations to charity and ear-marked taxes.

I'm not sure whether this would be a good idea, though, and am open to counter-arguments.

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Silent Cal 15 September 2015 08:56 AM

I worry about the complexity of, in addition to having to set a budget, also having to set earmarking rates for each area. I also am concerned about counterfactual trust; even if the legislature tried to be counterfactually trustworthy, I think it would be impossible to ignore the foreseeable earmarking, and I think people would pick up on it after it happened a few times.
In general, the interaction between the people's representatives setting the initial budget and the people earmarking on top of that seems weird. Will the public end up paying more in taxes than they want to offset each others' earmarks? Will they cut taxes in response to this and end up with a post-earmark budget identical to the old pre-earmark budget? It seems like there's a lot of game theory to be done here.


melian 14 September 2015 05:46 AM

Suppose the amount of money that government collects under this scheme is comparable to all other charitable donations (about 1% of the GDP for most western countries). Since government has to spend $10 for each dollar it collects in voluntary tax contribution, it now needs an additional income equal to 10% of the GDP. Where will this money come from?


ChristianKl 19 September 2015 04:38 AM

John Oliver did a good episode on state lotteries. A lot of them promise that they profits they generate is ear-marked towards education.
At the same time the education budget in many examples didn't increase because less money from other sources went into the education budget.

The earmarking basically leads to misleading people to think that playing the lottery actually increases the available funding for education.

With your proposal a similar thing might happen if you keep the numbers low. People might be more motivated to pay taxes and willingly pay more taxes but at the same time, the government policy doesn't change. I don't think such games should be played to give people the feeling that they have more influence without them getting any.

If you on the other hand use strong numbers so that this actually effects budgeting you get additonal issues. A lot of the budget is due to money that the government has to pay due to legal obligations. The Medicare budget is at a certain size because the government is obliged to provide the service.

Changes in public opinion might also drastically change the money that's allocated to departments on a year to year basis. That means money can't be well invested for strategic objectives because there's more uncertainty whether the funding dries up. I would estimate that the public is very bad at estamating the value of marginal dollars for the next yearly budget.

A proposal like that would mean that all departments spend more of their resources in public relations. I don't think that would be positive.

I have a general belief that burocracy should be kept low and that keeping it low should be one of the prime factors when thinking about policy making. This proposal adds a lot of burocratic complexity.


Fwiffo 27 September 2015 01:00 PM

The goverment already has to decide what costs are tax deductible. This seems to blurr or even mititgate the alledged difference to tax cuts.


Fwiffo 27 September 2015 01:29 PM

This post is written ina tone that people in general don't want to pay taxes and don't want the goverment spending for them. Being from Nordic countries where keeping high tax rates is popular and public services very expected I am kind of unfamiliar with this mindset. Or that the proposed psychological updrift would be to end up to where we are now.

It might just be that you do not feel involved in decision making unless its your personal money. I could intepret that as a sign of unneccesary enstrangemetn from the political process rather than as a flaw in taxation schemes.

When your parliament actually passes laws that really affect your well-being it stops being an empty wheel. We got universal healthcare, we got universal free higher education and we kinda like the process on how we got there and upkeep it. One rationale why it isn't for everybodys tstes is that one wants to micromanage their personal affairs. That is instead of having free healthcare they want to earn more money so that they can afford to pay themself sick when their health collapses. It ends up being about the same amount but the guy who lived so day-to-day he couldn't afford the buffer gets the bare minimum or even no healthcare. I don't understand what is so special about being free to f up your basic neccesities? Or like can people opt out of getting sick? There are also economical arguments about economies of scale. If people micromanage too much most of those are lost.

There is also problems about detaching collective decision to be indivudual decisions. I heard about a news story about a fire department not putting out a fire because the house wasn't insured. In a way there needs to be a clear consequence whether the house pays insurance or not. And that can be let happen. But what if you object to excessive military spending or are a devout anti-militarist? Do we let foreign countries free dibs on those citizens? It is way more clear that there is no opting out of defence or that defence is done as a community and not as individuals. In a way if you dedicate your taxes to some particular single cause then you are effectively opting out out several small tasks that somebody needs to do if they are to happen. Under such a system the goverment runs the risk of being the funder of the poorly understood but desperately needed services. Because not every indvidual is concerned with running a whole country it is more likely that the understanding on decision where to fund are based on more naive understandings. Or a goverment when it makes a budjet it can more reasonably see what are the likely outcomes of making that kind of budjet where individuals are largely left hoping they get what they desire.


Xerographica 19 September 2015 06:43 AM

I'm a little unclear whether you're discussing donating to the government or tax choice (pragmatarianism).

Both are really good ideas. In fact, here's a thread that I just posted... Should The Government Seek Donations?

There should be a lot more intercourse between government and citizens.